Like Most Things In Government, Anti-Trust Policy Is Terribly Misguided.
By all indications merger and acquisition activity is on the rise. In the first five months of 2019 companies announced over $1 trillion in mergers and acquisitions, a 14% increase from the same period in 2018. This is generally good for the economy, the consumer, and the shareholders as all Americans are set to benefit from the economies of scale, the increased innovation, lower prices and stronger stock market returns that generally accompanies this kind of activity.
While it is difficult to pinpoint one specific reason for the increase in corporate consolidations, recent developments including the president’s tax reform bill, large corporate cash reserves and strong equity and debt markets may all be contributing to this flurry of activity. The need to maintain our technological edge in the face of growing global competition is another.
The United States is quickly losing its research and development edge against the rest of the world, a key metric of economic success. In 1960 the United States accounted for over two-thirds of all R&D activity. Since then the total U.S. share of R&D has fallen to 28% and is risk at of greater decline as foreign competitors put a strong emphasis on developing new technologies.
Over the past two decades China, for example, has emerged as a global science and technology leader. Since 2000 China’s share of global R&D more than quintupled from 4.9% to 25.1%. At this pace of growth they could well soon overtake American innovation. Mergers can help reverse this trend.
Pooling collective corporate resources offers economies of scale that increases capabilities and helps advance technologies. By eliminating the redundancy of fixed costs, savings can be passed down to consumers in the form of lower prices and leveraged to fund additional research and development.
Ultimately, strategic mergers ensure that companies can compete in rapidly changing markets both domestically and abroad. The Trump administration is constantly looking for ways to even the playing field against China. They have leveled tariffs against a number of imports and just recently labeled China a currency manipulator in response to their efforts to devalue the Yuan. Allowing companies to take advantage of natural synergies in order to streamline costs and make them more competitive is an underutilized tool that the administration should employ more often.
While the headlines of business pages have primarily been devoted to tech and pharmaceutical mergers recent movements in the defense and aerospace sector, specifically the proposed merger between Raytheon and United Technologies, demonstrate how strategic mergers can prove beneficial to national security as well.
Just as technology companies need to continuously compete with foreign developments so does our defense industry. U.S. defense-related R&D has fallen from 36% of global R&D to 4% today and will likely fall further as defense budgets come under additional pressure in future years. To ensure America maintains its edge against foreign adversaries the federal government will have to rely more heavily on contractors and commercial companies to leverage their integrated capabilities for cost-effective innovation.
Naysayers have been raising anti-trust concerns about the merger, arguing that joining the two companies will remove a source of competition and increase the pricing power of the new entity. But defense only accounts for 25% of United Technologies’ business and a mere 1% of the two company’s sales overlap.
Many of the most vocal critics of this proposed merger also happen to be activist investors who are motivated more by short-term profits than generating long-term value. This modus operandi is devastating to private research and development. One study, for example, found that after companies were held for a median period of 423 days by activist hedge funds, funding for R&D was cut by more than half. Another study found that companies, under pressure from activist investors, are defensively making cuts to R&D harming long term technological innovation in the economy.
At the end of the day, commonsense mergers are essential to American competitiveness. While every merger deserves the appropriate scrutiny to allay relevant anti-trust concerns and not all will pass the sniff test, deals like the Raytheon-United Technologies merger and similar partnerships in innovation are key to ensure that America maintains its technological edge, both in the commercial and defense sectors.
Michael Busler is a professor of finance at Stockton University, where he teaches undergraduate and graduate courses in finance and economics. He obtained his doctoral degree from Drexel University.