The Biden Administration’s Lina Khan, head of the Federal Trade Commission, is one of the administration’s very few bright spots, intellectually speaking. She has overthrown the existing merger jurisdiction, set up by the late great Judge Robert Bork in the 1980s, to question why the FTC should let through mergers as a matter of course. It is a very good question; countless studies have shown that most mergers destroy value rather than enhancing it, reliably enriching only the top managements of the companies concerned. Should the default position not be to ban mergers, and how different would the world look if we followed that approach?The National Bureau of Economic Research produced a seminal paper in 2003, showing that over the previous 20 years, large companies had destroyed at least $226 billion in wealth through mergers and acquisitions. Only smaller companies had created wealth through mergers — $8 billion over the same period – thus, on balance, mergers had been highly value-destructive. Subsequent studies have confirmed this qualitative conclusion; indeed, during the “funny money” period of 2011-21, in which interest rates were held far below their market level and the incentives to undertake mergers were increased by the greater stock-option returns available to managements, that value destruction almost certainly increased geometrically.In an ideal world, there would be no regulation of mergers. We do not however live in such a world; in an ideal world, we would be on a Gold Standard and share prices would be around a third of their current level, since there would be no inflation of asset prices through Fed money printing. In such a world, the incentive to merge companies would be limited to the few cases in which such mergers brought genuine operational or marketing synergies. The whole artificial apparatus of M&A brokers, private equity funds and leveraged buyout speculators would disappear. (It must after all be remembered that the first contested takeover in the United States was the international Nickel deal, which took place as recently as 1974.)We do not, however, live in such a world. Even two years after the end of the worst “funny money” policies, stock and asset prices remain artificially high, and the return on acquiring new assets correspondingly low, although the possibility of speculative gains will always attract the private equity crowd. In the world we actually inhabit, there are few natural constraints on excessive, economically unproductive mergers, and so it may make sense to introduce an artificial one, in the form of Khan’s FTC.It probably does not make sense to ban mergers altogether – the rare cases where a competitor takes over a failing medium sized company and rescues it are on balance worth preserving. It certainly doesn’t make sense to permit mergers only via the kind of “woke” criteria Ms. Kahn and her colleagues are likely to dream up – an undertaking to employ more transgenders or use appropriate pronouns at board meetings is unlikely to distinguish a good merger from a bad one. Nevertheless, a general prohibition against mergers, with an FTC office full of very old-fashioned bean-counter types determining which few special cases would be allowed through, might well be economically superior to the fees-and-stock-options driven casino we have currently.Such a system would sharply reduce the concentration in most industries, producing business sectors where many medium sized companies competed, mostly having stable employment and an informally-agreed “who does what” division of the markets concerned. Such a structure would have several advantages over what we have now:
Ever since William McKinley gave the green light to the “trusts” in 1897, after the Sherman Anti-Trust Act of 1890 had appeared to forbid them, the U.S. economy has worked on the basis that “bigger is better.” The resulting tsunamis of mergers have produced an economy where diseconomies of scale dominate in many sectors, while the original economies of scale that caused the mergers have disappeared. Given the excessive incentives for top managements to merge, we cannot rely on the economy to “sort itself out.” Ms. Khan’s approach, in which mergers would be forbidden except in a very few cases, would almost certainly make us richer in the long run.I have no doubt at all that it would make us happier.More By This Author:Riding The Tides Of Interest Rates The G In ESG Is As Bad As The E And The S The Decade Of Debt Restructuring
