The merger movement has involved both horizontal concentration and vertical integration in industry, as well as the creation of conglomerates, in particular in western Europe. The vertical integration resulting from mergers is particularly apparent in such fields as the production of aluminium and its end products. Such vertical integration tends to preclude exports of raw materials and intermediate goods except through the structure of the multinational corporations in question. In the industrial sectors of computers, agricultural machinery and motor vehicles, transnational corporations produce components and parts in many different countries of the world, including developing countries. As a result, the finished product represents a culmination of an international co-operative effort involving extensive intra-company trading marked by cross-shipments of sub-assemblies of industrial intermediates and components.
Even more impressive than the growth in trade itself has been the growth in the role of a limited number of giant transnational corporations (TNCs) in world trade. This is due not only to the large percentage of trade which takes place within and among such corporations, but also to the fact that recognition of the role of TNCs in the development of new technologies in production innovation, and in the penetration of export markets for goods and services, has led to their being seen as "national champions", whose interests are increasingly seen to coincide with national goals. In the name of competition, enterprises are encouraged by governments to use all the restrictive business practices at their disposal in order to strengthen their positions in international trade transactions. This situation results in a considerable degree of concentration of market power among firms which consider they would otherwise be unable to reach the "critical size" to compete on global markets. As a result, the tendency towards fewer but larger corporations dominating the world economy seem to be accelerating.
Increased participation by transnationals has had implications for the structure of international trade, including the growing oligopolistic nature of world trade, transfer pricing and the greater impact of restrictive business practices in the international trading system. Despite efforts to regulate such excesses, none of them have effectively imposed obligations upon the transnationals to ensure that their activities conform to the overall goals of the international community, especially that of economic development. Trade and foreign investment liberalization, although increasing competition in many sectors, tends to reinforce oligopolistic global market power in others, particularly in some high technology sectors. Such market domination may be difficult for individual competition authorities to control.
The power concentrated in the hands of the transnational enterprises and their actual or potential use of it, their ability to shape demand patterns and values and to influence the lives of people and policies of governments, as well as their impact on the international division of labour, is dangerous. This is especially so, since there is no systematic process of monitoring their activities and discussing them in an appropriate forum.
While the international division of labour is influenced by the existing international trade and monetary regimes, it may be strongly affected, intentionally or unintentionally, by transnational corporations. Their large capabilities for moving products and inputs across borders are important instruments in affecting the actual division of labour. At the same time, the apprehension that host countries may be turned into 'branch-plant' economies may not be limited to developing countries. The organizational, productive and distributive complexes created by transnational corporations often assign a peripheral and dependent role to affiliates in many host countries, while the centres of top decision-making and scientific research remain in a few highly industrialized countries.
Although the locational pattern of transnational corporations reflects the uneven distribution of the factor endowments, it is in many cases also moulded by artificial administrative devices employed by home and host governments (tariffs, subsidies, etc), as well as by the corporations themselves. In today's complex economy, the 'invisible hand' of the market is far from the only force guiding economic decisions. To a considerable extent, conscious planning, both public and private, has played an increasing role in decision-making. Increasingly, basic decisions on the allocation of resources with respect to what, how and for whom to produce are being concentrated in corporate planning mechanisms. The growth of transnational corporations gives them increasing control over resources and thus augments their capacity to re-allocate them. Such decisions, when taken exclusively from the point of view of the interests of the enterprise pose serious problems.
Corporate strategies and market structures in developed market economies have been strongly influenced by a series of factors that have characterized the world economy in the 1980s. These factors include a slow growth in demand compared to previous decades, and the resulting growth of surplus capacity, rapid diffusion of technological innovations in both process and product technologies, unstable and speculative financial and monetary markets, and increased international competitive pressures resulting from the intensified rivalry between the major trading blocs (USA, EEC/EU, and Japan) for the same international markets. Deregulation and privatization in many countries has facilitated expansion into previously inaccessible markets.
Firms have responded to these challenges by strengthening their position globally through mergers or acquisitions of domestic or foreign companies. Geographical diversification is seen as critical to the attainment of a significant presence in vital markets. Associated with this has been the establishment of a multiplicity of linkages and relations at various levels with competitors or other firms. These have ranged from joint ventures to a wide spectrum of strategic alliances or non-equity arrangements.
