(James Saft is a Reuters columnist. The opinions expressed are
By James Saft
Dec 28 For all the talk about efficiencies as
the driving logic behind corporate mergers, the real juice comes
from increased power to hike prices.
A study using new techniques finds that industrial mergers
show little evidence of increased efficiency or productivity.
What does happen is a lot simpler: bigger markups leading,
theoretically, to higher profits.
If you listen to the typical conference call after a merger
is announced you will hear a lot about "efficiencies," shorthand
for the sorts of economies of scale which form much of the
supposed rationale behind most such deals. What you won't hear
is the very possibly true and more honest: "Now we'll be hiking
On that basis, the most attractive merger for shareholders
isn't the one with the most scope to gain economies of scale,
but the one which wins the buyers the most market power.
In other words, the merger that sails closest to the line of
being rejected by regulators as anti-competitive.
For society and the economy, of course, it may well be that
mergers are not so attractive.
The study, by Bruce A. Blonigen at the University of Oregon
and Justin R. Pierce of the Federal Reserve, looked at census
data on manufacturing plants in the U.S. between 1997 and 2007,
allowing them to compare efficiency and markups among plants
which were and were not part of mergers, examining as well those
plants which were part of a merger which had been announced but
not yet consummated.
"We find that evidence for increased average markups from
M&A activity is significant and robust across a variety of
specifications and strategies for constructing control groups
that mitigate endogeneity concerns," Blonigen and Pierce write
in the October paper.
"In contrast, we find little evidence for plant- or
firm-level productivity effects from M&A activity on average,
nor for other efficiency gains often cited as possible from M&A
activity, including reallocation of activity across plants or
scale efficiencies in non-productive units of the firm."
Besides having serious implications for investors and
policy-makers, the results rather undercut the value of much of
the output of consultants and buy-side analysts over the past 40
years, who have collectively expended forests of paper in
praising and recommending the efficiencies which now,
apparently, are nowhere to be found.
And while the study doesn't prove, or set out to prove, why
we get markups after mergers it does not take an Adam Smith to
work out that it has something to do with taking full advantage
of eliminating competition.
OF MARKUPS AND MEN
Central to the issue are the concepts of markups and market
Markups are the amount a company can charge above what it
costs them to make goods or services. In a perfectly competitive
market markups are winnowed away to nothing while the more
market power a firm has the more it is able to impose markups.
Plants in the study which were part of a merger were able,
mysteriously, to impose markups of 15 to 50 percent higher than
the average of those which were not.
The study also looked, and found little evidence, to support
the idea that mergers led to production being moved to more
efficient plants or even of increases in efficiency by
eliminating administrative costs.
It is enough to make you want to change the name of the
degree from MBA (Masters of Business Administration) to MCE
(Masters of Competition Elimination).
What makes the study particularly interesting, and even more
richly ironic, is when you look at what it shows about markups,
which after all imply higher top line profits, and the rather
mixed history of actual mergers creating actual wealth for the
A 1999 study by KPMG found that 83 percent of mergers fail
to create shareholder value. A 2003 looking at more than 12,000
acquisitions by public firms over more than 20 years found that
among large firms shareholders lost $218 billion in the
aftermath. ( www.nber.org/papers/w9523 )
While part of this is doubtless that acquiring companies
must pay up to clinch the deal, implying that sellers do quite
well, the very high rate of post-merger failure implies
something is wrong.
After all, if you can hike your prices by 15 to 50 percent
more than your peers the market ought to set a very high premium
on the value of your shares, even in the immediate aftermath.
That doesn't happen and very likely it is because those
excess profits are being diverted before they hit the bottom
line. Fees and executive compensation are likely culprits.
Both shareholders and regulators, it seems, have good reason
to be dubious about the benefits of many mergers.
(At the time of publication James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund. You can
email him at firstname.lastname@example.org and find more columns at blogs.reuters.com/james-saft)