Don't forget the benefits

Scrutiny of mergers is on the increase, notably in the US, where new draft merger guidelines have been widely interpreted as a sign of a more activist competition regulator proposing to take a tougher line, but also elsewhere. In the UK, for example, one economist recently wrote a piece in the Financial Times pointing out that the CMA's merger decline rate has been rising in recent years ('The UK’s competition watchdog risks undermining business dynamism', possibly $). 

In this latest swing of the pendulum, it's getting harder to argue for the 'good' merger, where the merged entity produces efficiencies (typically cost savings) or other benefits, such as innovative synergies from a combo that's more than the sum of its parts, or creates a more effective competitor to an entrenched incumbent. And more critics are finding more reasons to ping supposedly 'bad' mergers which reduce competition and increase corporate market power.

By happenstance, along have come two pieces of work, reminding us not to forget the 'good merger' story.

First, two hat tips for unearthing the first piece. One goes to the always interesting 'Blog Watch' column which the University of Canterbury's Paul Walker (aka GrumpyMcGrumpyface on Twitter) writes for the New Zealand Association of Economists' Asymmetric Information newsletter (if you're the proverbial intelligent lay person who'd like some very well-written takes on local and international economic issues, sign up for Asymmetric Information here, it's free). And the other goes to the equally approachable Conversable Economist blog, run by Timothy Taylor. He's also the editor of the Journal of Economic Perspectives, which "aims to bridge the gap between the general interest business and financial press and standard academic journals of economics" and is a terrific explainer in plain (or plainish) English of current economic debates (it's also free to read online, start here). Taylor's 'Recommendations for Further Reading' in each issue are always worth a look.

In his latest (July) 'Blog Watch', Walker picked up on one of Taylor's blog posts in April, 'After that Big Merger, What Happened?'. Taylor had come across some research done by folks at the International Center for Law and Economics, 'Doomsday Mergers: A Retrospective Study of False Alarms'. They looked back at six high profile, highly contested US mergers: their bottom line was that "Our retrospective analysis shows that many of the alarmist predictions of the past were completely untethered from prevailing market realities, as well as far removed from the outcomes that emerged after the mergers". With only one, partial, exception, the mergers had actually been 'good' mergers, with pro-competitive pro-consumer effects, or as Taylor summarised it, the retrospective case studies "do show pretty clearly that dire predictions about ill effects of mergers need to be taken with a few spoonfuls of salt" (he also wondered whether the merger sponsors' claimed benefits were as oversold as the merger critics' claimed costs were, which is fair enough).

The only partial exception was a big merger in the beer industry, where post-merger prices for some of the mass-market beers did increase (average prices remained steady). But that had the happy outcome that it created a profitable opening for the craft brewers, who have taken increased market share. And if you'd had the choice between a now more expensive but decidedly pedestrian beer and a tastily hopped artisan American Pale Ale, you'd have switched, too.

The other piece of research, which I came across on the ProMarket blog, is some work done for the World Bank. The ProMarket write-up is 'Firm Consolidations Hurt Workers, But Likely Not Because of Market Power', and the original all the bells and whistles World Bank working paper is 'Firm Consolidation and Labor Market Outcomes', very short summary here and full pdf here.

The researchers were primarily concerned about the adverse employment consequences of mergers, and they were well placed to investigate them. They were able to use a big administrative database in the Netherlands which contained matched employer-employee data, so they were able to compare what happened to employees in acquired companies after some 1,000 takeovers in the Netherland over 2011-15, compared to what happened at very similar companies that weren't taken over.

It's true that takeovers led to job losses: "There is substantial job loss among the workers of target firms: in the four years after a takeover, workers at a target firm are 8.5% less likely to be retained at the consolidated firm compared to workers in the control firm. This lower retention rate translates into income loss ... These effects are long-lasting and are present even in the fourth year after the takeover" (pp1-2 of the World Bank paper). 

Now, the researchers are, properly, concerned about this long-term adverse impact on those hit by involuntary job loss: my two best answers (which I've championed here before) are, at a macroeconomic level, maintaining as hot a labour market as you can run without triggering inflation, and, at a microeconomic level, 'active' labour market policies that make it easy to retrain, upskill, or go self-employed. Stomping on anti-competitive constraints in the labour market, like non-compete clauses, wouldn't go amiss, either.

But that said, the employment restructurings they are bemoaning are what in the competition policy game we would call efficiencies: they're cost savings, and as the researchers discovered, cost savings of a very specific kind. They found that if lab technician Kath in the acquired company is paid more than lab tech Rita in the acquiring company, Kath tends to get laid off. They also found that if there are lots of accountants in the acquired company, but the acquiring company already has lots of accountants, too, then the acquired accountants tend to get laid off. 

It makes complete sense, and it's likely to be a ubiquitous feature of mergers everywhere, not just in the Netherlands: if you were running the acquirer, you'd very likely act on similar lines. It's hard on Kath, and hard on the accountants, but the merged entity ends up more productive. And that's without thinking of any other efficiencies that may be on the table. Sure, for competition policy purposes, it's the net outcome that matters, and in any given case efficiencies may well be outweighed by detriments, but it would be silly to start from a viewpoint that efficiencies are nebulous or unlikely. A better starting presumption is that there are very likely to be at least some.

The Dutch example also got me thinking about what the New Zealand data might show. The Netherlands may well have a good administrative database, but so does New Zealand: indeed I'd hazard a guess that ours is top tier by international standards. Formally, it's the 'Integrated Data Infrastructure', or IDI: Stats calls it "a large research database. It holds de-identified microdata about people and households. The data is about life events, like education, income, benefits, migration, justice, and health. It comes from government agencies, Stats NZ surveys, and non-government organisations (NGOs). The data is linked together, or integrated, to form the IDI. The IDI complements the Longitudinal Business Database (LBD), which holds linked microdata about businesses. The two databases are linked through tax data".

At one point, access to the IDI was overtightly corralled, and not enough was being done to exploit its potential value. Now, it's being increasingly mined to good purpose: this year's NZ Association of Economists' conference featured a variety of IDI-based projects. AUT's Gael Pacheco and her team, for example, were able to follow (anonymised) Kiwi students who had done badly on the international PISA tests of numeracy and literacy to see what their subsequent employment, health, and justice system outcomes had been (as you'd expect, not good).

So why hasn't someone had a look at the effects of takeovers? It's all very well for supporters of mergers to claim benefits, and critics to claim costs, and the Commerce Commission to appeal to first principles of economics, but wouldn't we get more informed decisions if the question was, how does this proposed merger line up with what we empirically know about New Zealand mergers in general?