Simon Caulkin on… The curse of size

28 March 2017 -

Big mergers are often merely an investment in political power and influence

The world is being swept by a tsunami of consolidation. In September, AB InBev won approval for a $100bn-plus takeover of rival SABMiller, creating a brewing giant with a commanding 27% of global beer sales (and nearly half of the profits).

Chemicals firm Bayer is bidding $66bn for seeds company Monsanto in a deal that would net the combined group a quarter of the world market for agricultural seeds and pesticides. Telecoms titan AT&T is angling to buy Time Warner in another mega-deal, worth $109bn. The combined phones-and-media colossus would become the third-largest US firm by profits.

Two-thirds of US industry sectors have become more concentrated in the past 20 years – nowhere more obviously than the web, where the domination of GAFA (Google, Apple, Facebook and Amazon) is near total.

Between them, Google and Facebook mopped up 75% of all new online advertising in a year and, if anything, that percentage is increasing.

The winner-takes-all economy that’s emerged online – the opposite of the promised democratic free-for-all – is ominous. Globalisation as the freer circulation of people, goods and capital – yes. Globalisation as monopolisation of industries by a few global behemoths, blunting competition and reducing corporate biodiversity – a firm ‘no’

Notoriously, extra bulk doesn’t usually benefit acquirers. Beyond a certain point, big becomes too big. Economies of scale, like synergies, are discussed but rarely seen. There are no economies of scale in managing people – rather the reverse.

The collapsing banks were uniquely dangerous for their systemic effects, but the often overlooked lesson is that they were too big to manage, as well as to regulate and fail.

The same goes for some of the giants of the productive economy, which employ the same dodgy financialised management model that the banks blew themselves up with in 2008.

Whereas the banks (which should have emphasised caution) recklessly overlent and overleveraged, big non-financial companies (which should be focused on innovation and investment) have become anti-capitalists.

Sitting on cash mountains of perhaps $3tn, US and UK firms are on investment strike, bent on retiring capital for the benefit of their families and shareholders rather than deploying it to create jobs and markets.

Public corporations on both sides of the Atlantic are older, fewer, bigger and less dynamic. If size is such a dubious blessing, why do CEOs and boards pursue it? There is one arena where bigging up translates directly into added clout, and that is in the interaction of big business and politics.

Put bluntly, large-scale mergers are an investment in political influence. Under international trade treaties, corporations can and do sue governments for actions that damage profitability.

CEOs hobnob with politicians rather than customers. Lobbyists throng the corridors of Washington, Brussels and London. Antitrust authorities do nothing to correct the balance, taking a narrow economistic view of choice and competition, and ignoring politics.

The populists are right that economic and political systems have long put the interests of the big, the faceless and the global over those of ordinary citizens (albeit wrong with their prescriptions).

Perhaps we should heed the words of John Maynard Keynes: “I sympathise with those who would minimise, rather than those who would maximise, economic entanglements among nations. Ideas, knowledge, science, hospitality, travel – these are things that of their nature should be international. But let goods be homespun wherever it is reasonable and conveniently possible and, above all, let finance be primarily national.”

Are corporations becoming too old, too few and too big? Tweet Simon and CMI: @nikluac; @cmimanagers