Opinion

The Great Debate

from Breakingviews:

Rob Cox: The worry now is a brewing M&A bubble

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Stop worrying about the tech bubble – there may be an even bigger one inflating beyond the confines of Silicon Valley. The corporate urge to merge has gone into global hyper-drive this year. Deal activity has surged as investors egg companies on and bid up the shares of acquirers well beyond mathematical explication, or prudence. As new metrics from interested parties are trotted out to justify the irrational, it’s time to exercise caution.

So far this year companies have announced some $1.3 trillion worth of transactions around the world, according to Thomson Reuters data. That’s nearly double the level of activity a year ago. European corporations have fueled even greater increases. Much of this is pent-up demand and a delayed response to the past year’s remarkable runup in stock market values.

But after years of relatively restrained M&A movement, giddy shareholders appear to be over-titillating the animal spirits of executives and directors into taking on ever riskier transactions.

Consider the huge regulatory hurdles that Pfizer is attempting to jump in its efforts to seal a $100 billion-plus merger with AstraZeneca and shift its tax domicile to the UK, or the French political sensitivities that General Electric is taking on with its $13.5 billion bid for Alstom’s power assets. Equally, Comcast’s $45 billion takeover of Time Warner Cable raises severe antitrust questions. These may be overcome by divesting assets. The fear that Comcast may succeed, though, is compelling rival AT&T to mull a stab at DirecTV despite having been recently thwarted in trying to acquire T-Mobile US.

from Jack Shafer:

Who’s afraid of Comcast?

Set aside for a moment everything you've read about the $45 billion bid Comcast made for Time Warner Cable last week. Blank from your mind Paul Krugman's prediction that the deal will result in a Comcast monopoly. Pretend you didn't read the New York Times piece about the acquisition presaging further consolidation in the cable market, with Charter Communications picking off Cox Communications. Thump yourself with a neuralyzer, if you can, and remove from your memory the protest against the transaction by Michael Copps, former Federal Communications Commission commissioner.

Finally, purge from your bile ducts the seething hatred you hold for Comcast and Time Warner Cable, those hurtful memories of rising bills, rotten service, and phone-tree purgatory and allow me to persuade you that we're having the wrong telecom argument when we quarrel about mergers and acquisitions. Instead of blocking mergers or beating concessions out of the telecom giants, let's give them the treatment they really fear: Policies that encourage the entry of competitors, which are the bane of every monopolist.

If you hate your cable television company -- to simplify a half-century of history -- blame it on the government. In the founding days of the industry, local municipalities mistakenly insisted that cable TV was a "natural monopoly" that must be regulated like telephone service. In nearly every case, the selection of a cable operator was a political one, with the most flattering supplicant winning the right from city councils to string wire on utility poles and cross right-of-ways to sell cable service. The municipalities collected franchise fees from the cable companies, shook them down for sweeteners like municipal channels and public access studios, regulated their rates, and required the operators to wire all if not most of their jurisdiction.

from Nicholas Wapshott:

Comcast: How to win at monopoly

The proposed merger between the cable television interests of Time Warner Cable and its principal rival, Comcast, demonstrates a neat example of how the theory of the free market differs so radically from the marketplace in practice.

In the storybook version of how business works, companies compete for customers by offering rival services and the company with the best products and prices wins. In this fairytale, everyone wins. Customers benefit from competition through a better choice of products and cheaper prices, the good companies take a handsome profit and prosper, and the bad companies go to the wall.

In real life, this heroic version of how the world spins is far less noble. In the mythical version of the free market, companies fiercely compete with each other for market share by trying to outdo each other in pleasing customers. In reality, companies tend to forego the difficult and expensive art of wooing customers from a rival and resort to buying the competition. Buying business is far easier than earning it.

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