The time has come to face up to the problem of "megamergers."
I define a megamerger as any transaction that results in a business with at least $100 million in total assets. This business can be created either from the merger of two giant firms or from one giant firm acquiring a small or medium-sized company.
W.T. Grimm & Co., which keeps book on public mergers and acquisitions, called 1981 "the year of the mega-deal." Grimm measures mergers by the cost to one company of acquiring another. Of the nearly 2,400 mergers it recorded in 1981, 113 cost over $100 million to engineer. Twelve of these deals cost over $1 billion. In contrast, only 4 cost this much in 1980.
The number of these "mega-deals" has climbed steadily since 1975, when there were only 14 in the over-$100-million category. Out of the total 1981 merger cost of $82.6 billion, $38.4 billion came from the 12 over-$1-billion deals.
However dizzying these numbers are, it would not be easy -- or necessarily desirable -- to wave a legal magic wand and make all megamergers stop or go away. Not all mergers or acquisitions are bad. A few are essential if businesses are to be large enough to survive in some industries. Some represent legitimate efforts to achieve economies of scale in production, research, or marketing.
No. of mergers
costing $100 million
Year or more
Total dollar value
paid for all mergers
Year ($ billions)
But many of the megamergers don't make a lick of business sense. Experts have estimated that as many as 7 out of 10 of them fail. Some take place simply because profit-chasing sharks, who couldn't care less about the companies involved, want to make a quick buck. The game of megamergers is itself forcing some companies to sell out to "white knights" in order to avoid being taken over by less desirable meger partners.
And whether they're good or bad, there's no question that megamergers reduce the number of producing, employing units in the country. We can't continue to assume that economic diversity will be maintained automatically -- that the net increase of new, smaller firms will offset this growing concentration.
As a reasonable first step toward limiting the negative effects of these giant mergers, I propose an "enterprise renewal" or "enterprise recycling" tax. This tax would skim some of the profits from megamergers at the big-dog end of the economy for reinvestment in the business puppies at the small end.
The tax would work this way: Each time a deal took place that involved or resulted in a company with more than $100 million in assets, the government would collect a one-time tax from that firm. The tax would be levied regardless of whether the merger or acquisition involved cash, stock, notes, bonds, or bottle-tops; the rate would increase with the size of the merger.
The proceeds from this tax would go into a "Small Business and Entrepreneurship Trust Fund," which would be used to relieve taxpayers of the costs of present and future federal small business programs. A 1% tax on last year's 12 over-$1-billion deals would have been enough, for example, to cover the administrative costs of the Small Business Administration for a year and a half.
Monies could also be used to cover any losses under guaranteed loan programs or to replace funds now borrowed by the Small Business Administration from the Federal Financing Bank for loans to small business investment companies.
The managers of the budget and Treasury will probably oppose such a special-purpose fund. They hate to lose any revenue from their general fund and like to have the authority, in the name of the president, to determine how revenues are spent. But we have had successful past experience with trust funds. It's unlikely, for instance, that we'd ever have built the interstate highway system if a trust fund hadn't been set up to finance it from specific revenue sources. Each administration would have found different and, by its lights, more important things to do with the money.
There's no reason the same principle can't work for small business. If it were thought advisable, the trust fund could be set up outside the control of the executive branch, further away from the political process.
To do this, we could replace the SBA by a quasipublic, independent corporation run by a board of businesspeople with special skills and experience in small business. The board would be a bipartisan group, some of whom would be named by the president, some by the Senate majority leader, and some by the Speaker of the House. Directors would serve staggered terms, making it more difficult for a new president to make these appointments political footballs. The employees, like those in the Federal Reserve, would not fall under civil service regulations.
A similar effort to renew or recycle enterprise could be applied to international megamergers. If we set a merger tax in motion, we would certainly have to impose the tax on foreign firms that acquire companies in the United States. But it would be even better to work out a joint tax with other countries, particularly those with whom we do a lot of business. We could amend existing tax treaties in order to impose a tax on international mergers and acquisitions, no matter which country's firm initiated the acquisition.
The two countries involved would divide the tax proceeds according to the percentage of assets of each country's firm that went into the merger. Or, best of all, they could both use the proceeds in a jointly administered fund to support small business import and export programs or joint ventures between smaller firms in the two countries.
We might get even tougher if a foreign government took control of a U.S. firm, as in the case of the recent acquisition of Texasgulf Inc. by Elf Aquitaine Inc., an oil company controlled by the French government. These acquisitions happen more often than most Americans think.
There's no question that one of our stickiest problems internationally would be in dealing with companies owned or directly controlled by foreign governments. But maybe that's the place we most need a tax -- or a total ban.
On the domestic front, we could eventually take stronger measures to make those who profit most from megamergers share more of their gains with the rest of us.
Most megamergers, for instance, involve the use of borrowed money. The interest on that debt is now tax deductible. The government could -- and probably should -- make this interest nondeductible.
We could also make nondeductible the handsome fees paid to investment bankers, lawyers, accountants, and other professionals for their services in facilitating megamergers. We could make it up to these professionals by offering reduced taxes on fees earned from the creation of new, independent businesses by divestiture or spinoff.
We might also impose a stiff surtax on the capital gains made by any stock-holder -- whether an individual, a company, or a fund -- from megamerger profits. The tax would not apply if the stock had been held for, say, at least three years. This surtax would surely cool the megamerger ardor of arbitrageurs and pension fund managers.
As Arthur Burck, a leading merger and acquisition practitioner, pointed out last year in the New York Times:
"It is ironic that the taxpayers have been subsidizing the damage and wreckage caused by giant mergers. Invariably these deals depend on tax-free exchanges of stock and/or the tax deductibility of interest on the huge borrowings needed to float the deal. So half the carrying charges are borne by the United States Treasury.
"The solution, of course, is simple: Remove the tax incentives that have so long fueled giant mergers. In that way the activity will shift to the small and medium-sized companies. That is the sector where mergers are needed to keep our capitalism dynamic, to restore the imbalance caused by the burgeoning bigness of past giant mergers."
If all else fails, we could take the step of creating a new bureaucratic tribunal that would be charged with sorting out the "good" mergers from the "bad" ones. Unless and until the president and Congress make our antitrust laws less costly and more effective, few, however, will be keen to adopt that solution.
The one thing we ought not to do is hide any longer from the problem of economic concentration furthered by these giant mergers. If there is a back-lash against business because of these mergers -- and there will be sooner or later -- it will hurt all business, small as well as large.
To get moving in the direction suggested here will take some attitude changes. Too many of us have yet to recognize the common danger represented by excessive size in government agencies and in government-sized businesses (those with over $5,000 employees). While they differ in many ways, each reduces economic diversity and the size of the independent sector.
National opinion has already swung -- and swung hard -- against endless government growth. In 1981 we saw the first small drop in employment at all levels of government. This year we must begin to arrest the growth of government-sized business if we are to encourage the largest number of employers in our economy.
James Madison once wrote to Thomas Jefferson that the only basis on which the people could control the powerful was "divide and rule." He made it plain that he was talking about privately based power as well as the power rooted in government. We need to limit the potential power of government-sized business well before it affects the practice of free competition that obsesses antitrust practitioners.
If we take moderate, small steps in time, we may not have to take more drastic steps later.
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