Are companies ready to take risks in this economy?
American International Group (AIG) offices in New York City.
TEXT OF INTERVIEW
CHRIS LOW: Now let's get to the private sector. There's news this morning of another big deal in the works. Community Health Systems is bidding more than $3 billion for its rival, Tenet Healthcare. A joint company would own almost 200 hospitals in the U.S. This is just the latest big deal as companies try to take advantage of their stockpiles of cash.
Let's turn to Chris Low, he's chief economist at FTN Financial and he's here with me in our New York studio. Good to see you, Chris.
CHRIS LOW: Good to see you.
HOBSON: We heard about another big deal, this healthcare deal. It seems like we hear about one of these acquisitions just about every week, or more than one. Are companies ready to take risks again with their money?
LOW: That's a little bit of what's going on, sure. You don't make a $3 billion acquisition if you're not willing to take any risk at all. But the other thing that's going on and has been a theme for years is controlling costs. The reason you make an acquisition like this is because there's economies of scale and that usually means cuts are in the works.
HOBSON: Cuts to jobs -- is that what we're talking about?
LOW: Yeah, that's right. And you know what's unusual about this is that normally mergers are late cycle activity. This is the kind of thing that companies do when they've arleady done the big expasion and plant equiptment. They've already hired people, the job markets are tight, and productivity's the only what to squeeze out growth. It's very unusual for early in the business cycle.
HOBSON: So we don't benefit really in terms of jobs as an economy with all of these acquisitions and mergers going on?
LOW: Certainly not short run, no. In fact the sort of standard assumption is that the first thing you do in a merger is cut about 10 percent of the work force. Long run it means more productivity, it means these companies are more competitive and they'll hire. But you know we've been talking about long run now for three years.
HOBSON: Alright, another three year situation, or two and a half at least, we've this week that AIG -- the big insurance giant that was bailed out to the tune of $180 billion -- has laid out a plan and the Treasury Department may actually make a profit on the AIG bailout. And we heard that Citigroup, one of the biggest bailed out banks is about to get itself out from under the government's wing as well. Are these financial institutions really as healthy as they seem?
LOW: Look, the big shock here is AIG. I don't think anybody thought at the time they would be able to pay the government back and certainly not this quickly. However, there is still a lot of heavy lifting to do. The first thing these guys had to do is get back to where they were profitable. They now have to start selling assets so that they can not be too big to fail I guess.
HOBSON: A lot of toxic assets still left on the books. Chris Low, Chief Economist at FTN Financial, thanks for coming in and have a great weekend.
LOW: Thank you.