Magazine

Here Comes The Year Of The Deal


After years of stagnation, the U.S. mergers-and-acquisitions market is heating up again. The value of deals in the fourth quarter totaled some $250 billion, including Kmart Holding Corp.'s (KMRT) agreement to buy Sears (S), Roebuck & Co. for $11 billion, the announced $39 billion deal between Sprint (FON) and Nextel (NXTL), and Exelon's (EXC) $12 billion bid for utility Public Service Enterprise Group (PEG).

All of the factors are in place to make 2005 the year of the big deal. The economic recovery is on a firm footing, enabling executives to take bigger risks. U.S. corporations have more than $2 trillion in cash and short-term assets on hand, enough to pay for plenty of acquisitions. Potential foreign buyers have the advantage of the weak dollar. The increased globalization of business makes economies of scale more important than ever. And the announcement of a few big deals is quickening the pulse of corporate managers, who are scouting for potential merger partners or acquisition targets, lest they be left behind.

Corporate deals are essential to the workings of the U.S. economy. They wipe out excess or obsolete capacity, allow companies to adjust to changing market realities, and even help balance out the trade deficit, as foreign companies buy U.S. outfits. The willingness to do big deals and reposition corporate assets reflects the flexibility of the U.S. economy -- one key reason why the U.S. was able to adapt so quickly to the Information Revolution of the 1990s.

However, fallout from a new M&A boom could turn out to be a major unanticipated policy issue in 2005. Rapid consolidation could increase pricing power in many industries. For example, a series of big telecommunications mergers could reduce competition and boost inflation in that sector. Some critics have suggested that the oil company mergers of the 1990s were one reason why oil and gasoline prices have risen so sharply in recent years. Moreover, a string of foreign purchases of major U.S. companies could also stir up politics, renewing fears about the "selling of America."

The downside of consolidation was less apparent during the M&A boom of the 1990s, since acquisitions and consolidations were balanced out by an equal amount of business formation and initial public offerings. New, homegrown companies such as Yahoo! Inc. (YHOO) and eBay Inc. (EBAY) became formidable competitors to existing businesses. This time, however, there's no sign of a similar surge of startups leavening the economy.

By natural inclination, President George W. Bush and his economic advisers lean away from government intervention in the workings of the market. Still, it's the right time for the government's trustbusters to stay alert.


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