Mega-mergers raise debate on who profits; Bigger seems better for firms and stocks, but not for employees


The mantra in corporate America seems to be "the bigger, the better."

But better for whom?

Over the past two years, the corporate world has been blitzed by giant mergers in the automobile, oil, banking and telecommunications industries. The deals have fueled a debate among economists and academics over whether mega-mergers can work and whether they are good for shareholders or employees -- or the country.

Yesterday, MCI WorldCom Inc., the nation's second largest long-distance telephone company, announced an agreement to buy Sprint Corp. for a stunning $129 billion -- the biggest corporate acquisition in history.

The news added more heat to an already hot debate.

"The record [on mergers] has been hugely checkered," said Lacy Hunt, an economist at Hoisington Investment Management Co., an Austin, Texas-based money management firm.

"Mergers are going to continue to be a fact of life. I think the frenetic pace of the current merger activity is a strong sign of the lack of pricing power and the weak performance of corporate profits. Firms can't grow their way to profitability, so they decide to merger their way to profitability."

Others argue that mergers are necessary to make companies more efficient so they can make better products and services at lower prices. Finding a partner also helps corporations bulk up to take on competitors at home and abroad.

"I trust the average merger," said Sherry L. Jarrell, assistant professor of finance and economics at Wake Forest University. "I trust the research that has been done. I trust their decision-making, on average. I just can't believe [corporate executives] are going into it to destroy value. Yes, there is upheaval, but a lack of upheaval breeds complacency on the part of the workers and management."

Jarrell said her research shows that two-thirds of all mergers result in better companies.

What has impressed many experts is the sheer size of mergers in the past two years.

Last year, Exxon Corp. and Mobil Corp. signed a deal valued at $81.75 billion. The same year, Citicorp and Travelers Group teamed up in a $72.5 billion deal; Ameritech Corp. and SBC Communications joined in a $76.1 billion transaction, and NationsBank Corp. and BankAmerica Corp. merged in a $61.6 billion deal.

"It gets your attention," Jarrell said.

But big deals often result in big layoffs, which generally come from middle management and back office employees. Exxon and Mobil said they would slash 9,000 jobs, and Citigroup said it would eliminate 10,400 jobs. First Union Corp., which merged with Philadelphia's Corestates Financial Corp. in 1998, said in March that it would cut nearly 6,000 employees -- from tellers to computer programmers to white-collar workers.

"The general presumption usually is that there will be cost savings, profits will go up. It tends to be good for the shareholders," Hunt said. "It tends to be less of a positive for the employees."

Mergers don't "necessarily work out for the economy overall," Hunt said. "It may leave the economy with a poorer mix of employment opportunities and more lower-paying jobs," he said.

So why has the "bigger is better" mantra gotten louder?

One reason is that corporations are facing more competition from overseas.

"Globalization is here to stay," said Sung Won Sohn, chief economist at San Francisco-based Wells Fargo & Co. "The fear in the marketplace is if you don't get big and lock up customers, you will be swallowed up by someone else."

James Glassman, director of U.S. economic research at Chase Securities Co., a subsidiary of New York-based Chase Manhattan Bank, said even though a company might dominate its market in the United States, that does not mean that profits will come easily and its stock price will rise.

He pointed to Boeing Co., the only U.S. maker of commercial jets, which is in a dogfight for market share with the European consortium Airbus Industrie.

"The competitive field is intensifying because the marketplace is becoming global," Glassman said.

As the world shrinks and competition stiffens, companies that don't have all the products and services customers want will vanish, experts said.

The main reason MCI WorldCom and Sprint are merging is that MCI WorldCom lacks a nationwide wireless system that enables customers to use mobile phones, analysts said.

"Part of it is bundling," Sohn said. "Today you have to sell in a bundle: Internet services, long distance and wireless all bundled together. If you are not able to do that you could be left out."

Hunt said companies are merging because "there is a squeeze on profit margins. Firms lack pricing power."

If a merged company can cut expenses by eliminating redundant functions while keeping sales stable, profitability will increase, he said.

But there are worries that some of the Goliaths could become monopolies and squeeze customers by raising prices.

"I am not so sure that it is good to be big in the long run -- at least in the consumer's point of view," said Anand Anandalingam, professor of information management at the Wharton School of Business in Philadelphia. "In the long run, you are right back to antitrust. The natural tendency is to raise prices."

Sohn recalled when AT&T; controlled every facet of the telephone industry before it was broken up by the courts in 1984.

"You could have a black phone or a white phone, and the white phone cost you more," he said. "If you wanted the Princess phone, which was top of the line, it really cost you more."

Pub Date: 10/06/99

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