A 1972 memo by R. J. Reynolds researcher Claude Teague included the remark: “Happily for the tobacco industry, nicotine is both habituating and unique in its variety of physiological actions.”
A 1978 Brown & Williamson memo signed H. D. Steele noted: “Very few consumers are aware of the effects of nicotine, i.e., its addictive nature and that nicotine is a poison.”
A 1983 memo by B&W researcher A. J. Mellman stated: “Nicotine is the addicting agent in cigarettes.”
An undated marketing document by British-American Tobacco product development researcher Colin Grieg referred to cigarettes as a low-cost “drug administration system for public use” and noted that “other ‘drugs’ such as marijuana, amphetamines and alcohol are slower and may be mood dependent.”266
Despite this, Washington politicians in the White House and on Capitol Hill were aiming to pass a bill in 1998 ratifying state legal settlements that would curtail rights of past and future victims to sue for damages. The tobacco companies who insisted on this immunity were among the biggest contributors to political campaigns on the federal level. When the bill, as amended, was not to their liking, they spent $40,000,000 on a media campaign to denounce it as a tax on the poor and working class, and the bill was killed.
Big Business can do business with Big Government
As President Clinton joined with Republicans to call for the end of big government, too little attention was given to the fact that most of the political attacks on big government had been financed by major stockholders and top management of big business, which has bureaucratic inefficiency on the same scale as big government. Nobody said much about big business, nor realized that if corporations weren’t so big, we wouldn’t need so much big government to control them and fix the problems they create.
Flouting the laws
While the owners of businesses and corporate management would like to be above the law, with the immunity enjoyed by major league baseball, they sometimes approach the same result by ignoring laws they don’t expect will be enforced. It may cost them an occasional minor fine or slap on the wrist, considerable legal expense, contributions to the politicians who can help them, and sometimes sacrificing an underling to protect the big bosses, but many of them prefer it to obeying the law.
Such behavior is seen among persistent polluters, safety law violators, child labor exploiters, labor relations scofflaws, and violators of the antitrust laws. It is, of course, patterned on methods used by gangsters and drug lords to resist the law.
The problem involves multinational corporations more powerful than many nations. Their records on human rights are generally dismal, and they have been responsible for much of the
exporting of American jobs to exploited workers in low-wage countries.
30. MONOPOLY AND RESTRAINT OF TRADE
Heads of corporations announcing a merger often speak of enabling their companies to compete more effectively and to improve their service to customers. Actually the opposite is usually the case—mergers are a means of suppressing competition, and service to customers generally deteriorates as fewer companies are competing for their patronage. Adam Smith, the 18th century free-market economist whom business leaders revere, said: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”267 Smith knew that the “invisible hand” of supply and demand in the market cannot do its magic unless there are many buyers and many sellers.
As ever-larger mergers continue to be announced, the beginning of the 21st Century may resemble the turn of the century 100 years ago. About that time the “robber barons” of industry, as they have been called by reformers and some historians, were riding high. Vanderbilt, Rockefeller, J. P. Morgan, and other “captains of industry” did not build their fortunes by fair business dealing as most people would regard it today. In fact, much of the federal regulation that exists now was enacted to prevent a repetition of their coercive business practices.
Emergence of the railroads
During the 19th century, railroad promoters, including Cornelius Vanderbilt and others, received vast gifts of public land to encourage them to build lines across and throughout the U.S. (which land, incidentally, was later spun off into separate corporations for profitable real estate development, while passenger rail operations were neglected). The lords of the rails set high and discriminatory rates for freight and passengers over those routes where no alternative transportation was available,
eventually leading to creation of the Interstate Commerce Commission (ICC) in 1887, after state legislation had been invalidated by the U.S. Supreme Court.
Not satisfied with the profits to be obtained from this new form of transportation, the railroad magnates further lined their pockets by stock manipulation, which was subject to little regulation until the Securities and Exchange Commission (SEC) was created in 1934. The majority of state legislators in the 19th century were said to be on the payroll of the railroads. (I was interested to learn that Abraham Lincoln, before he was elected President, was a railroad lawyer with a fine home quite unlike the log cabin in which the “rail-splitter” was said to have grown up.) With the political control the railroads had at the state level, it is understandable why they fought against federal regulation by the ICC. They welcomed free land from the federal government, but not federal regulation.
Birth of the oil cartel
John D. Rockefeller also amassed his fortune in the 19th century. It came from petroleum, but he used conspiracy with railroads to build his Standard Oil empire. With promises and threats he got railroads to charge his competitors in the oil business higher freight rates than they charged his company. By this means, and other sharp practices, he acquired competitors or drove them out of business.
