Critics of takeovers as not so benign push for legislative remedy
T.BOONE PICKENS JR., Carl Icahn, Ivan Boesky, Michael Milken - these takeover specialists have become famous. Mergers and acquisitions are restructuring large chunks of corporate America. Raiders argue that their activities are good for the nation, shaking up management and improving economic efficiency. Richard Darman, deputy secretary of the Treasury, recently noted that raiders ``are gaining attention as a new kind of populist folk hero - taking on not only big corporations but the phenomenon of `corpocracy' itself.'' Mr. Darman defines ``corpocracy'' as ``bloated, risk-averse, inefficient, and unimaginative'' businesses.
Academics, however, find little historical evidence that raiders have improved American corporate performance.
F.M. Scherer, a professor of economics at Swarthmore College, has looked at 6,000 ``friendly'' mergers and 96 unfriendly tender offers during the 1960s and '70s. He found no improvement in the profitability of the 96 corporations, even after eight years.
Many friendly mergers, he says, showed ``a wash'' as to profitability, but on average, the impact on profit performance was negative. Small companies suffered most. Professor Scherer figures that is because the personnel disruption in such companies was greater than in big ones.
Some 40 percent of the acquisitions of the 1970s ended up in corporate divorce - the purchasing companies somehow selling or otherwise disposing of their acquisitions or portions thereof. In the meantime, the mergers have upset the lives of thousands of employees, and communities have been decimated by the loss of corporate headquarters or major plants.
The winners are the corporate raiders, investment bankers, and lawyers. Shareholders in acquired companies have also benefited by selling out at higher prices. But the shareholders of companies making acquisitions rarely enjoy any price gains. Murray L. Weidenbaum, director of the Center for the Study of American Business at Washington University in St. Louis, notes that raiders' stock often declines.
In the wake of the Ivan Boesky inside-trading scandal, Congress is set to investigate stock market practices, corporate governance, the nation's industrial structure, and antitrust policy. But what Congress should actually do about this ``helter-skelter redrawing of the corporate map,'' as economist H.Erich Heinemann of Ladenburg, Thalmann & Co. puts it, is a matter of debate.
Dr. Weidenbaum, like many conservative economists, says it should do nothing. ``Study after study shows that government often does more harm than good when it interferes in private business decisionmaking,'' he argues. The former economic adviser to President Reagan holds that takeovers would occur less frequently if corporate boards looked after the interests of their shareholders better.
Mr. Heinemann wants Congress to focus on ``the truly critical issues - namely, the buildup of debt and the restoration of the United States' competitive position in world markets.
``The toxic waste in most corporate takeover attempts is a mountain of debt which companies assume at the same time that they redeem large amounts of common stock,'' he says. ``The totals run to the hundreds of billions of dollars.''
Swarthmore's Professor Scherer worries that should a recession occur, these companies will find their cash flow significantly reduced. They will then cut back drastically on capital spending, worsening the recession at a time when the federal government, troubled by its own high debts, will find its hands tied, unable to take expensive remedial measures.
``It could cause a severe recession,'' he warns.
He also believes the wave of tender offers is causing management to take its eyes off the challenge of international competition and devote attention instead to devising takeover defenses. Among these: ``golden parachutes'' to save the financial skins of executives in a takeover; systems that reduce shareholder power; stock buybacks; sale of corporate assets; and ``poison pills'' that harm the raiding company if the tender offer succeeds.
Another concern arising from the merger boom is that it is concentrating economic power in the nation. With the Reagan administration taking a much more relaxed antitrust viewpoint, merger activity has grown from about $50 billion annually (1982 dollars) in the period from 1977 through 1980 to roughly $150 billion annually in the years since then.
Most studies indicate that corporate concentration has changed little in the postwar years. Small companies have sprung up and grown sufficiently fast to cancel out the effect of mergers. But Robert Pitofsky, dean of the law school at Georgetown University, says if the merger wave continues until the turn of the century the nation will indeed end up with much greater corporate concentration.
``You would have a different kind of country if every industry had only two or three firms,'' Professor Pitofsky says.
Other critics dislike the effect of takeovers on individuals. Yale economist James Tobin has written about the merger business taking more and more resources, ``including the cream of our youth, into financial activities remote from the production of goods and services into activities that generate high private rewards disportionate to their social productivity.''
Joseph F. Brodley, a law professor at Boston University, calls for a national commission to study the merger question, with Congress imposing a moratorium or slowdown on mergers during the study.
Pitofsky, holding that the lack of antitrust enforcement in the last six or seven years has been ``rather extreme,'' wants a sterner position by the Federal Trade Commission and the antitrust division of the Justice Department.
One measure that could knock out some takeovers has already been taken: Under the new tax law, which takes effect Jan. 1, some benefits enjoyed in mergers end. ``You will get somewhat fewer takeovers, because this extra juice will not be in the deal,'' predicts Alan Feld, a Boston University law professor.
Congress could also increase the waiting time between announcement and a tender offer from 15 days to 30 days in the case of cash tenders. It might also try to ban ``greenmail'' (paying off a raider by buying back his stock at a premium) and tighten up the rules on how much ``junk bonds'' (high-risk bonds, often used in financing takeovers) could be bought by banks or other financial institutions.
With Democrats in power in both houses, measures to discourage takeovers and industrial concentration have become more likely, although a presidential veto remains possible.
Should takeovers go too far, concentrating power in the hands of too few companies, Congress would come under public pressure either to increase regulation or consider state ownership. That is the pressure that prompted Theodore Roosevelt to move against the ``trusts'' in 1890. It would be better to discourage takeovers now and not repeat history.