Mergers Are No Menace

Merger mania hit a new peak in 1998, with $2.5 trillion worth of deals announced worldwide. This year promises to be even hotter. There are all kinds of reasons why companies merge, but one underlying macroeconomic force driving the phenomenon is glut. After a decade of huge capital investments in Asia, the U.S., and elsewhere, supply outpaces demand nearly everywhere. This is sending prices lower, eroding corporate profits, and increasing layoffs. Mergers, especially among big, like-size companies, are the market's way of reducing supply. Antitrust policy must focus on maintaining competition. But with the global economy facing a deflationary spiral, leeway should be given to some mergers that cut back overcapacity.

Oversupply is sending oil prices lower, leading Exxon to hook up with Mobil and British Petroleum with Amoco. There are perhaps 5 million cars' worth of overcapacity in the world auto industry. The Daimler-Chrysler merger is a harbinger. At the Detroit Auto Show, there was talk of Ford or DaimlerChrysler linking up with Nissan, Renault, Volvo, BMW--take your pick. In Asia, chip factories are being mothballed, and others are being sold to American and European companies. A vast consolidation is under way.

Glut is a two-sided beast. It pushes inflation lower, which is fine, since it ups real wages and income. But falling prices can mean falling profits and unemployment. Layoffs are reaching record levels in America as companies strive to rebuild profit margins. So far, people have been able to get jobs easily, and the economy has rolled along. But deflation can be dangerous. Mergers are one of the ways free markets deal with overcapacity and deflation.

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