Commentary: All These Mergers Are Great, But...

The $129 billion merger of MCIWorldCom Inc. (WCOM) and Sprint Corp. (FON) may be garnering the headlines, but it is only the tip of the biggest merger wave in history. On the day before the two companies announced that megadeal, the largest U.S. radio station company, AMFM Inc. (AFM), made public its $23 billion acquisition by the third-largest, Clear Channel Communications Inc. (CCU) (page 56).

And the merger frenzy is not restricted to technology, media, communications, and other New Economy industries. On Oct. 6, Phelps Dodge Corp. (PD) agreed to buy Asarco Inc. (AR) less than a week after completing negotiations to acquire Cyprus Amax Minerals (CYM). The result: The largest copper producer in the world. Globally, more than $2 trillion worth of mergers and acquisitions were announced in the first three quarters of 1999, according to Securities Data Co.

GROWING CONCENTRATION. Given this mind-boggling volume, it's time for antitrust regulators to take a broader look at what the megamerger boom is doing to the economy. Nobody is calling for a return to the era of out-of-control trustbusting. But there is a growing sense among some economists and antitrust lawyers that the concentration of market power in the hands of a relatively small number of big companies may be going too far. ''Antitrust policy has taken itself out of the ballgame,'' says Albert Foer, president of the American Antitrust Institute, a think tank founded in 1998. ''The regulators are doing a reasonably good job at near-term microanalysis, but they are not giving adequate attention to long-term implications.''

Since the early 1980s, the dominant view among economists has been that regulators should avoid second-guessing corporate decisions unless there is clear evidence that a merger will create significant pricing power. ''Especially when the merging companies are not direct rivals, the presumption should be that it is O.K.,'' says Jonathan B. Baker, a law professor at American University and the former chief economist at the Federal Trade Commission. When regulators have problems with a deal, the preferred solution is not to block the union but to force merging companies to sell off overlapping parts of their businesses.

But taking a case-by-case approach to mergers means that regulators lose sight of the bigger picture. For one, they do not sufficiently weigh the possibility that a particular deal, even if it looks O.K. by itself, may trigger a merger spree among other companies in the same industry. The Clear Channel-AMFM merger, for example, is in many ways an effort to avoid being crushed by the combined CBS Corp.-Viacom Inc. (VIA.B) media empire.

SQUEEZE PLAY. The old market verities apply: As concentration increases, it's easier for remaining players to raise prices. In the copper industry, the prospect of consolidation helped drive up future prices by more than 20% since the middle of June.

Dominant players can potentially squeeze their suppliers as well as their customers. In farming, the continued concentration of agribusiness is putting pressure on independent farmers. This trend should only continue in the aftermath of Cargill Inc.'s July acquisition of Continental Grain Co.'s grain business, giving Cargill almost one-third of the U.S. grain export market.

The merger boom affects far more than pricing. The absorption of smaller, less bureaucratic companies into larger, more rigid ones can potentially choke off innovation. Moreover, as the companies at the top of the pyramid get bigger and bigger, they also wield more and more clout. ''Political power goes hand-in-hand with economic power,'' says Foer. Such a concentration of power may not be healthy for the democratic process.

Certainly, at this point there is still relatively little public outcry against the perils of bigness, even when behemoths such as Sprint and MCIWorldcom merge. Nevertheless, a closer, more critical examination of such deals can only leave the U.S. economy healthier in the end.

By Michael J. Mandel

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