Wall Street's fast buck artists
TWO Brigham Young University professors have some choice phrases for the wave of leveraged buyouts (LBOs) and hostile takeovers that have been sweeping the business community. Warner Woodworth and Christopher Meek call them ``Wall Street's version of trash TV...sleaze economics...corporate cannibalism.'' Such phrases are designed to attract attention to a problem - a problem which should get the attention of Congress and the new administration next year. The LBOs and mergers indicate a deterioration in the motives of some corporate executives and financiers. Instead of trying to make their fortunes by the slower means of building a business, helping customers, and providing useful financial services, too many businessmen are out for the quick buck - or should we say, hundred million bucks.
Merger artists and LBO specialists usually claim they are making the corporations more efficient. Contrariwise, the two business school professors maintain ``public virtue and concern about well-being have been replaced by Wall Street conflicts of interest, power cravings, and sheer greed.''
There is little economic evidence that mergers and LBOs add much to the real economy. Most reflect financial manipulation and personal empire building.
The raiders of various sorts note that stockholders benefit from their deals. When Kohlberg Kravis Roberts & Co. took over RJR Nabisco, its share price jumped from $56 to $109. Also, the bankers, attorneys, and other experts will charge massive fees - literally hundreds of millions of dollars for their help.
Their gain, however, can to some degree be the loss of many other Americans. Super-capitalists may act as if owners of a company - the shareholders - are the only ones that count. In fact, employees and home communities of a company also have an interest that should be considered in managing a corporation.
When an LBO or major merger takes place, it usually involves a huge buildup in corporate debt. To improve the cash flow to service that debt, the new managers may cut back on research and development, new products, innovative marketing, or job creation. That's a loss to the economy. They may cut back services. Some mergers devastate communities when new managers remove the headquarters or other operations.
The government also can be the victim of a merger. Its revenues may be enhanced in the short term when shareholders reap capital gains. But with a majority of stock held by institutions, many of them tax-exempt, that boost in revenues will likely be more than offset by the loss resulting from deductions from corporate income of the interest paid on all the junk bonds or other debt instruments used in takeovers. That revenue loss could last for years, boosting the tax burden of taxpayers in general.
What needs to be done is to make it more difficult - not impossible - to take over a company. Congress should take a close look at making the interest on bonds used in such LBOs or mergers no longer deductible for tax purposes. And the new administration should once more start enforcing the anti-trust laws.