Mergers are on the Rise: Is it Good for the Economy?

130319140943-stock-market-economy-americans-opinion-1024x576.jpgMergers and acquisitions are on the rise. In the first quarter of 2018, mergers and acquisitions (M&As) all over the world totaled more than $1.2 trillion in value, reaching a record high. The motivation for the increase is due to a variety of factors, including fast economic growth in the European Union, optimism from the United States’ recent tax reform, strong equity and debt markets, and an increase in cash offers from corporations.

Because conditions will likely remain favorable for M&As to continue growing in the near future, we have to ask: is this increase ultimately a good thing or a bad thing for the economy?

How Mergers and Acquisitions Work

First, we need to understand how M&As work. The basics are pretty easy to understand, though certain types of deals can get quite complicated.

In an acquisition, a (typically large) company buys a smaller company, gaining access to its infrastructure, assets (including intellectual property), and in many cases, its workers as well. Think of this as Google buying a tech startup so they can utilize its technology in an upcoming product.

In a merger, two (relatively) equal companies decide to partner up and start a new company that accomplishes the goals of each. For example, in the late 90s, Daimler-Benz and Chrysler merged to become Daimler Chrysler.

Within a business, a merger or acquisition is often treated as a standalone project to manage, with individuals within the company consolidating financial records, analyzing human resources, and paving a new path forward. It requires significant attention to detail and cooperation from both sides, and in some cases, the deal falls through before everything is finalized.

But let’s assume a deal has gone through; is this going to impact the economy positively or negatively?

The Benefits for the Economy

There are some ways that M&As impact the economy positively:

  • Efficiency and synergy. The biggest positive from M&As are the increase in efficiency and synergy within the final company. A core company may gain access to better equipment, more retail locations, more sophisticated technology, or a bigger workforce, which can allow that company to produce things more efficiently. Ultimately, that increase in productivity could be good for the business, for consumers, and for the economy overall.
  • Competition encouragement. When two small competitors merge to create a more formidable one, it’s natural for other competitors to get nervous. In a capitalistic environment, this encourages competition—and competition drives productivity up and costs for consumers down.
  • Incentives for growth. Supporting an environment with the potential for strong M&As gives more entrepreneurs an incentive to start businesses and succeed. Knowing that it’s possible for a small startup with an innovative technology to get acquired for millions of dollars is an enormous incentive to innovate.

The Dangers for the Economy

However, there are also some risks:

  • Debt. In some cases, merging companies take on each other’s debt; in others, financiers use a leveraged buyout to purchase the acquired company with borrowed funds. Either way, the final company may be saddled with more debt than it bargained for. If this isn’t done intelligently, or if unforeseen factors interfere with its plans, it can cause the business to collapse.
  • Ego and impulsiveness. Not all M&As are done with efficiency or growth in mind. Some are done to bolster the image of the company (or the CEO leading it), and some are done for a short-term boost, so the company’s leadership can immediately benefit. When deals are done this way, they’re almost universally bad for the economy, since they’re all fluff with few benefits.
  • Oil and water. Merging companies don’t always mix well. Differences in corporate philosophy and leadership might lead to a division within the workforce, and more productivity problems than advancements.
  • Defensiveness and desperation. Some companies pursue an M&A out of defensiveness; afraid of competition, they see it as their only option for escape. These types of deals rarely work out in a way that benefits the economy overall, though it may allow the company to survive a few months longer than it otherwise would.
  • Size and domination. One of the biggest threats to the economy (and consumers) is the looming size and market domination of a company that’s gone through a successful merger; a bigger company is one that has more control over prices, and one capable of stifling market competition. One report, for example, indicates that M&As are typically associated with a significant markup of products and services, without a corresponding increase in value or productivity. This may increase profitability, but it’s not health for the broader economy.

The impact of an M&A on the economy depends almost entirely on the intentions of the companies involved, the nature of the deal, and how the M&A is internally handled once the deal is finalized. As there is potential for both a positive and negative impact, we must consider M&As as a neutral move in general, considering each individual M&A action as a unique situation unto itself.

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