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Big Mergers and Shrinking Economy
July 5, 2010 - 12:22am | 
Many big corporate mergers have occurred in the past three years. Does this lead us to believe that the cause is the economic downturn? Surprisingly this can also happen in booming economy, but the toll will be much less compared to a shrinking economy.
Big mergers are often seen as positive by the public, especially from the stock market side. Whatever industry the merger may be in whether: banking, finance, technology, media, energy, auto, retail, mobile phone or pharmaceuticals, the entire sector will usually soar at the market open. Are the big mergers really good? It may be good from the investment perspective but definitely not from the economic point of view.
Big mergers often yield great benefits to the company’s growth, and to top management as well as the investors in the company. Though a CEO may be asked to leave due to merger, he/she would expect to receive a good monetary compensation, sometimes huge! In this article we analyze some of the benefits and drawbacks associated with a corporate merger, current trends and its effect on the economy in this article.
Benefits to Corporate
Excellent demographic presence can boost the confidence and also the earnings. Think about the mergers between Bank of America and Fleet bank, Wells Fargo and Wachovia, Delta and Northwest Airlines, etc. Wells Fargo and Bank of America had good presence on the west coast and Fleet Bank and Wachovia are on the east.
The senior management team will dictate the cost cutting plans, merging their divisions and new software that can provide the features of similar products in both companies. Of course, merging their divisions will include significant layoff that is another savings to corporate. The new innovative product arises from the merged company is provided to the existing customers to make them happy. This can reduce the marketing cost and increasing sales compared prior to merger. Increasing product price due to lack of competition is an added advantage.
Difficulties Caused by a Merger
There will be significant cost and fees associated with the merger. Besides the cost of getting the state and federal regulatory approval, shareholders' approval is another challenge. Even after the company is merged, there will be internal competition between the legacy divisions to retain their jobs and product services. Some good products or services may have to be deprecated even if they earn revenue.
One or two years after the mergers, their customers will start using the latest version of the product. Training and educating the sales and marketing teams, support and helpdesk team and the customers and end-users with new product is another big challenge.
Effects to the economy of a country
With big mergers the negatives to the economy of a country will outnumber the positives. Increasing product prices due to monopoly affects the people. Mergers often cause hiring freezes and layoffs. Consequently both the company and those who are laid off will spend less - affecting the business of retail sector, restaurant and entertainment sectors as people tightening their wallets, energy sector as less use of gas & electricity and mobile phone carriers as companies cancelling plans laid off employees. Excellent geographic presence reduces the need for frequent flying for sales people affecting the airlines industry. On top of this, the government must provide unemployment benefits to those who have been laid off. This might strain the government budget.
Thus big mergers affect the business of many sectors. A significant side effect is that other sectors are forced to consider mergers in order to survive.
What the next mergers would be?
The market is betting on next mergers in the recent years. Here is the brief outlook from my perspective.
Even Microsoft (NASDAQ:MSFT) was ready to pay a huge premium to Yahoo (NASDAQ:YHOO) in the past, the merger deal did not go through. Microsoft can look for complete alternate by entering directly into online trading business. The easy way to acquire a company like E TRADE (NASDAQ:ETFCD) which market capital is approximately $3.07 billion as of 11 June 2010. Even paying $4.5 billion to E TRADE which is 50% premium, is a tiny amount to Microsoft. Microsoft can enhance MSN finance with online trading for its growth. Alternatively even Yahoo or other financial companies who are not into trading can acquire E TRADE or similar ones.
The possibility of mergers between gold mining companies across countries is also likely. The top list would be Barrick Gold (NYSE:ABX) and Goldcorp (NYSE:GG) in Canada, Gold Fields (NYSE:GFI) in South Africa and Newmont Mining (NYSE:NEM) in USA. Where the physical gold can be sold in anywhere in the world, it can only dug in some places. When the digging becomes deeper, extracting gold becomes costlier. Rather the companies can move forward in looking different region may lead to the mergers.
Delta (NYSE:DAL) acquired Northwest airlines in the past. There might be some more on the pipeline - the mergers among UAL corporation (NASDAQ: UAUA), Continental Airlines (NYSE: CAL), Southwest Airlines (NYSE:LUV) and US Airways (NYSE:LCC) are likely. Increasing the gas prices and reducing the number of business travelers might do a forceful merger in airlines.
As Metro PCS and Vonage (NYSE:VG) started capturing mobile phones and landlines customers respectively by providing good international deals and no long term locking, they are most likely to be acquired in the future. Verizon (NYSE:VZ), Comcast (NASDAQ:CMCSA), AT&T (NYSE:T), Sprint Nextel (NYSE:S) and T-Mobile are loosing landline customers to Vonage and mobile phone customers to Metro PCS.
Down the road
Why most big mergers happening more while economy is shrinking? The answer can be because of the survival of the fittest and to keep the good name and reputation. When the revenue is going down in a weak economy, companies will often seek a merger to support their revenue levels and they proceed with the big mergers and cost reduction plans to be in sync with the economic downturn.
When there are new innovative products coming up, then economy will begin to grow. At that time, there will be more news from big companies like, launching a new division, hiring huge number of people for R&D along with excellent sales and revenue forecast. I am optimistic about the US economy and we will see and experience the good news in about two to three years.
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