Llewellyn King: The case against mega-mergers is written in U.S. history
A judge has green-lighted the $85 billion merger of Time Warner and AT&T. Unless the Trump administration appeals and wins on appeal, another behemoth will take the field.
This merger, it is assumed, will lead to a flurry of other mergers in communications. Witness Comcast’s $65 billion bid for Fox, topping Disney’s $52.4 billion offer.
This is heady stuff. The money on the table is enormous, in some cases dwarfing the economies of small countries.
Merging is an industry unto itself. A lot of people get very rich: They are investment bankers, arbitragers, lawyers, economists, accountants, publicists and opinion researchers. When really big money moves, some of it falls off the table into the willing hands of those who have managed the movement.
The fate of the real owners of these companies, the stockholders, is more doubtful after the initial run-up. The earlier merger of Time with Warner Communications is considered to have been disadvantageous for stockholders.
Another concern is the mediocre performance of conglomerates. The latest to have run into trouble is General Electric, which had managed to do well in many businesses until recently.
A more cautionary story is what happened to Westinghouse when it went whole hog into broadcasting and lost its footing in the electric generation businesses. This was spun off, sold to British Nuclear Fuels in 1997, then sold again to Toshiba and later went into bankruptcy.
From the 1950s, Westinghouse it bought and sold companies at a furious rate, until the core company itself was sold in favor of broadcasting. One of Westinghouse’s most successful chairmen, Bob Kirby, told me it was easier for him to buy or sell a company than to make a small internal decision.
In another pure financial play, a group of hedge funds bought Toys R Us and with the added debt, it failed.
In many things, big is essential in today’s economy. News organizations need substantial financial strength to be able to do the job. Witness the cost of covering the Quebec and Singapore summits. As Westinghouse proved by default, big construction needs big resources. That is indisputable.
When growth through acquisition becomes the modus operandi of a company, something has gone very wrong. The losers are the public and the customers. The new AT&T, if it comes about, will still need you and I to lift the receiver, watch its videos and subscribe to its bundles.
Recently, I was discussing the problems customers have with behemoth corporations on SiriusXM Radio's "The Morning Briefing with Tim Farley" when a listener tweeted that I hated big companies and their CEOs and loved big government.
Actually, I’d just spent a week with the CEOs of several companies, admirable people, and I don’t think government should be any bigger than needs be. I certainly don’t think government should perform functions that can be better performed in the private sector.
The problem is size itself.
When any organization gets too big, it begins to get muscle-bound, self-regarding. Although it might’ve been built on daring innovation, as many firms have been, supersized companies have difficulty in allowing new thinking, reacting nimbly and adopting innovative technologies and materials.
If large corporate entities were as nimble as small ones, the automobile companies would’ve become the airplane manufacturers in the 1920s and 1930s. They had the money, the manufacturing know-how and the engineering talent. They lacked the vision. It was easier to be rent-takers in the production and sale of automobiles.
Likewise, it’s incredible that FedEx was able to conquer the delivery business when another delivery system, Western Union, was up and running. But Western Union was big, smug and monopolistic. They had the resources and an army of staff delivering telegrams.
Companies like Alphabet (Google’s owner) snap up start-ups as soon as they are proven. That snuffs out the creativity early, even if it wasn’t meant to, and makes Google even more dominant. I would argue too big for its own good -- and for ours.
Llewellyn King (llewellynking1@gmail.com) is executive producer and host of White House Chronicle, on PBS. He is based in Rhode Island and Washington, D.C.
The epicenter of merger mania -- Wall Street, with the New York Stock Exchange draped with the flag.
Llewellyn King: Whether good merger or bad, the M&A kings prosper
Whether Rupert Murdoch’s 20th Century Fox ultimately succeeds in its $80-billion bid for Time Warner, rest assured the mergers and acquisitions (M&A) industry will do just fine. Very fine, actually.
There is such a thing as the M&A industry, but it is elusive. It has no trade association and cannot be looked up in the telephone directory. But this virtual organization is a power in the land and very, very rich.
It is made up of investment bankers, lawyers, economists, advertising agencies, public-relations tacticians, lobbyists and legal printing firms. They all swing into action like sharks alerted by blood in the water. They are a diverse crew with one thing in common: They do not come cheap.
At the top of the pinnacle are the investment bankers and their pals in the hedge-fund world, who are ready with ideas and capital if it is needed; ready to reap the rewards of arbitrage. These are the elite officers of the Wall Street Brigades; money is their North Star. They have been bred, in the best schools, to expect it as their entitlement, and they are keen to live up to that expectation.
They are retained by both sides in a hostile takeover and, however it goes, their fees will be enough on one transaction to keep them on Easy Street for years. They fly high, shoot high and live high. They are aristocrats in the kingdom of money.
Just below them come the lawyers, droves of them each offering advice on some aspect of the challenge. Each billing more for one hour than most people earn in a week. When working on a big merger, where there are billions and billions of dollars in play, the legal fees run into the tens of millions of dollars -- and nobody cares. Outside of the senior management, who expect to get extraordinary wealthy – hundreds of millions of dollars, at least -- in a takeover, it is the bankers and the lawyers, denizens of Fifth Avenue and the Hamptons, who make out beyond normal dreams of avarice, and do it over and over.
So it is not surprising that it is often bankers who instigate mergers either by pushing the ideas and the finance mechanism on the firm that hopes to be the acquirer, or persuading a firm that it is time to put itself on the market. Once a target is “in play,” as Time Warner is, anything can happen: A white-knight suitor can come along or the vulnerable company can become an acquisitor, as in the way Men’s Warehouse stitched up Jos. A Banks.
If there is a hostile battle, the advertising and public-relations people come in, cajoling shareholders to hold out or sell out. More millions are spent in this effort: No one is trying to save money when the transactions are so large.
The biggest winners are those at the top of the heap: the managements. They own stock options and shares, plus special deals are written to sweeten things for them.
Everyone engaged in the M&A industry makes money when the game is on, all the way down to the caterers, who provide the sustenance when the midnight oil is burning. A merger is a grueling and fun undertaking; the fun of making money under pressure, a lot of pressure and even more money.
Who loses? Certainly the staff of the lesser-partner firm. The conqueror calls the shots and decrees the layoffs, which are one of the principal savings or “efficiencies” of the takeover. There will be less duplication, fewer subsidiary businesses, and fewer facilities that can be consolidated.
The other loser, feverishly denied in advance of the nuptials, is the consumer; the poor stiff who purchases the goods and services that the new entity offers. These may be fewer and, almost certainly, they will become more expensive over time.
Not all mergers are bad. Actually, Rupert Murdoch’s takeover of The Wall Street Journal has resulted in an invigorated newspaper. But anyone, including myself, who has flown on the merged American Airlines and U.S. Airways has nothing good to report about service, pricing, or frequency. I'll venture that the M&A moguls are taking private jets -- wouldn’t you?
Llewellyn King is executive producer and host of “White House Chronicle” on PBS. His e-mail is lking@kingpublishing.com.