EMERGING ANTI-MERGER SENTIMENT

Anti-merger sentiment is sweeping through state legislatures - from New York, which passed an anti-merger law in 1985, to California, which is now contemplating restrictions. In all, 30 states have passed laws in recent years that place various restrictions on merger and acquisition (M&A) activity.

This flurry of law-making is a response to public demands for solutions to continuing layoffs, plant closings, and declines in manufacturing. But it is a misguided response, for M&A transactions are not an important cause of job loss. On the contrary, M&A activity is often an alternative to plant closings and may even prevent layoffs.From 1980 to 1985, there were 297 M&A events in New Jersey, one of the states considering restrictive legislation. In our recent study of the largest of those, we discovered that the current wave of corporate purchases and sales does not fit the conventional wisdom: a big company growing even larger by acquiring small ones.

The fact is that M&A activity has not increased concentration. Moreover, business combinations in the 1980s are an eclectic lot - unlike previous merger waves - in the 1890s when oil trusts were created, or the mid-1970s when patchwork businesses were spawned by conglomerization.

Today, mergers are attempts to put assets to work at their highest value or to restore or enhance profitability and regain international competitiveness. Techniques now include extending product lines, decreasing supply costs, expanding distribution channels, and generating new products. Many M&As increase competitiveness; they do not diminish it, as many assume.

Our findings on M&A effects on employment also went against the grain. When we examined major transactions involving New Jersey companies, we found that no permanent layoffs occurred because of a hostile takeover. "Target companies" (those bought in whole or sold as one or more divisions) experienced a gross decline of fewer than 2,000 New Jersey jobs during that period. Most of those jobs of a company was sold.

The few examples we discovered where acquisitions led directly to job losses involved verysmall numbers of jobs - under 100 in two cases, about 150 in another. Many of those terminated were professionals, who were laid off when the acquisition made their jobs redundant. (One study showed that more than 60 percent of executives leave within three years of a large takeover.)

Some of the jobs might have been lost, we found, even if the company had not been sold, because the seller was having financial problems. Several companies permanently laid off workers one or more times during that period and sold divisions at other times.

This strongly indicates that M&A transactions are one of several strategies corporations choose at various times, and are often an alternative to permanent layoffs. Moreover, some companies used acquisitions to grow; that led directly to increased administrative and research jobs at their New Jersey headquarters.

There are many reasons for plant shutdowns: the increase in the dollar, international competition, the search for lower labor costs, disinvestment, and just plain poor management. In New Jersey, selling the plant to new owners seemed to be an alternative to shutting down a plant and curtailing the work force.

Over half (55.6 percent) of the M&A transactions in our sample occurred in manufacturing, while that sector comprises only 21 percent of total New Jersey employment. Mergers, acquisitions, and divestitures facilitate adjustment to structural changes that are unsettling U.S. industry. The goal of a takeover is not to eliminate a company but to operate it more profitably.

In this environment, legislating barriers to takeovers will probably have the unintended effect of increasing plant closings. This would only contribute to institutionalizing of poor management, wasteful corporate bureaucracies, and antiquated marketing plans.

By protecting executives from the consequences of incompetence, takeover restrictions can retard corporate leadership and result in fewer new jobs and

closed plants.

State anti-takeover regulations are also redundant. States have already granted sufficient powers to corporations themselves to adopt a variety of defensive measures, and many have. The 20 largest New Jersey corporations have recently adopted 54 anti-takeover measures.

Corporations know how to protect themselves. They need no help from state legislators. State anti-takeover laws only make it more difficult for companies seeking to be acquired to make the best deal.

Plant closings and U.S. manufacturing declines will persist until they are met with appropriate responses. State governments can help by promoting employee and investment-oriented approaches to economic development and investment-oriented approaches to economic development that remove barriers to job growth and new company formation.

States should recognize that proposed anti-takeover statutes are merely diversions. They waste taxpayers' money and give legislators an opportunity to pretend they are advancing the public interest while courting a few, local special interests.

The rationale for anti-takeover bills is that plant closings and job loss arise from simple and single causes. This results in symbolic rather than substantive policy initiatives. States should not prevent corporate takeovers or mergers. If they are well-formulated, state policies should improve - not interfere with - market forces.

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