White House Chronicle

News Analysis With a Sense of Humor

The Merger Industry Is Doing Just Fine

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Whether Rupert Murdoch’s 20th Century Fox succeeds in its $80 billion bid for Time Warner, rest assured the mergers and acquisitions (M&A) industry will do just fine. Very fine, actually.

There is such a thing as the M&A industry, but it is elusive. It has no trade association and cannot be looked up in the telephone directory. But this virtual organization is a power in the land and very, very rich.

It is made up of investment bankers, lawyers, economists, advertising agencies, public relations tacticians, lobbyists and legal printing firms. They all swing into action like sharks alerted by blood in the water. They are a diverse crew with one thing in common: They do not come cheap.

At the top of the pinnacle are the investment bankers and their pals in the hedge-fund world, who are ready with ideas and capital if it is needed; ready to reap the rewards of arbitrage. These are the elite officers of the Wall Street Brigades; money is their North Star. They have been bred, in the best schools, to expect it as their entitlement, and they are keen to live up to that expectation.

They are retained by both sides in a hostile takeover and, however it goes, their fees will be enough on one transaction to keep them on Easy Street for years. They fly high, shoot high and live high. They are aristocrats in the kingdom of money.

Just below them come the lawyers, droves of them each offering advice on some aspect of the challenge. Each billing more for one hour than most people earn in a week. When working on a big merger, where there are billions and billions of dollars in play, the legal fees run into the tens of millions of dollars — and nobody cares. Outside of the senior management, who expect to get extraordinary wealthy — hundreds of millions of dollars, at least — in a takeover, it is the bankers and the lawyers, denizens of Fifth Avenue and the Hamptons, who make out beyond normal dreams of avarice, and do it over and over.

So it is not surprising that it is often bankers who instigate mergers either by pushing the ideas and the finance mechanism on the firm that hopes to be the acquirer, or persuading a firm that it is time to put itself on the market. Once a target is “in play,” as Time Warner is, anything can happen: A white-knight suitor can come along or the vulnerable company can become an acquisition, as in the way Men’s Warehouse stitched up Jos. A. Bank.

If there is a hostile battle, the advertising and public relations people come in, cajoling shareholders to hold out or sell out. More millions are spent in this effort: No one is trying to save money when the transactions are so large.

The biggest winners are those at the top of the heap: the managements. They own stock options and shares, plus special deals are written to sweeten things for them.

Everyone engaged in the M&A industry makes money when the game is on, all the way down to the caterers, who provide the sustenance when the midnight oil is burning. A merger is a grueling and fun undertaking; the fun of making money under pressure, a lot of pressure and even more money.

Who loses? Certainly the staff of the lesser-partner firm. The conqueror calls the shots and decrees the layoffs, which are one of the principal savings or “efficiencies” of the takeover. There will be less duplication, fewer subsidiary businesses, and fewer facilities that can be consolidated.

The other loser, feverishly denied in advance of the nuptials, is the consumer; the poor stiff who purchases the goods and services that the new entity offers. These may be fewer and, almost certainly, they will become more expensive over time.

Not all mergers are bad. Actually, Rupert Murdoch’s takeover of The Wall Street Journal has resulted in an invigorated newspaper.

But anyone, including myself, who has flown on the merged American Airlines and U.S. Airways has nothing good to report about service, pricing, or frequency. I’ll venture that the M&A moguls are taking private jets — wouldn’t you? — For the Hearst-New York Times Syndicate
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Stop the Airline Merger

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Those nice people who run two of the largest airlines, U.S. Airways and American Airlines have this nifty idea: they will merge. But the Justice Department — showing uncommon good sense for once — has said "no" to the merger.
 
So the airlines have done what multibillion-dollar outfits do: they have hired the best lawyers (i.e. the most expensive), the best lobbyists and the top public relations operatives to persuade a judge and the public that the Justice Department is off its rocker and that if the merger happens, the traveling public will be transported on aircraft as comfortable and as safe as magic carpets.
 
A new and glorious era in air travel would be at hand.
 
Don't you believe it. The last thing we need is a new monster company with monopoly control of many airports and life-and-death control of the prosperity — even the survival — of small towns. If the merger goes through, go long on bus companies.
 
Airlines, to give them their due, have their problems; starting with the ups and downs in the price of jet fuel, the vagaries of a market that is spooked by terrorism, a downturn in the economy or the difficulty of getting landing rights at top airports, particularly those serving the North Atlantic route.
 
But the vagaries of the commercial space occupied by the air carriers has not brought out their humanity. Instead they have become predatory, turning on their passengers with the viciousness of hungry snakes. Flights are overbooked with the certain knowledge that customers will suffer extreme discomfort. Likewise flights are canceled arbitrarily if the passenger load is not high enough, and fees have spread through the industry like the Black Death in the Middle Ages.
 
The airlines don't answer their phones and they juggle prices endlessly, so you can't predict the cost of travel. And if you should even think of modifying your itinerary, you become an economic target.
 
Recently on an international flight on one of the two carriers trying to buffalo a judge, the Justice Department and Congress that they should get into bed together, I tried to change the last leg — flying from Philadelphia to Washington instead of Philadelphia to Providence, R.I. My original itinerary said there would be a change fee of $150, and I had credit card in hand ready for this extortion. But I underestimated the ingenuity in kleptomania of the airline. Sure there would be a change fee, but there would also — get this — be a much higher fee for re-writing the ticket. Oh, even if I tried to get off the plane in Philadelphia, I'd have to pay a fee.
 
But, like the Ginsu knives ads on television, that was not all. To fly the last leg as needed, I would have had to pay more than the original ticket cost.
 
The airline would not check my bag to Philadelphia; nor would they allow my wife to put it on her ticket, while I took a few toiletries in the cabin. That change would cost $100 because they knew I was going to jump ship and take a bus to Washington.
 
The airlines are simply out of control. They de facto collude to fix prices on non-ticket items. One airline decides to charge for baggage, bang, and they all do. One decides that any change in itinerary is a revenue stream, and as fast as you can say “cleared to land,” they all have. One decides to charge for food, and in days they're all at it.
 
The Justice Department is right to oppose this merger which has, at its heart, what economists call “market power” or the ability to gauge their defenseless customers. If Justice loses its suit, Congress should act to block the merger — and it should outlaw non-transport fees and other thievery within the present law.
 
We should be able to see airliners for what they are: the triumph of the ascent of man, not as winged predators. — For the Hearst-New York Times Syndicate