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Saturday, January 27, 2024

It’s Time to Stop the Prejudice against Mergers and Acquisitions

There is no justification for assuming from the outset that a merger or acquisition will be bad for consumers.

Image Credit: Public domain

Change can be a challenge for industry giants, and new ideas are sometimes hard to come by for established and incumbent firms. Competitive inertia and NIH syndrome (a marketing acronym for Not Invented Here) can creep in since focus is placed on maintaining sales and status rather than taking chances. Classic examples include Kodak’s initial refusal to go digital and Xerox’s zeroed-in focus on copy making despite having had an instrumental role in PC development.

NIH is why Blockbuster didn’t buy Netflix and why Yahoo! passed on purchasing Google. But for companies that do have a desire for expanding or diversifying their offerings, looking outside the firm is sometimes as important as thinking outside the box. For instance, Dyson acquired the University of Michigan startup Sakti3, in 2015, to improve its cordless capabilities by leveraging Sakti3’s solid state battery technologies.

Mergers and acquisitions (M&As), when done well, can reinvigorate corporate offerings and generate greater value for consumers. However, the Biden Administration and those appointed to power positions within the DOJ and FTC have made it a point to paint any M&A deals in a negative light. Regardless of whether it concerns video games, grocery store chains, or economy-based airplanes, federal agencies seem to feel that they know what is best for the marketplace.

Such a stance is a little absurd given that even those making the deal are never truly sure of how things will pan out. Indeed, M&As are no trifling matter. There are many examples of well-known names having made bad deals, which is why Senator Elizabeth Warren’s ‘subway shop’ concerns and FTC Chair Lina Khan’s Big Business qualms are simply silly.

Take the case of the Kmart and Sears merger. Estimates for cost savings for the combined company were projected at $500 million, but instead the creation of Sears Holdings resulted in bankruptcy in 2018. If even industry experts can’t guarantee the continuation of dominant players or the success of an M&A, then why do government officials and appointees think they can know what will be best for the market?

Other popularly cited M&A failures include Quaker Oats’ acquisition of Snapple, Mattel’s botched buy of the Learning Company, and AOL and Time Warner’s disastrous deal. Just this past year, there was a slew of bankruptcies ranging from trusted namesake firms, like Rite Aid, to trendy newcomers, such as WeWork.

Government meddling in anything from startups to shutdowns and any M&A deals in between is a waste of taxpayer dollars and only encourages increased cronyism. And, let’s be honest, government court cases raising concerns over anti-competitive behavior will never move as fast as market mechanisms. Right now, Perplexity is having a go at Google’s preferred position as a service for search which, if successful, will make the DOJ’s current case against Google a bit of a moot point.

Perplexity is showing signs of having true unicorn status given its AI capabilities, and yet even its growth cannot be guaranteed as nothing is ever certain in a dynamic marketplace.

One thing that is clear, though, is that business owners are better suited to manage their transactions and investments than government bureaucrats. Our compounding national debt provides ample evidence of that.

Money matters should be left to those who create wealth rather than those who siphon it, and businesses should bear the costs of the choices being made. Moreover, the role of consumers shouldn’t be sidelined by government agencies claiming to be working on our behalf. We can vote with our dollars on what is of value and what is not.

Carl Menger once said that “Man himself is the beginning and the end of every economy” and Charlie Munger has asserted that “If you have a dumb incentive system, you get dumb outcomes.” I completely agree with both Menger and Munger and would like to add that if you have distorted incentives, you get distorted outcomes. Such is the nature of the political realm, which is why it’s imperative to let markets do their thing and keep the government from getting in the way.