Economy / Regulation / U.S. Domestic Policy

No Buds for Budweiser: Are Corporate Mergers Bad for Consumers?

Budweiser’s proposed merger with Corona and Stella Artois was denied in early February by the Department of Justice, but several other big name companies have plans to get together.

The big name mergers underway are: Office Depot with Office Max, US Airways with American Airlines, and Warren Buffet’s Berkshire Hathaway with Heinz Ketchup.

These corporate mergers are bringing optimism to Wall Street, but should they cause uncertainty to individual consumers? Some reasons for concern are at that these types of large company unions often occur before recessions, potentially create higher prices by creating monopolistic power, and may cause the moral hazard of too big to fail.

However, these potential difficulties are not very likely.

To see if consumers should be anxious about the corporate mergers, a glance at past merger history can be of help.

merger history

This chart of mergers and acquisitions (M & A) shows their volume by year. Highlighted are the years of notable increases. Following each M & A’s spike the US suffered a recession: the great depression from 1929-1933, stagflation and a stock market crash from 1973-1975, a brief recession in the early 1990’sand the bursting of the dot-com bubble in 2000.

Before any assumptions are made, correlation does not mean causation, and most of the years of recessions coincided with other historical problems: the end of WWI, the OPEC crisis, and 9/11. Even though no absolute conclusion can be made that large amounts of mergers are precursors to recessions, it remains as something to think about.

On the other hand, higher prices resulting from monopolistic power provide a more evidenced based argument for worry.

But since Theodore Roosevelt and William H. Taft, the trust-buster presidents, U.S. monopolies are few and far between. The beer companies are a prime example, because the grounds to stop the Budweiser, Corona and Stella Artois amalgamation was the potential market power they would have enjoyed by their unification.

Finally, the moral hazard of – too big to fail – remains.

The big bailouts of GM motors, AIG, and Fanny Mae remain fresh in the minds of most Americans, and few want billions of tax dollars to once again pay for poor private corporate decisions.

Fortunately, two of the mergers are weak firms looking for help. Both Office Max and Office Depot are in the struggling industry of paper products, so it should not come as much of a surprise that they are consolidating in an attempt to increase profits.  For the airlines, the much larger American Airlines is in effect being acquired by the smaller U.S. Airways, because American is going bankrupt.

And the Buffet– Heinz deal, even though neither company is facing severe financial problems, does not raise much concern for a bailout since it is a conglomerate merger (a merger of two completely unrelated firms).

Most consumer concerns regarding the big corporate mergers are not likely to cause any problems, but should consumers be celebrating alongside the corporations? Probably not.

That said optimism on Wall Street results in a better market for everyone regardless of the cause.