Mergers and the supersizing of business
Revival of acquisitions is driven by healthier stock market - and spurs consolidation of industries.
Mergers, megamergers and empire-building corporate weddings are back in vogue on Wall Street.Skip to next paragraph
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Almost every day, there is news of some new billion-dollar combination: banking, healthcare, and tobacco in just the past few days.
Behind the new surge in acquisitions is a much healthier stock market. Since the beginning of the year, stock prices are up between 15 and 20 percent. This has given companies the means to snap up competitors - some weakened by an economic downturn.
The furious dealmaking is part of a larger trend in American business life: the consolidation of whole industries. National companies snap up regional companies, with Bank of America buying Fleet Bank this week for $43 billion in stock. Rivals join forces to take on bigger fish - such as RJ Reynolds buying Brown & Williamson's tobacco division this week to compete against Altria's Philip Morris brands. Chief executives play chess with their company's accounts.
Call it the Supersizing of America.
"I think it's largely driven by the economies of scale inherent in global communications and systems," says Don Straszheim of Straszheim Global Advisors in Los Angeles.
It's not hard for Americans to find examples of this consolidation in their own lives. Four packers sell over 70 percent of all the beef bought in the US. Only two companies in the world make commercial jets. Three wholesalers control over 90 percent of the distribution of drugs. Three companies control almost 80 percent of the confectionary market.
The increased consolidation has prompted fairly intense antitrust reviews in Washington, says Jon Dubrow, an anti-trust partner at McDermott, Will & Emery in Washington. "They don't look at size. Big is not necessarily bad," says Mr. Dubrow. "The question is who will remain to constrain the company after the merger," says Dubrow, who says the Bush administration is as aggressive on antitrust as the Clinton administration.
Despite fewer competitors, many experts dismiss fears of monopoly control. "Most of the time, new competitors pop up," says David Wyld, a business professor at Southeast Louisiana University.
FOR example, today only a handful of grocery stores distribute most food. Yet 15 years ago, a new competitor entered the business - Wal-Mart. Today, the Bentonville, Ark., chain sells 19 percent of the groceries bought in the US.
"What has happened is that consolidation has led to incredible competition," says Adam Fein, president of Pembroke Consulting in Philadelphia. "Wal-Mart is now considering selling groceries in California, and the retailers there are figuring out how to compete."
The competition has been especially fierce in the distribution of pharmaceuticals. Only three companies, McKesson, Cardinal Health Systems, and AmerisourceBergen distribute 90 percent of the drugs bought by hospitals and drug stores. "These companies have been forced to cut costs as their profit margins have declined," says Mr. Fein.
Meat packing has also consolidated, some say to the consumer's advantage. "I don't see any evidence that quality is down or the end price is up," says Sam Rovit, global head of mergers and acquisitions at Bain & Co., a consulting firm. For example, he says the packers have introduced ready-to-eat and pre-portioned products. This has eliminated the need for butchers at the local grocery and cuts costs for the consumer. Most grocers now carry pork tenderloins, sometimes already marinated.
In such consolidated industries, competitors watch every move by their competition, says Sam Weaver, an associate professor of finance at Lehigh University. He should know - he worked for Hershey Foods for 20 years. The giant candy company, Hershey has 42 percent of the market competes but closely watches Mars and Nestle. "If there was a promotion or a price cut, there was intense scrutiny and one would immediately follow the other," he recalls.
More of the same can be expected in the banking industry as it consolidates, says Charlene Stern of NewGround, a consulting firm that works with banks. She predicts that Bank of America, which acquired Fleet, will do everything to try to retain customers. "They (Fleet customers) will see some real bargains," she says.
For example, she says Bank of America does not charge for online banking and billpaying. Fleet charges $4.50 a month for online billpaying. "In this economy, it is the customer who has the vote,," says Ms. Stern, formerly head of retail banking at Wells Fargo.
In fact, the banking industry is full of examples of how not to merge, she points out. Fleet admits its purchase of Bank of Boston resulted in unhappy consumers.
Employees at new giant companies can probably expect to work harder, says Jay Whitehead, president of HR Outsourcing Today, a magazine. With the Bank of America merger he estimates there will be an 11 percent rise in the workload for the employees. "The supersizing of companies means the workloads are getting supersized," he says.