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What we can learn from all the mergers
Logos for Abbott Laboratories and Solvay
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TEXT OF STORY
Kai Ryssdal: You know how we're always saying a pickup in consumer spending is a good indicator that things are getting better economy-wise? The same holds true for corporations. When they're more confident, they tend to spend more. Xerox, the document company, and the health-care conglomerate Abbott Laboratories are clearly feeling pretty good. Today they opened their wallets and shelled out a combined $11 billion to expand their opportunities.
You think back over the past couple of weeks, and we're up to half a dozen or so high-profile deals. Our senior business correspondent Bob Moon has more now on what's behind the pickup in mergers, and what we might learn from it.
BOB MOON: Mom always told me, "That money is burning a hole in your pocket." Which may explain why I didn't grow up to be a CEO.
These days, though, even bosses who've been stuffing their corporate pockets with cash reserves are under increasing pressure to spend it to stay out in front of the competition. Up to now, they've socked away a record $700-billion-plus, according to Standard & Poor's -- making up for lost profits by cutting costs.
SUZANNE STEVENS: Cost cutting is only part of the equation.
Suzanne Stevens is a senior editor at The Deal. She says now things seem to be improving, that old business axiom is kicking in again: You've got to spend money to make money.
SUZANNE STEVENS: You've also got to see sales increase at some point, and certainly for public companies. I mean, they're all about growth, and one of the main levers they have to achieve that is through M&A.
Their renewed confidence in spending that money may bode well for the economic future. That's how Fred Dickson sees it. He's chief market strategist for D.A. Davidson and Company.
FRED DICKSON: Possibly the worst days of the credit crisis are really behind us and companies at this point are moving away from hoarding cash and now thinking opportunistically about expanding their business.
The Deal's Suzanne Stevens says it helps that businesses are finding it a little easier to bolster their own spending money with cheaper credit. But she remains cautious.
STEVENS: There is still a lot of fear out there in the market. I mean, I've interviewed dozens of bankers and M&A lawyers who will tell you that, yeah, credit is a problem. It's certainly holding down the level of M&A, but fear and pricing continue to be an issue. You know, boards are much more cautious.
After what we've been through, though, Stevens points out the extra care behind these deals might actually encourage the banks to start lending a little more freely.
I'm Bob Moon for Marketplace.
As the story points out, these companies aren't buying with liquid cash--they're using loans. Having a flush bank that wants to make money to offset past losses, does not mean a company that takes the money is doing well. Railroad and automotive history are loaded with bankrupt companies that merged with other bankrupt companies, hoping to make one good company that would come back from the brink.
If a company took a loan to reinvest IN ITSELF, then I would say, that company sees itself doing well. But, during the Reagan era, there was the classic story of US Steel taking money from Reagan's tax breaks, and investing in a different field, leaving the steel industry behind for the Japanese to take over, rather than re-invest in the machinery Japan was using, and competing for America's business in steel needed for manufacturing.
What we should be learning from the “M&A†is that, hype notwithstanding, is that they are not beneficial to the economy or the country.
MARKETPLACE should stop cheering them and start critiquing or at least neutrally reporting on, them. These “deals†are almost always done with borrowed money; they almost always result in massive layoffs at the acquired company; and they almost never result in a net increase in output. Frequently the debt incurred by the acquiring company to finance the “deal†ends up threatening the existence of that company.
For the most part, the trillion$ in M&A that occurred in the 1998 to 2007 era are almost as responsible for the “crash†as the housing bubble. Regulators definitely fell down on the job by failing to say “Noâ€, especialy in the case of banks.
While I would just as soon outlaw them, under my government M&A would be heavily taxed: the initial takeover would be taxed, there would be a surcharge on borrowing to effect the “dealâ€, layoffs in the first five years would be taxed, and federally insured banks would not be allowed to participate in financing them.
