Page images
PDF
EPUB

both the number of mergers and the amount of business expenditures for new plan and equipment were low. In the 1950's business has been in a phase of rapid expansion, and both number of mergers and amount of expenditures on plant and equipment are higher than in the two previous decades.

The figures are too weak to yield any conclusions which can be accepted with confidence, but even as they stand they suggest no' untoward developments. It is therefore surprising to find them continually cited as evidence of a dangerous trend to concentration. An example is contained in a recent report by a congressional committee:

“For one thing, the concentration of economic power to a degree that approaches the absolute in the hands of fewer and fewer large corporations continued throughout 1956 at an accelerated pace. Corporate mergers and acquisitions, for instance, which at a rate of 846 in 1955 attained a 25-year peak, climbed still further in 1956 to a new quarter-century record of more than 900 competitively significant mergers.

“The impact of unrestrained merger activity on competition and on smaller companies which are trying to retain their grip on existence is obvious * * *." 1

(The reference to more than 900 “competitively significant” mergers in 1956 inust have been a slip by the committee. The cases reported by the Federal Trade Commission include all mergers or acquisitions which come to their attention. In this compilation the Commission does not attempt to distinguish between mergers which are competitively significant and those which are not.)

This emphasis on mere numbers of mergers suggests that many persons approach the problem with the assumption that mergers are like murders-if even one occurs it is too many, and a rising trend in the number is alarming indeed. If this were so the legal problem would be simple: the law could simply forbid all mergers just as it forbids all murders.

Clearly, the law is based on a recognition that some mergers are good, some bad, and some neutral in their effects on our competitive economy. This being so, one wonders why a mere count of numbers, without distinction as to the effects of each merger on competition, should be regarded as having any alarming implications.

ASSETS INVOLVED IN MERGERS

We get one step (although not a very long one) closer to a sound basis for judging the magnitude of the merger movement if, instead of merely counting mergers and acquisitions, we estimate the dollar amount of assets which changed hands in those transactions.

No official body has published such an estimate of the total assets involved in all mergers during any period. However, a congressional committee has published a list of the 1,593 mergers or acquisitions by manufacturing corporations during the period 1948 through 1955, giving the assets involved in every case where that information was available. Actually, the information on value of assets acquired was available in only 286 of the 1,593 cases. It appears that in most of the missing 1,307 cases the assets involved were probably very much smaller than in the cases where assets were reported. On this assumption, the NAM research department has estimated that the total value of assets acquired by manufacturing corporations through merger, during the years 1948 through 1955, was about $4 billion.

To put this figure in perspective it should be noted that the total assets of all manufacturing corporations was $190 billion at the end of 1955. Thus only about 2 percent of manufacturing assets changed hands through merger and acquisition during the entire 8-year period.

Another significant comparison is with the value of the brandnew plant and equipment acquired by manufacturing corporations by the ordinary process of growth from within. These brandnew assets amounted to $80 billion over the years 1948 through 1955—20 times as great as the assets absorbed by merger or acquisitions.

Even though our $1 billion estimate may be subject to a wide margin for error, it is clear that mergers and acquisitions have played a relatively insignificant role in the recent expansion of manufacturing business generally.

1 Seventh Annual Report of the Select Committee on Small Business, U. S. Senate, 85th Cong., 1st sess., Rept. No. 46, p. 3.

2 Interim Report of the Antitrust Subcommittee of the Committee on the Judiciary,.. House of Representatives, 84th Cong., 1st sess., 1955.

[ocr errors][ocr errors][merged small][merged small][ocr errors][merged small][merged small][ocr errors][ocr errors][ocr errors][merged small][ocr errors][ocr errors][ocr errors][ocr errors][ocr errors][ocr errors]

An adequate description of the reason for any specific merger would have to explain why the acquiring company decided to expand in the first place and why, in the second place, it chose to do so through merger rather than through construction of new capacity. From the point of view of the acquired company, it would have to explain why the acquired company was willing to sell out and why it was able to find a satisfactory opportunity for doing so. It is difficult enough to pin down such an explanation in any specific case where all the facts are known, and still more difficult to compile statistics on the relative frequency of the various reasons.

One statistical analysis of the reasons for merger, although only from the acquiring company's side, was prepared by the Federal Trade Commission. It is summarized in table 2. Notice how inadequate this is for providing any basic understanding of why mergers occur. We are informed that in 804 out of 2,091 mergers, the acquiring company gained the advantage of "larger capacity to supply old markets.” We get no inkling as to why the acquiring firm decided it was better to buy such capacity from an existing concern rather than to construct it anew. We are given no reason as to why it was economically advantageous for the selling firm to accept an offer that it was economically advantageous for the acquiring firm to make. In other words, the reasons for a merger cannot really be explained until there has been an exploration of the alternatives open to both firms.