The Standard Oil monopoly was a major impetus for the Sherman Antitrust Act of 1890, but the law was weakened by court interpretations and languished for a decade, failing to prevent the growth of more monopolies. When Theodore Roosevelt launched his famous “trust-busting” effort in 1902, his attorney general first took aim at a railroad holding company, Northern Securities, and prevailed in the Supreme Court.
The dissolution of the Standard Oil empire under the Sherman Act was upheld by the Supreme Court in 1911. The ostensibly independent pieces that resulted (Standard Oil Companies of New Jersey, New York, Ohio, California, etc.) have seemed quite competitive with each other at times, but also have
been found to have conspired together against consumers, notably during the OPEC oil crises of 1973 and 1979.
J. P. Morgan and U.S. Steel
Formation of a monopoly in the steel industry was engineered by the powerful financier, J. Pierpont Morgan, in 1901 with formation of U.S. Steel Corporation, for many years the largest holding company in the nation, capitalized at $1.4 billion. An antitrust case was brought against U.S. Steel by President Taft‘s administration in 1911, but the Supreme Court finally ruled in 1920 that, although the company clearly possessed monopoly power, it did not “unreasonably” restrain trade.
The concentration of power in the steel industry has been blamed for loss of world markets as steel companies in other nations modernized their plants, while the U.S. steel industry complacently milked the tariff-protected domestic market until foreign steel flooded in over the weakened trade barriers.
Arguments for bigness
The argument that size makes a firm more competitive is legitimate only to a point. “Economies of scale” obviously improve efficiency as the result of division of labor and specialization. Often this is interpreted as “the bigger the better.” However, large units are not always more efficient. So long as a business grows because of good management and success in pleasing its customers few people would object. Its size would be limited by the optimum for efficiency, and, of course, by the success of its competitors. Bigness is therefore not bad per se, but when growth is sought by swallowing up or destroying competitors, the public is not benefited, nor is efficiency assured. By the decade of the 1990s most well-known businesses probably exceeded their optimal economic size.
This also applies in agriculture, where a 1979 study by the U.S. Department of Agriculture found that the average U.S. farm reaches 90% of maximum efficiency at just 314 acres, and 100% efficiency at 1,157 acres. Beyond that, farms don’t get any better.
They may become more bureaucratic and less efficient. The very largest farms are twice as debt-prone as smaller family farms.268
Many studies have shown that relatively small companies produce more innovation, new products, and new jobs than the giant corporations. For example, Florida and Kenney (1990) found that “venture capital-backed start-ups dominate the top 100 research and development spenders in microelectronics, as measured by percentage of sales invested in R&D....Contrary to conventional wisdom, most high-technology start-ups are not creatures of the Pentagon. In fact...most are quite hesitant to accept defense funding for R&D.” They quoted National Science Foundation statistics showing that small companies (with 50 employees or less) increased their share of total corporate R&D spending from 6% in 1980 to 12% in 1987.269
New jobs also arise predominantly in smaller companies, as has been recognized in their speeches by political candidates of both parties, while “downsizing” has become the favored route to profit enhancement in the giant corporations. Of course, even when a company has grown beyond its optimum size, domination of its market may give it the power to increase its profits. That is not efficiency in any legitimate economic sense of the word because the corporate gains come at the expense of its customers, and perhaps its employees.
The motivation for mergers and acquisitions, therefore, is more often a desire for market control than efficiency. Another motive, of course, has been the opportunity for windfalls to top management as well as wall street lawyers and investment bankers.
Renewed monopoly building in the late 20th century
A hundred years ago the public recognized such dangers as the Standard Oil monopoly, U. S. Steel, and other pools, trusts, and cartels in commodities and transportation, which led to the Sherman Antitrust Act of 1890. As loopholes were revealed, Congress passed the Federal Trade Commission and Clayton Antitrust Acts of 1914, followed by the Robinson-Patman Act of
1936 that outlawed price discrimination tending to destroy competition.
Corporate lawyers kept trying to find escape hatches, but federal action occurred often enough to restrain merger mania until the 1980s. The restraints collapsed under President Reagan, whose habit, whenever he didn’t approve of a law, was to appoint people hostile to the laws they were supposed to enforce. The proportion of all industrial assets controlled by the top 100 corporations had grown from 39.8% in 1950 to 46.4% in 1960, 52.3% in 1970, and 55% in 1980. By 1983, 58.2% of those assets were controlled by the top 100, and 13% were controlled by only five companies: Exxon, General Motors, IBM, Mobil, and Texaco. Most of this concentration resulted from smaller companies being bought up or merged into larger ones.270
The wave of corporate mergers, takeovers, and restructuring during the Reagan years amounted to more than 25,000 deals, cumulatively valued at more than two trillion dollars. Hundreds of major companies were subjected to leveraged buyout, merger or acquisition. Between 1984 and 1987 alone, there were 21 such deals for a billion or more dollars each.271 Most mergers are tantamount to acquisitions, the difference being a legal technicality when management of one company dominates the other after the merger.
