On The Case Of The Big Boys

Merger mania, the markets call it. They love the idea. Swiss banks, Wall Street brokers and British drinks groups rush to get together. The drug companies Glaxo Wellcome and SmithKline Beecham propose a £100bn merger, the biggest in history. Each time, share prices leap in response.

Karl Marx has a view about this sort of things. More than a century ago, he predicted that capitalism would be destroyed by its drive tow-ards monopoly. He has been wrong so far. But now that globalisation and its attendant giants are upon us, might he prove right after all?

Until now, the tendency to monopoly has been thwarted by two main forces. First and most important, capitalism has shown an immense capacity to renew itself from below: new technology, emerging nations and the animal spirits of entrepreneurs create new companies all the time.

 

Second, capitalism has not hesitated to break its own free market rules. When monopolies have sho-wn signs of forming for example, in the US with oil and railroads a century ago or with Ma Bell in the early eighties governments have simply intervened and broken them up.

But how far can those two safeguards be relied on today? Not far enough, doom-mongers would say. Consider, for instance, how these two forces have been acting in computer software.

The US company Netscape should be a classic case of dynamic capitalism. Founded less than four years ago to make browsers for the Internet, it has a market value of some $2bn. But Netscape is rumo-ured to be for sale. If true, this is presumably because its life is being squeezed out by the older and dominant producer in its industry, Microsoft. That case is being investigated by the US antitrust authorities. But, it could be argued, there are examples in which that is no longer enough. Todays global markets require a global policeman. No such entity exists.

The point was made explicit two weeks ago by Karel Van Miert, the EUs competition commissioner. What was needed, he told the world Economic Forum in Davos, was more co-operation between competition authorities around the world. Joel Klein, Americas chief trust-buster, comes to the same conclusion in an article opposite, albeit using different arguments.

A related point was made by Don Cruickshank, the retiring UK telecoms regulator. The biggest challenge for his successor, he said, would be to find ways of policing mega-mergers across Europe between telecoms, computing and entertainment. Competition law would not be enough to protect consumers. New regulatory powers would be needed as well.

As bulletins from the coalface, these warnings cannot be dismissed. But they need not be taken as gospel either. Before deciding how seriously to take them, it is necessary to stand back and ask in strictly objective terms, what is the evidence that industries and markets around the world are becoming concentrated in fewer hands?

The besetting problem is lack of data. Economists are roughly agre-ed on how to tackle the issue. First, take the biggest companies say, the top 100. Then measure their output against some broad economic measure value added, or GDP over time.

According to the specialist in this field, Prof Leslie Hannah of Londons City University, the relevant work has yet to be done. Not a single measure of global concentration has ever been published, he says, even for now, let alone the past.

Prof Hannahs own belief is that there is no evidence for Marxs theory of continued concentration. In-deed, he argues, the evidence from the period 1970-1990 suggests the opposite. But as he also concedes, such data as exist are badly out of date. There is no hard evidence on what has been happening in that most dynamic decade, the 1990s.

We are therefore forced back on anecdote and observation. One obvious place to start is the FT 500, which lists the wo-rlds largest companies by market value. Of the top 50 companies, nine are products of recent merg-er. A further three, by contrast, did not exist 30 years ago.

The three new companies Micros-oft, Intel and Compaq  all belong to the same industry, personal computers. The nine merged companies belong to three industries: drugs, banking and telecoms.

This suggests a general truth: that concentration varies enormously by sector. At one end of the scale, take the auto industry. The worlds biggest carmaker is General Motors. At present, GM has 16 per cent of the world market. Ten years ago its share was 19 per cent; 20 years ago it was 25 per cent. That shows the capitalist system working as it should. As emerging nations have industrialised, they have challenged the dominant supplier.

A similar effect can be achieved by technology. Before the first world war, the worlds biggest employer was US Steel. The company still exists, but is in comparative terms a minnow. It has been overtaken by upstart mini mills, such as Nucor, which have mastered the technology of making steel from scrap.

At the other end of the scale is computing. Microsoft, according to its many enemies, is the most powerful company on the planet. Certainly, it and the chipmaker Intel have shares of their respective markets that in any other industry would be regarded as unconscionable.

But this is an industry that changes with bewildering speed. Ten years from now, Microsoft may be more powerful again. Or just possibly, as a result of some seismic shift in technology, it may not exist at all.

What about the drug industry? If Glaxo Wellcome and Smithkline Beecham go ahead with their merger, they will have 8 per cent of the world market for prescription drugs. No supplier in history has had more than 5 per cent.

But 8 per cent is scarcely world dominance. It is also worth noting that, even if the merger goes through, there will still be eight drug companies among the top 50 in the FT 500. If a merged Glaxo Smithkline seems a monster, that is because it belongs to a monstrous industry.

Perhaps more stable, low-growth industries are different. But the evidence is thin. Consider food manufacturing. Market shares can scarcely be computed here. But the worlds biggest producer with sales of around $48bn, is Nestle.

Over the past decade, Nestles sales in dollar terms have risen 90 per cent. In the same period, the worlds nominal GDP has risen 75 per cent. Nestles faster growth is the result of acquisitions, which include Rowntree, Buitoni, Perrier and a fortnight ago - the £715m purchase of the Spillers pet food business.

Given all that activity, it might seem surprising that Nestle has not grown faster again. But this illustrates an important point: that todays companies, in the developed world at any rate, are more interested in profit and shareholder value than mere size.

David Lang, of the London stoc-kbrokers Henderson Crosthwaite, says: Consolidation of the world food industry is not really happening. The big companies are focused on emerging markets, where they are not well represented. In North America and Europe, they are sorting out their portfolios, which means selling things.

Where consolidation is occurring, it is often a sign not of overweening power, but of weakness. In the drug industry, for instance, the real growth belongs to start-up biotech companies, which now have a collective market value of around $50 billion.

The big, old drug companies, like the banks, are getting together because their growth is under threat. The aim is not so much to dominate the world as to cut costs.

Finally, take the telecoms industry. Among the top 50 companies in the FT 500, two are merged US pho-ne companies: Bell Atlantic, which now incorporates its neighbour, Nynex, and SBC Communications, which has merged with Pacific Telesis. This is in response to a turmoil of change in the US phone industry, which has robbed those companies of their local monopolies.

Another old-established ex-monopolist of the phone industry, BT of the UK, bid for the US long distance operator MCI last year. It was beaten by a $30 billion offer from WorldCom, a high-tech phone company founded some 15 years ago. The evidence it that that market for telecoms one of the vital industries for the next century is not consolidating, but falling apart.

So is everything all right, then? No entirely. Marx has so far proved wrong, we should recall for two reasons. On occasions when market forces have failed to stop monopolies, the competition authorities have stepped in.

Hence the relevance of Mr Van Milerts appeal. The worlds competition authorities, as he observed, are unwilling to agree to a single set of standards, if only because they are jealous of their sovereignty.

But in todays world, capital has no country and sovereignty does not apply. So far, global monopolies have not appeared. That is not the same as saying they the cannot.