About all that can be done is to list the various possible motives for merger, without attempting to assess their relative frequency, and recognizing that in practice any particular merger results from a complex balancing of advantages and disadvantages by both parties. The following is an attempt at such a list: Possible reasons for merger1. On the part of the acquiring firm :

(a) Acquisition of additional capital for supplying an expanded market.

(6) Acquisition of capacity in a new area.

(c) Acquisition of new products—sometimes complementary to the old line, sometimes entirely unrelated.

(d) Acquisition of customers of the acquired company.
(e) Acquisition of trademarks.
(f) Acquisition of patents.
(9) Acquisition of personnel and organization.
(h) Investment of idle capital.

(i) Presentation of an advantageous offer by a firm which desires to sell out.

(j) Desire to get into a new field, either for diversification or because the old field is declining.

(k) Acquisition of a tax-loss carryover. 2. On the part of the acquired firm :

(a) Lack of any suitable succession to present management.

(0) Desire to convert personal assets into more liquid form in order to meet prospective inheritance taxes.

(c) Desire to salvage whatever may be possible from a failing enterprise.

(d) Presentation of an advantageous bid by a firm which desires to expand.

(e) Desire to diversify personal holdings.

(f) Inability to obtain needed capital. Many other motivations occur in practice. The combinations and variations are almost limitiless.

The general impression is that tax considerations have been an important motivating factor in recent mergers. This is confirmed in a study by the division of research, Graduate School of Business Administration, Harvard Uni rsity. The conclusions of that study are summarized as follows. (The study was pre pared in 1950 and therefore does not take into account subsequent changes in the tax law :)

“This analysis of our field cases indicates that for the period since 1940 taxes have been a major reason for sale for about two-fifths, or a little more, of the transactions in which the selling company had assets of between $15 and $50 million as of the date of sale, for between one-fourth and one-third of the companies sold in the $5 to $15 million asset-size class, for a little over one-fifth of the companies in the $1 to $5 million class, and only rarely for the sale of companies with assets of under $1 million. These fractions obviously represent only approximations of the percentage of tax-motivated sales, as we have defined. EFFECTS OF MERGER OY BUSINESS SIZE

Statistics on the number of mergers, or even on the total value of assets involved, do not tell us much about the effects of inergers on the size distribution of business firms. We need to know whether these mergers are cases of large companies combining with each other, large companies buying up small companies, or small companies acquiring still smaller ones.

Although general statistics are not available, it is obvious that there have been no cases in recent years of industrial giants consolidating with other industrial giants. The nearest approach to this has been the consolidation, in pairs, of the smaller automobile companies. Here, obviously, the operation was a desperate bid for survival rather than an attempt at dominating the industry.

Since merger is a game in which all may play, it can result either in the large companies growing still larger or in their smaller rivals catching up with them. We have no studies on this question for recent years, but an earlier study indicates that for the period 1940 through 1947 the smaller companies grew faster through merger than the bigger companies.

This earlier study was prepared by the Division of Research of Harvard Business School. The results are summarized in chart II. For the 8 years, 1940 through 1947, companies with assets of 1 to 5 million dollars increased their assets by an average of 68 percent through their acquisitions of other concerns. For larger asset-size classes there is a consistent decline in this percentage, and the firms having assets of over $100 million increased their assets by only 2 percent through merger.

Thus the study of mergers during the period 1940–47 indicates that their chief role was to enable smaller concerns to gain ground on the very large corporations and, in many cases, to compete more effectively with them.

No similar study is available for years since 1947. However, there is no reason for supposing that the results would have been significantly different for later years.

At least these results demolish the commonly accepted myth that mergers inevitably tend to increase the size of the largest companies relative totheir smaller rivals, thus intensifying “industrial concentration.”

MERGERS COMPARED WITH OTHER METHODS OF BUSINESS GROWTH

As is well known, over the years certain business firms have grown to very great size. An important factual question is whether, typically, this great size has been attained through absorption of other companies by merger and acquisition, or whether it has been attained by growth from within.

