Are Mergers Good or Bad for Consumers?

0 0 Julius Choudhury June 6, 2018 Edit this post

By Susannah Snider, U.S. News & World Report - Money

AT&T and Time Warner. Sprint and T-Mobile. Sinclair Broadcast Group and Tribune Media. Heinz and Kraft.

It seems like every other month is dominated by news of a proposed or completed corporate merger. And while those partnerships can result in a major financial boost for the corporations involved, consumers are left scratching their heads and asking, "What does this mean for my finances?"

The short answer for those curious consumers is: It depends.

"There are some mergers and acquisitions that will probably promote consumer welfare," says Bill Galston, senior fellow at the Brookings Institution, a District of Columbia-based think tank. "But as some research has found, there are other [mergers and acquisitions] that point in the opposite direction."

Here's what regular folks should know about the impact of corporate mergers on their personal finances.

A merger takes place when separate companies become a single new entity. The more newsworthy mergers tend to be "horizontal," experts say. That means the consolidation happens between businesses operating in the same space, like when two airlines join forces. Other mergers are "vertical," meaning the two companies operate at different stages of the supply chain, like when an automotive company buys a tire manufacturer.

Mergers also run the gamut in terms of size and scope. While multibillion-dollar corporate mergers between, say, airlines or media companies dominate the news, some mergers are as small as one local restaurant joining forces with another. Their impacts on consumers' finances can also vary widely, depending on everything from the type of merger taking place to the size of the companies and the existence (or absence) of robust competition in the marketplace.

When a merger works for consumers, it can lead to long-term lower prices, says Michael Noel, associate professor in the department of economics at Texas Tech University. "The vast majority of mergers are actually pro-competitive," he says. "They're actually good for consumers."

Merged companies accomplish price cuts by operating more efficiently, reducing redundancies in staffing and other areas and streamlining operations, Noel says. "Ninety-nine percent of mergers are happening around you all the time," he says. "And it's really people growing their businesses."

But mergers may have a negative impact on consumers' pocketbooks when they place a stranglehold on competition, some experts say. "A merger can be bad for consumers if, instead, a company uses that merger to restrict competition and consumer choice, which could lead to increased prices for consumers," says Joshua Stager, policy counsel at the Open Technology Institute at New America, a District of Columbia-based think tank.

That effect can be especially palpable in industries where there is already limited competition – say, the airline industry or the cable industry – and a further limitation in choice can drive up prices and worsen the consumer experience.

"The cable companies are a great example of how mergers don't create a lot of the efficiencies," Stager says. As they've gobbled up smaller companies, "they've created a Frankenstein's monster of different networks that can be difficult to operate," he says. You may not like Comcast, he says, but "they know they no longer have to compete for your business." So, consumers are forced to deal with noncompetitive prices and bad customer service.

On the other hand, Noel says, he doesn't think it's quite so easy to dominate an entire industry. "Every time we think there's an industry where we think a firm has a lock on it, before you know it, up comes the Facebook, up comes the Snapchat, up comes the Instagram," he says. Those upstarts manage to disrupt and redefine that industry, he says, even if it doesn't happen right away.

If you happen to work for one of the companies involved in the merge, the new partnership could have a profound impact on your ability to earn a paycheck, experts say. When two organizations combine, executives may determine, for example, that they have an extra accounting department or two human resources offices, which can result in layoffs in those departments. "The labor impacts of mergers is something that antitrust law traditionally doesn't look at," Stager says, "but it's important to real people."

If two companies merge, it may also result in fewer businesses at which job seekers can compete for new career opportunities, Stager says. For example, if two restaurants in a community merge, servers lose a business through which they could change jobs, negotiate for a higher salary and grow their career. Additionally, if one company has a unionized labor force and the other does not, a merger could threaten the union and the job benefits that come with it.

Mergers can also create challenges for aspiring entrepreneurs and innovators, some experts say. "The bigger problem is that, in some cases, you can say that mergers, acquisitions and consolidations can contribute to a climate where it's harder for small businesses to get started and make a go of it," Brooking's Galston says. "Evidence shows that the 'big boys,' particularly in Silicon Valley, acquire new firms, not to bring innovation to scale, but to strangle it in its cradle."

On the other side, Noel argues that when mergers are effective and prices are lower, consumers have more money in their pockets to buy something else, and that extra spending money will create new jobs and opportunities. "If we're bigger and better and making products cheaper and more efficiently, that's more disposable income, more jobs and more businesses," he says.

For investors in the firm, the merger's impact on their finances and the health of their investment portfolio depends on the details of the deal, including whether it results in better performance and whether the price paid for acquisition is reasonable, Noel says. The initial stock price reaction of the acquired firm may be low because mergers create short-term uncertainty, he says. Plus, Noel notes, acquirers often pay a premium to get shareholders of the acquired firm to liquidate their shares at the same time.

If you're interested in making an impact on the types of mergers happening in your neighborhood or across the U.S., you can make your voice heard, experts say.

One thing consumers can do: Vote with their wallets. "The most powerful thing you can do is be smart with how you spend your money," Noel says. Spend money at independently owned businesses or at retailers where you feel your voice is heard. If you feel bullied into using a particular service – for example, a local cable monopoly – try to opt out of it altogether by cutting the cord.

Concerned consumers can also register antitrust concerns with the Department of Justice, says Becky Chao, a millennial public policy fellow in New America's Open Technology Institute. Their state's attorney general may also be able to bring a lawsuit that blocks mergers that threaten competition, Chao says.

Consider calling your elected representatives to share your thoughts about a specific merger, Stager says. Keep in mind that there are antitrust laws on the books designed to help fight monopolies.

"If members of Congress start receiving letters and emails and telephone calls about something that they don't think ordinary citizens are very interested in, after a week or two or three, I can tell you ... there will be notes from the legislative director or chief of staff to the boss saying, 'Hey boss, there's something here you want to pay attention to,'" Galston says. "Don't think that your voice doesn't matter because it doesn't take all that many voices to add to up a signal."