Hold the Mergers
By
There’s nothing like working at cross purposes to make the economy worse. While the majority of Congress recognizes that job retention is the most immediate need in order to ease the downward economic spiral we are in (except the Republican right that is looking for more tax cuts for those that don’t need them and the Democratic left that is trying to do social engineering), the other side of the government is approving mergers that are openly designed to eliminate jobs
It is painfully obvious that the key to slowing the downward spiral is to limit the accelerating job loses that are almost daily being announced. Job loses will continue for all of 2009 no matter what Congress does, as the industrial sector adjusts to declining demand and over extended retailers pay the price for their excesses.
Mergers and acquisitions are not always bad but those that are clearly designed to contract the workforce during an economic decline, need to be deferred. The country is in a unique time and by temporarily limiting consolidations, except for the survival of a firm or industry where more jobs will be lost if the merger is not permitted, the economy has a better chance of righting itself.
The capitalist purists among us will argue that the
government should not intervene in the day to day business decisions of
corporate
At the present time, there are predictions that the unemployment rate will reach 10% in the first quarter of this year. Merely holding it there will not solve the problem, which is why we cannot afford to permit additional consolidation mergers that will result in additional job losses. Recessions and depressions are often driven by psychology and the fear of “will my job be next” is not going to encourage either the borrower to seek loans that they may not be able to pay back or encourage the lender to extend credit to an individual who works for a company that has announced a merger, regardless of whether they work for the acquirer or the target company.
An Op-Ed in the Wall Street Journal on Monday, February 2 by Harold L. Cole and Lee E. Ohanian is entitled “How Government Prolonged the Depression” makes some interesting points. Although I felt the title was a bit misleading, since the writers indicate that things were going along pretty well once the FDR administration stabilized the economy with new and effective financial regulations and provided a much needed safety net for the average citizen with Social Security, unemployment benefits and deposit insurance. The writers estimated that the economy should have been back on track by 1935.
What went wrong? Industry consolidation and artificially high wages were identified as the culprit.
At the beginning of the 20th Century, consolidation was everywhere as the “robber barons” acquired their competitors, closed duplicate facilities or completely shut down the rival companies. The result was the rise of unions and the wealth of anti-trust legislation that opened the marketplace for competition; innovation ensued and set the economy on the road to the prosperity of the 1920’s.
We have been in a new era of consolidation and a new type of “robber baron” has emerged. For more than 25 years the U. S. Government has turned its back on industry mergers and acquisitions. The current rule of thumb seems to be to never reject an acquisition as long as some “element” of competition remains.
The current acquisition of Alltel by Verizon Wireless is a perfect example. As a result of massive consolidation in the telecommunications industry, A T & T and Verizon Wireless now control 60% of the wireless service in the country. In an effort to obtain Department of Justice (DOJ) approval, Verizon has offered to divest some of the Alltel assets (DOJ would certainly never reject the acquisition as anti-competitive). Guess who the leading contender is to acquire those assets? Why A T & T, of course.
During a recession/depression, where the government has undertaken a program of providing assistance to the corporate sector (be it financial or industrial) and has identified job creation and retention as critical to turning the economy around, it makes no sense to be approving transactions that will further contract the workforce. The rule should be to temporarily hold the mergers that will eliminate jobs until the economy “officially” has exited the recession. It should be automatic: growth is back; the shackles are off.
There is also one more element that should seem rather logical to the people making the rules: If you’re too big to fail then you’re probably too big to merge.