Walter Adams, Professor of Economics at Trinity University, Texas, and past president of Michigan State University, in an interview published by Multinational Monitor in June 1996, cited the example of department stores. “A real estate operator out of Montreal, Campeau, acquired a whole bushload of department stores—great names like Bloomingdale’s Burdine’s, Lazarus, Jordan Marsh—that ended in bankruptcy.
“Other bankruptcies in the industry include: B. Altman, Garfinkel’s, Carter Hawley Hale, Macy’s, Ames. These mergers were financed with debt that has burdened the companies so that they could not do the things they ought to have done to enhance production efficiency, technological progressiveness and international competitiveness.”
Also interviewed in the same article, James Brock, Professor of Business and Economics at Miami University (Ohio),
pointed out: “The purpose of deregulation is to have competition do the regulating, but if you...let all the major firms merge...then they destroy the basis for that competition....Section 7 of the Clayton Act prohibits mergers that might substantially lessen competition or tend to create a monopoly. It does not say anything about efficiency....
“After World War II, when the US occupied Japan, we implemented a massive trust-busting program to break up the monopoly of financial and economic control that existed there. We...created an intensely competitive system. They were competitive at home, and...therefore [in] global competition....
“Study after study of the sources of inventions...shows it tends to be mavericks, independents or outsiders. They tend not to have much money to work with....The notion of economics today has been twisted...to represent one narrow, extreme ideological point of view, the laissez-faire point of view....”
Changes in the merger movement
Mergers and acquisitions in the 1970s emphasized conglomerates. That is, combinations were formed of companies that were not in the same industry and therefore a merger was less likely to be considered damaging to competition. “Synergy” was a popular word, denoting that the combining companies added up to more than the sum of their parts because of ways they could help each other.
This changed in the 1980s as supporters of laissez-faire economic policies were appointed to antitrust enforcement posts. The results showed up, to my surprise and chagrin, in a computer model I developed to predict the likelihood that a company would be acquired (as an indication that the price of its stock would be bid up). This was an outgrowth of research on acquisitions that I did as a doctoral candidate.
The doctoral research aimed to measure the factors that influence how soon a company becomes acquired. It showed that among firms acquired from 1972 through 1976, acquisition tended to come sooner when: (1) managerial economies were available as indicated by lower profitability (before interest and taxes) than the
weighted average of its industry; (2) potential increase in stock value was indicated by lower price-earnings ratio than industry average; and (3) there had been an increase in earnings before interest and taxes (EBIT) over the previous three years.
Statistical measures showed significance of the model as a whole to be well above the 99% confidence level. When the model was tested to see how well it would have predicted results in the next two years, 1977 and 1978, the error was about as small as that of the original sample.
An adaptation of this academic model, eliminating industrial categories where there were no acquisitions in recent years (presumably because of industry concentration that would arouse antitrust concern), was able to select stocks for each of the seven years 1977-83 that gained an average of 31.4% each year, not counting dividends, compared with 7.3% for the Standard & Poor’s 500 Stock Index.
When the same formula was used to select stocks for purchase at the beginning of 1984, however, their performance by year-end was only about a break-even result. This was not just because Standard & Poor’s 500-stock index ended the year with only a tenth of a point gain; there were years of decline in the earlier period when the model was successful. In my opinion, it was due to the change of behavior in the merger market. As the promoters of mergers and acquisitions developed confidence that antitrust administrators would look the other way, they changed their criteria for selecting targets, emphasizing opportunities to enhance profits by eliminating competition.
Often gains in stock prices in connection with mergers are temporary as the promised benefits fail to materialize. James Brock, an economics professor at Miami University of Ohio, was quoted by the Associated Press in October 1997: “At some point the size of the organization becomes so complex, so complicated, that it is increasingly difficult to manage and orchestrate.” He added that every merger boom since the 1890s produced only a
minority of companies that actually improved their operations after takeovers.
The AP report concerned the problems of Aetna, which revealed disappointing profits after its $8.9 billion purchase of U.S. Healthcare; Union Pacific, planning to abandon business to competitors because of routing, computer, and labor problems from its $5.4 billion merger with Southern Pacific; and Wells Fargo, which had to pay back depositors for money put into wrong accounts by computer mix-ups after its $14.2 billion combination with First Interstate.272
The opposite of a merger is a spin-off, and insiders make huge profits from both. Many bloated conglomerates have sold off one or more divisions to the public, to speculators, or to groups of their own management people.
