Rise of the mega-firm: Is bigger really better?
Corporations the size of nations raise questions about job creation, regulation
Companies are getting bigger than countries.
Ten "supercorporations" now exist with annual revenues of more than $102 billion - greater than the annual gross domestic product of Greece or Finland. In fact, if newly merged Exxon Mobil were a country, its $203 billion in revenues would make it the 20th largest nation in the world - bigger than Saudi Arabia, with all its subterranean seams of oil.
The emergence of the era of the supercorporation, however, is also posing profound new problems for governments, workers, and even the people running them. For example:
* They put pressure on other companies in the industry to merge, develop niches, or go under. One example: the railroads, where there used to be about 20 carriers. Now there are four big firms and a few small ones. "The costs of running them just became enormous, and any time there was an economic downturn, the weakest faced bankruptcy," says Philip Verleger, adviser to the Brattle Group, a Boston-based consulting firm.
* They become increasingly difficult to regulate. Exxon Mobil, for example, says it will operate in virtually every country in the world. Because of such global mergers, Karel Van Miert, the head of competition for the European Commission, is calling for an international cartel authority.
* The new combinations may not be good for job creation. Almost immediately after a major merger, corporations cut back on duplicate staff. Exxon Mobil, for example, expects to lay off about 9,500 employees.
"When you look at job growth in the US, virtually 100 percent of it is not from the Fortune 500, but from the development of new business ideas and innovation," says Michael Cleary, a vice president at Mercer Management Consulting in New York. But he adds that the mergers might ultimately save jobs if a company's only other alternative is going out of business.
Spurring the merger trend, in part, is some of the same factors that are tearing down national borders. The Internet, cell phones, faxes, computers - all make it easier for companies to control the flow of capital and manage operations across continents.
"Monolithic things like countries can't maintain consistent behavior, and the same factors are driving companies to move quicker than before and to achieve scale so that someone else does not beat them to the punch," says Steve Bloom, national director of corporate finance at KPMG, an accounting firm.
Impact on consumers
For consumers, the giant companies may not be beneficial. Consultants say that, as giant companies, they have larger bureaucracies. This makes it more difficult for them to react quickly to changing consumer desires. "There is a good chance the larger companies will have a tougher time figuring out what the customer wants," says Mr. Cleary.
Twenty years ago, companies could still profit even if they were slow to change. But Cleary says that in the era of global competition, "new ideas appear much more rapidly on the horizon." The example most often cited: General Motors, the second-largest car company, lost touch with customers and was slow to produce minivans and sport-utility vehicles.
Alan Webber, founding editor of Fast Company magazine, says giant companies may also have trouble attracting talented people, many of whom feel anonymous in a huge organization.
"People need to feel they have a stake in the company and can affect the direction of the organization," he says. "If you took a class photo, it would be interesting to look back in a few years to see how many of the top talent have left and how their new employer was able to recruit them."
Still, there are advantages to being big.
For example, giant companies often control a major segment of a market. In automobiles, it's the Big Three (now the Big Two). In soft drinks, it's Coke and Pepsi. Raj Sisodia, trustee professor of marketing at Bentley College in Waltham, Mass., has done a study and found that often three companies control 60 to 70 percent of a market.
"We used to think it was just a handful of industries, but it turns out it is much more widespread," he says. He cites consumer electronics, aerospace, tires, airlines, and the auto industry. Through mergers, he says it's also happening in telecommunications and pharmaceuticals. "The companies that don't get merged have to figure out their exit strategy or find ways to specialize," he adds.
Benefits of bigness
Another advantage of size is access to capital, which makes it easier to grow. For example, in the oil industry, the cost of drilling for new oil has been steadily decreasing but the size and scope of the projects are getting larger.
Some of the new oil fields are in hostile environments where the development costs are in the billions of dollars.
"A modest size firm can't play in that league," says Mr. Verleger. "You have to have the growth to keep pace with the expanding size of the investment opportunities."
In fact, one reason companies have become as big as countries is because of a shift in the way management thinks about paying for acquisitions. It would be almost impossible to fund a $100 billion buyout with cash.
Instead, companies are now willing to use their own stock. "If it were not for the use of stock, you would not see these deals," says Mr. Bloom, who believes it's good for the economy to use stock. "It does not divert money from expenditures or endanger the future of the company."
Why urge to merge
Bloom says another reason for many of the giant mergers is a shift in the US financial services industry. Banks and insurance companies used to stick mainly to their own individual states.
But in the last five years they have started to spread across state and regional lines.
"They have now become large enough that when you buy them, you buy a large footprint," he says.
Two of the largest recent mergers are indicative of this new dynamic: The acquisition of Bankers Trust by Deutsche Bank AG and Bank of America's link up with NationsBank.