Opposition to Mergers Doesn’t Make Economic Sense

Critics often portray mergers as a way for “evil” big companies to swallow up smaller competitors. According to populists like Sen. Bernie Sanders, big corporations are “destroying the moral fabric of America.” This view suggests business acquisitions create monopolies to line the pockets of company executives at the expense of consumers and the public. But is this really the case?

If business acquisitions were prohibited by arbitrary political constraints, firms would have a much more difficult time expanding and remaining globally competitive. So while a reasonable degree of vigilance is needed, blatant hostility towards all mergers, which was the climate in the Obama administration, has the potential to harm both consumers and business. Throwing mud in the gears of our economic engine slows the process down and prevents economic assets from shifting to where they could be most effectively used.  

Far from “destroying the moral fabric,” mergers can actually contribute to the economic prosperity of our country. Economists generally agree that mergers can increase efficiency, a vital economic metric for all businesses, both big and small. Permitting businesses to consolidate has the potential to increase economies of scale, which causes the average cost of production to fall while the output volume rises. Reductions in the cost of inputs and the elimination of redundancies will lower average cost, with those savings being passed onto consumers in the form of lower prices.

Merging also allows businesses to allocate greater capital into innovation instead of dedicating resources toward undercutting competition. Because the new firm will earn more profit, more resources will be used to finance risky (and often expensive) research and development that wouldn’t have otherwise happened. Experts continuously cite that “mergers and acquisition activities have a positive and significant effect on innovation and have found no support for the argument that mergers are detrimental to innovate.”

When it comes to government approval, the burden of proof should fall upon merger opponents, not the businesses in question. More often than not, this isn’t the case. Take for instance, the pending Bayer-Monsanto deal. Some see the price tag of the deal (valued at $66 billion) and immediately become apprehensive. The price of the deal shouldn’t matter (unless you’re a shareholder); the contents of what the company does, should.

On the very same day the deal was announced, Sanders, darling of the socialist left, dinged the deal because it might create profits for a private business and said it should not only be “blocked” but also investigated by the government for monopolization. It’s hard to imagine that his response was preceded by an effective cost-benefit analysis.

Other congressional Democrats cited this deal as part of a “corporate takeover of the farm industry.” They believe this merger, along with the Dow/DuPont and Syngenta/ChemChina deals, “will not only hurt small-town, family operated farms, who will have to pay more for seeds, but it will also raise food prices.” Based on past experience, there is little evidence to support these populist claims.

Because these two firms operate in different industries, a monopoly is unlikely to form. Renowned economist Tyler Cowen states that a Bayer-Monsanto corporation “would not increase market concentration by much. Bayer is primarily a pharmaceutical and healthcare company whereas Monsanto deals in crop chemicals and seeds. Since Bayer does make biotech products and agricultural chemicals, there is overlap in the markets for cottonseed and canola seeds. But what’s the actual problem from possibly limiting competition in those markets? There are many substitutes for cotton fabrics and canola oil.”

Despite the resurgence of populism in modern politics, lawmakers and regulators should look at mergers and acquisitions through a logical lens. Knee-jerk, anti-corporate responses to these deals could end up hurting consumers and the economy at large. The antitrust review process is important to protect against truly anticompetitive transactions, but shouldn’t be used as a cudgel in a politically motivated fashion.    

Thomas Aiello is a policy and government affairs associate at the National Taxpayers Union.

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