There is factual information on this question, in the form of a survey by an expert from the academic world. The survey covers the expansion of 74 typical large companies over the period 1900-48. It indicates that only about one-third of their growth during these years was accounted for by absorption of previously separate businesses. The remaining two-thirds of their growth was made possible by ordinary business expansion through investment of new capital-either retained profits or funds obtained in capital markets.

Thus for the period 190048 internal expansion has been the major means of growth for our large companies, with mergers and acquisitions playing a smaller role.

A study covering more recent years, although limited to a smaller number of firms, has been published by the United States Chamber of Commerce. This is limited to the Nation's 10 largest (on basis of assets, as of 1955) industrial corporations. It compares their growth through mergers or acquisitions with their total growth, over the period 1920 through 1955. For the group as a whole, only 6 percent of their total increase in assets over this period is accounted for by mergers and acquisitions. Thus mergers have played a relatively minor role in the growth of the largest manufacturing corporations during the past 35 years.

REASONS FOR MERGER

An important question, but one on which it is virtually impossible to compile statistics, is the reasons for the occurrence of mergers.

3 Butters, Lintner & Cary, Effect of Taxation : Corporate Mergers, Harvard University, Boston, 1951, p. 267..

* See J. Fred Weston, Role of Mergers, University of California Press, Berkeley, 1953,

5 Chamber of Commerce of the United States, Mergers-Report of the Committee on Economic Policy, 1957, p. 10.

p. 14.

An adequate description of the reason for any specific merger would have to explain why the acquiring company decided to expand in the first place and why, in the second place, it chose to do so through merger rather than through construction of new capacity. From the point of view of the acquired company, it would have to explain why the acquired company was willing to sell out and why it was able to find a satisfactory opportunity for doing so. It is difficult enough to pin down such an explanation in any specific case where all the facts are known, and still more difficult to compile statistics on the relative frequency of the various reasons.

One statistical analysis of the reasons for merger, although only from the acquiring company's side, was prepared by the Federal Trade Commission. It is summarized in table 2. Notice how inadequate this is for providing any basic understanding of why mergers occur. We are informed that in 804 out of 2,091 mergers, the acquiring company gained the advantage of “larger capacity to supply old markets." We get no inkling as to why the acquiring firm decided it was better to buy such capacity from an existing concern rather than to construct it anew. We are given no reason as to why it was economically advantageous for the selling firm to accept an offer that it was economically advantageous for the acquiring firm to make. In other words, the reasons for a merger cannot really be explained until there has been an exploration of the alternatives open to both firms.

About all that can be done is to list the various possible motives for merger, without attempting to assess their relative frequency, and recognizing that in practice any particular merger results from a complex balancing of advantages and disadvantages by both parties. The following is an attempt at such a list : Possible reasons for merger1. On the part of the acquiring firm :

(a) Acquisition of additional capital for supplying an expanded market.

(6) Acquisition of capacity in a new area.

(c) Acquisition of new products—sometimes complementary to the old line, sometimes entirely unrelated.

(d) Acquisition of customers of the acquired company.
(e) Acquisition of trademarks.
(f) Acquisition of patents.
(g) Acquisition of personnel and organization.
(h) Investment of idle capital.

(i) Presentation of an advantageous offer by a firm which desires to sell out.

(j) Desire to get into a new field, either for diversification or because the old field is declining.

(k) Acquisition of a tax-loss carryover. 2. On the part of the acquired firm:

(a) Lack of any suitable succession to present management.

(b) Desire to convert personal assets into more liquid form in order to meet prospective inheritance taxes.

(c) Desire to salvage whatever may be possible from a failing enterprise.

(d) Presentation of an advantageous bid by a firm which desires to expand.

(e) Desire to diversify personal holdings.

(f) Inability to obtain needed capital. Many other motivations occur in practice. The combinations and variations are almost limitiless.

The general impression is that tax considerations have been an important motivating factor in recent mergers. This is confirmed in a study by the division of research, Graduate School of Business Administration, Harvard University. The conclusions of that study are summarized as follows. (The study was prepared in 1950 and therefore does not take into account subsequent changes in the tax law:)

“This analysis of our field cases indicates that for the period since 1940 taxes have been a major reason for sale for about two-fifths, or a little more, of the transactions in which the selling company had assets of between $15 and $50 million as of the date of sale, for between one-fourth and one-third of the companies sold in the $5 to $15 million asset-size class, for a little over one-fifth of the companies in the $1 to $5 million class, and only rarely for the sale of companies with assets of under $1 million. These fractions obviously represent only approximations of the percentage of tax-motivated sales, as we have defined

« PreviousContinue »