Is there any chance that Republicans or the Trump administration will support a temporary ban on mergers? Probably not. But there are plenty of reasons for them to consider a softened version of what’s being proposed by Democrats.
Democratic Representative David Cicilline of Rhode Island, who leads the House subcommittee on antitrust, is pushing for a moratorium on corporate mergers and acquisitions until the pandemic subsides. And he wants it to be a provision in the next Covid-19 stimulus package. Cicilline presented the idea at an Open Markets Institute event on Thursday, saying:
As millions of businesses struggle to stay afloat, private equity firms and dominant corporations are positioned to swoop in for a buying spree. This is not complicated. Our country can leave room for merger activity that is necessary to ensuring that distressed firms have a fresh start through the bankruptcy process or through necessary divestitures while also ensuring that we do not undergo another period of rampant consolidation.
The U.S. is in a recession because a virulent disease has forced the economy to stall, leaving droves of businesses weakened and vulnerable in its wake and millions without jobs. This is a time for corporations to be prioritizing the safety and well-being of all stakeholders, including workers and the communities in which they operate. Some mergers and buyouts would seem be the antithesis of doing that — deals that exploit the frailty of smaller disruptive competitors, or that are likely to result in even more mass layoffs or troubling levels of debt. But an outright ban is unlikely to pass, nor is it the right solution.
First, where Cicilline is right: Private equity’s so-called dry powder, or undeployed capital, has accumulated since the last recession to about $1.5 trillion, according to researcher Preqin. Blackstone Group LP alone said during its earnings call Thursday that it’s sitting on $150 billion of unused cash. With so many beaten-down businesses — including larger companies that may resort to raising money by carving out units — a feast is awaiting private equity firms.
It would behoove government leaders and antitrust authorities to not allow a repeat of the last private equity buying binge, in which dozens of retailers were overloaded with debt and collapsed under the burden. Take Toys “R’ Us: Many have lamented the sad tale of Amazon.com Inc. crushing the iconic toy-store chain, but to accept that simplistic explanation is to rewrite history. Though online competition was inevitable, debt from a long-ago leveraged buyout hastened the demise of the Wayne, New Jersey-based retailer and left so many without jobs, as its own financial data showed. Revenue at Toys “R” Us held up during the last recession and in the years that followed. It’s quite likely the chain would have had more years left in it — but its interest payments overtook operating profit, leaving the brand unable to invest in its future.
On the corporate side, it’s been all about megamergers the last few years — deals of $20 billion, $50 billion and even $100 billion proportions. In so many of those cases, the gargantuan valuations hinged on ambitious estimates of synergies, a euphemism for staff reductions. It’s clear why Cicilline would want to prevent more of those now, but it’s not clear any companies are even pursuing such risky transactions at this point. M&A activity is down 35% globally and 50% in the U.S. this year, and the deals that are getting done tend to be smaller. Plus, being unable to travel and meet in person really throws a wrench in things for dealmakers: Verizon Comunications Inc. struck a $400 million deal for videoconferencing-software company BlueJeans Networks last week, but executives had to negotiate the terms over BlueJeans video calls. Wall Street at large isn’t ready for that.
What the country needs more than a ban on dealmaking are better regulators and more consistent oversight. Damage from the lack of both has already been done. The Justice Department, Federal Communications Commission and a federal judge all backed T-Mobile US Inc.’s takeover of Sprint Corp., a deal which closed on April 1 in the midst of the pandemic. That merger is likely to result in large numbers of job losses and, eventually, a level of pricing power that harms consumers. Meanwhile, antitrust authorities are cracking down on acquisitions by tech giants for the same reasons.
Cicilline said the only exceptions to his proposal would be companies in bankruptcy or “on the brink of failing.” But a company doesn’t need to be on the verge of collapse to want a rescue. Warren Buffett, the chairman and CEO of Berkshire Hathaway Inc., is known for buying undervalued businesses and giving them new life within his conglomerate. While even his operations have been impacted by the pandemic and some have furloughed employees, Buffett’s takeover math is never informed by synergies or opportunities to reduce headcount. If Buffett’s on the prowl, the government doesn’t have a legitimate reason to stand in the way.
An outright stop to M&A may not be all that effective. Instead, let it serve as a wake-up call to regulators who created conditions that may be making this moment worse for Americans, regardless of the color of their state.
Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.
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