Mergers continue in the 1990s
In the 1990s mergers continued almost unabated under President Clinton, with a new record of 3,700 merger filings in fiscal 1997.273 Occasionally the antitrust division of the Justice Department showed some signs of life, as in its 1998 successful prosecution of Archer Daniels Midland Co. (ADM) and three of its top executives for illegally conspiring with four Asian companies in price-fixing (the company pleaded guilty and paid $100 million in fines, while the individuals face up to three years in prison and millions of dollars in fines).274 The government also took on Bill Gates’ Microsoft Corporation, charging that it was illegally using its dominance of desk-top computer operating systems to give its other software unfair advantages over competitors. For the most part, though, the trend for government to let big companies buy out or stifle competition continued.
As the Senate Judiciary Committee held hearings in June 1998 on the multi-billion-dollar mergers of banks and other industries, FRB Chairman Alan Greenspan warned Congress against interfering. Although Joel Klein, head of the Justice Department’s antitrust division assured the committee his agency was “carefully considering” the impact on competition and consumers, Federal Trade Commission Chairman Robert Pitofsky
declared: “We believe that many of these mergers are the result of fundamental economic changes in both our economy and world markets and that they are, for the most part, beneficial to the economy and to consumers.”275
Huge banking chains merged together, and their announcements took government approval for granted. Television and radio giants gobbled up more stations, with the help of the FCC (and in 1996 the Telecommunications Act), and further combined with entertainment, cable, and publishing companies.
Stores that used to compete with each other were bought up by chains, reducing consumer choices. Manufacturers actually bought shelf space in supermarkets to crowd out alternative brands. They formed combinations so rapidly it is hard for any consumer dealing with a business to know who owns it. Grocery products of Kraft and General Foods, as well as Miller beer, came from the same parent company as Philip Morris cigarettes. The many products of Nabisco were part of the R. J. Reynolds tobacco giant. One shopping mall came to look very much like another with stores that belong to chains that in turn belong to huge corporations.
The same was true in fast food where, for example, Pizza Hut and Kentucky Fried Chicken belonged to Pepsico Restaurants International, and in the communications business, where restraint of trade is particularly dangerous because it leads to restraint of information.
Even the professional auditing firms that examine the accounts of corporations have been merging. In October 1997 mergers were proposed that would result in the auditing of most major corporations of the nation and the world being done by only four giant firms, down from the current Big Six, which were the Big Eight when I worked for one of them in the 1960s. These mergers, according to the Associated Press, “are a reflection of the changing focus in the industry into a one-stop service that combines the traditional auditing...with consulting.” The danger here is that the firm doing an audit for the protection of stockholders and the public could lose its objectivity.
The 1990s wave of bank mergers and attempts to expand into the insurance and securities brokerage businesses was
discussed in the chapter on banking. The logical outcome of unrestricted monopoly building is a world in which people are forced to deal only with one monopoly bank/financial company, one monopoly store, and one monopoly source of information blanketing the airwaves and print media. This would be not unlike the monolith of the former Soviet communist regime, except for the rulers being a private elite controlling government from behind the scenes rather than in government posts.
Control of communications
The bipartisan Telecommunications Reform Act of 1996, for which both major parties engaged in an orgy of self-congratulation, effectively removed virtually all limits in the communications and entertainment industries. The acquisitions of ABC by Disney, CBS by Westinghouse, and NBC by General Electric all occurred because the companies knew the bill would excuse them from antitrust and FCC restrictions. And, of course, laxity by the FCC in the 1980s had already allowed Rupert Murdoch’s Australian company to exert foreign control of the Fox network and to exceed the previous 12-station limit.
After amassing empires in publishing and broadcasting in Australia and in England, Murdoch turned to the U.S., buying the New York Post, the Village Voice, New York magazine, the Boston Herald, the Chicago Sun-Times, the Twentieth Century Fox film studio, and Metromedia television stations. His papers tended to be sensational tabloids and he also pushed the limits of taste and decency on the air. Although Murdoch was quickly granted U.S. citizenship with VIP treatment to overcome objections about foreign ownership, he controls Fox through his Australian company, News Corporation, which also controls over 70% of the press in Australia, and over 35% in Britain.
Under the 1996 law, all the TV and radio stations and newspapers in any city can now be controlled by one monopolist, and television station owners are now allowed to control as much as 35% of the entire viewing market. As a deal was pending for purchase of 13 stations of Sullivan Broadcasting Holdings by Baltimore-based Sinclair Broadcasting, a news account in March
1998 reported that Sinclair would then control 55 TV stations, or 23% of the American market, having purchased 27 stations in the previous year.
Sinclair’s purchase of the 13 Sullivan stations cost about a billion dollars, and Professor John Bittner of the University of North Carolina at Chapel Hill said many stations operate with profit margins in the 40% range. To raise profits and pay off acquisition debt some of the conglomerates shave payrolls, he added, “They feel they can go in and clean out the news operation and replace it with younger and cheaper talent as a way of servicing their debt.”276