Elizabeth Warren and AOC Get Everything Wrong About M&A
Arthur Schopenhauer once quipped that if it were constantly repeated with great solemnity, nothing was too absurd for people to believe. After reading the preliminary Pandemic Anti-Monopoly Act from Sen. Elizabeth Warren and Rep. Alexandria Ocasio-Cortez, I find myself more seriously contemplating absurdity. This proposal is a study in Schopenhauer’s point: though couched in great solemnity, both the act itself and the stated rationale for its enactment are, simply, absurd.
The Pandemic Anti-Monopoly Act would “impose a moratorium on risky mergers and acquisitions” for large companies. The objective of such legislation is, in their words, to “stop large corporations from exploiting the pandemic to engage in harmful mergers and to strengthen the federal government’s ability to respond effectively to future crises.” The language of the proposal is visceral, citing “predatory” and “harmful” mergers which lead to “job losses,” “price increases,” and the “exploitation” of small businesses. One might think some dystopian future looms unless we take immediate action! Yet, ironically, it is the cessation of corporate acquisitions and mergers, especially amidst a recession, that makes possible the very dystopia Warren and Ocasio-Cortez wish to avoid.
Corporate mergers and acquisitions are an important aspect of the economic ecosystem. Just as a fallen tree is recycled by the forest, M&A is how our economy reallocates resources away from companies which are poorly run, or which offer products of little real value. These companies are like trees with shallow roots, they are not firmly embedded in the soil of society. During times of economic expansion, flush consumers and complacent investors keep these shallow-rooted companies well-watered. Recessions force consumers to be choosier in their purchases and investors to be more meticulous with their risk, and just like a shallow-rooted trees in a drought, these businesses struggle to stay aloft. During times of plentiful rain all trees can draw plenty of water. It is only when the drought comes that we value deep roots and healthy leaves.
Capital and people are needed to run a business and both can become “trapped” in unhealthy companies during expansions. Just as a decaying tree is recycled by the forest, M&A releases those trapped resources to be absorbed by stronger, healthier companies—keeping the forest of our economy healthier long term. Warren and Ocasio-Cortez get their characterization of M&A entirely backward. Mergers are not “predatory” or “harmful,” they are a critical component of the business ecosystem!
This problem of shallow-rooted companies can be most readily seen in the recent rise of so-called “zombie firms.” Zombie firms are businesses that require constant cash infusions from investors because they do not earn enough revenue to cover their debt payments. By some estimates, zombie companies represent almost 12% of stock market value in the developing world. Driven largely by artificially low interest rates, zombie firms have been shown to dampen both economic growth and worker productivity. The emancipation of capital and workers from these companies is a social good, and M&A is the mechanism by which that happens. By barring that exit, the Pandemic Anti-Monopoly Act threatens to prevent the business cycle from doing its work, locking assets and workers in these foundering businesses.
Warren and Ocasio-Cortez also claim that mergers and acquisitions lead to job losses. This is a myth. M&A tends to act as a counterbalance to the economic cycle, stabilizing jobs during tumultuous times. This fact is readily confirmed by the data as slowing wage growth is highly correlated with slowing M&A activity. That corporate mergers and acquisitions preserve jobs and increase wages should be intuitive. A struggling company has few options left. An acquisition by or merger with another business is usually the best outcome for employees as 7 out of 10 employees are typically retained. The alternative is bankruptcy where employees have little chance of maintaining their positions. If Warren and Ocasio-Cortez care about increasing wages and insulating workers from job losses, encouraging M&A activity would be a good start. Snuffing it out leaves workers abandoned at the steps of bankruptcy court.
Let us also remember: not all M&A is due to business failure. Just as often an acquisition is the culmination of a lifetime of sacrifice by a business owner. Acquisitions very often generate the much-needed cash to pay estate taxes at the death of an owner. What do Warren and Ocasio-Cortez plan to say to grieving families when they owe millions in estate taxes and cannot sell the business to pay it? What will they say to hard-working retirees when they are forced to keep working because they cannot be acquired by a larger company?
Warren and Ocasio-Cortez list another rationale for the act: “Although antitrust agencies are tasked with defending open and fair markets by stopping anti-competitive mergers, their inability to aggressively take on concentration before the crisis began has further limited the federal government’s ability to respond effectively to the pandemic.” This is an argument from incompetence: because the Federal Trade Commission has been unable to do their job, we should not give them jobs to do. Rather than squelch the critical work of M&A in our economy how about we simply compel the FTC to do their duty?
More to the point: as Warren and Ocasio-Cortez rightly point out, anti-trust powers are already vested in the federal government. If a proposed merger would result in a monopolistic outcome, the Federal Trade Commission already has the power to prevent it. Why the need, then, for new law? And though dealing with “future pandemics” is also cited in support this proposal, there is not even the thinnest thread linking corporate M&A to federal pandemic response. That is a complete non-sequitur.
In the final analysis, Warren and Ocasio-Cortez get everything wrong about M&A. An outright ban would hurt workers, slow future economic growth, and rob us of the only benefit recessions provide: the emancipation of workers and capital from zombie-like companies. It would also rob retirees of their long-awaited exit and prevent heirs from generating the cash needed to pay estate taxes. Instead of letting shallow-rooted companies run their course and nourish the remaining trees, Warren and Ocasio-Cortez propose taking a chainsaw to the whole forest. Worse, the principles they cite to justify such extreme measures are founded on visceral language rather than sound economics.
The Pandemic Anti-Monopoly Act, then, is not a serious attempt at thoughtful policy. Rather it is a test of Schopenhauer’s claim: if repeated with solemnity and frequency, will people really believe the absurd?