In 1989 it was estimated that some 200 global corporations control nearly 80% of the productive assets of the non-socialist world. It was predicted that within 25 years they will own production assets in excess of $4 trillion, or 54% of the economic wealth of the planet. In 1982 the total revenue of the top 200 transnationals in the services sector was $1,192 billion, compared to $1,853 billion for the manufacturing transnationals. This implies a reduction of the power of governments to control vital areas of economic policy. It has also meant that TNCs have been able to restrict the growth of competition by a variety of monopolistic practices.
In a growing number of financial and industrial sectors there is a strong tendency towards oligopolistic structures. Regional and global inter-firm alliances and mergers are allowed on the basis that they favour the competitiveness of a nation or region at the global level. The financial markets have experienced a long wave of major domestic and cross-border acquisitions, closely linked to the emergence of the international securities market as the medium for cross-border borrowing and lending. This trend has not been limited to a few manufacturing sectors but has affected nearly every economic activity, both high technology and traditional, and is in some way reshaping the structure of developed economies. The extent of market power generated by mergers with international effects will vary according to the size of the market. The effects are likely to be most detrimental in small markets, such as those of most developing countries where foreign affiliates operate, especially if these already hold a dominant position. Monopoly or highly concentrated market structures would emerge as a result of a merger of the parent companies outside the control of the authorities of the country.
European companies are more fragmented than American ones. In 1989, the market share of the top five companies in major industrial sectors in Europe was on average half that in the USA. The percentage share (USA : Europe) of the top five companies manufacturing white goods was around 92 (USA) : 65 (Europe); for soft drinks 90 : 59; spirits 57 : 26; banking 71 : 21; paints and coatings 30 : 24; food retailing 21 : 10.
The number of mergers and acquisitions made by Europe's 1,000 leading firms --either within a member state, across EEC/EU frontiers or internationally -- rose from 227 in 1986-7 to 492 in 1988-89. The size of the deals has also grown. In 1986-7, about 70% of mergers involved firms with combined sales of over 1 billion ecus; in 1988-89, that figure was over 90%. The EC's competition commissioner tried to unwind a merger signed in 1988 by two Dutch coffee companies, claiming the merger was an abuse of the the two companies' competitive position because it gave them 70% of the Benelux coffee market. Companies will find it harder to corner markets in Europe with the connivance of politicians. Since 1990, the commission has the authority to vet and, if necessary, veto all deals involving firms with a combined turnover of more than 5 billion ecus, providing that at least 250 ecus-worth of these sales are in the EEC/EU.
The present trend of merger activity is disquieting, given its spread and the size of firms involved, many of which have numerous affiliates in developing countries. The alleged reasons for mergers and takeovers relate primarily to expected increased productivity and to tougher competitiveness in international markets. But the increasing number of hostile takeovers and the areas and manner in which they occur, suggest a merger movement largely motivated by financial considerations and elimination of competition, rather than by criteria of efficiency, rationalization and growth.
2. The future of everyone is becoming increasingly dependent on decisions made by, and in the interests of, a limited number of major corporations, many of which now control resources in excess of those of many individual countries.
3. Mergers generally speaking do not lead to increased shareholder value. One study suggests that only 2 out of 15 mergers studied increased the value of the company resulting from a merger. Secondly, in the USA and increasingly in Japan and western Europe companies are to big. They are not more cost effective, economies of scale is a falsehood. They are not more innovative, middle sized companies tend to take on more risky products. Mergers disrupt the main purpose of the company. They can cause hundreds of employees to spend thousands of hours over years integrating the companies. On the other hand, hugh companies that have been broken up over the past few years have resulted in more profitable smaller organizations.
4. The effects of concentration of market power of mergers and takeovers merit special attention. Even if a domestic or international merger has no effect on concentration in the country or countries involved, it may nevertheless create market power in other countries and may increase concentration at the world level. Moreover, an international merger may, in some cases, lead to restrictions on the freedom of the acquired enterprise to compete in certain product lines or export markets.
2. Carefully selected mergers which are not simply ways of diversifying can result in enormous opportunities. Inefficient multiple product factories can be cleaned up. Factories producing similar or identical products can be merged. Products and components can be exchanged within the group. Distribution and sales channels can be combined. Research and development departments can be utilized more effectively. The breadth of in house technology can be used more efficiently.