If you read the headlines of major newspapers, especially the business section, you will find that many companies are planning to or already have merge with another company. A ďcompany mergerĒ is when one company buys another company so they work under one new name. ď In 1997, $908 billion worth of inter-corporate transactions were made, tallied by Securities Data, making 1997 a record year for mergers. So far the first half of 1998 has already seen $604 billion worth of deals (Dunlam), and still bigger deals like the Exxon-Mobil deal are being negotiated. As an economics student, I ask myself, are mergers good or bad for a nationís economy? What does this do to unemployment and economic growth?
Letís look at the SBC-Ameritech merger and analyze whether or not itís good for a nationís economy. SBC Communications Inc. plans to purchase Ameritech for $61 billion. If the deal is complete, SBC-Ameritech will have a great control in telecommunications. About 20 years ago, there was a Ma Bell monopoly company. It was broken up by the Justice Department because they felt it was holding back the economy and telecommunications. The monopoly controlled almost all of the phone service in the U.S., then was broken up into seven local phone companies called ďBaby BellsĒ and a long distance carrier AT&T. Since the break up, competition increased which lead to a drop in prices, which lead to more subscribers and phone service. Itís obvious that competition is one of the important factors to economic growth.
SBC was one of the Baby Bell. It later bought Pacific Telesis, another Baby Bell, and is trying to buy Southern New England, another Baby Bell. If SBC purchases Ameritech, another Baby Bell, there will only be three of the seven Baby Bell companies left. Most likely SBC will try to purchase them too or SBCís rivals GTE or Sprint will.
One of the concerns of SBC purchasing Ameritech is that it will be SBC third merger. Some major opponents of the SBC-Ameritech merger are companies like AT&T, Sprint, and politicians like Herb Kohl( D-Wis ). They argue that the merger will greatly reduce competition and give SBC-Ameritech a huge monopoly in telecommunications. They strongly urge the FCC to reject the deal because it will hurt consumers.
SBC and Ameritech argue that telecommunication is such a big industry and is growing enormously. With cellular mobile service, and fax service, and Digital Data trafficking, the telecommunications industry is booming. It is estimated that by the year 2010, Digital Data trafficking will account for 99% of all traffic minutes (Dunlan ). To keep up, communication networks need to increase capital, and company mergers are a way to keep up with telecom technology and the economy.
The FCC will decide whether or not the merger will go through. There is a good chance it will go through, but because SBC already owns so much and many people argue against the deal, the deal might not go through. Everybody will find out soon enough when it makes headlines.
Now letís look at the Exxon-Mobil merger. Exxon plans to buy Mobil for $76.6 billion. If the deal is complete, it will be the biggest corporate merger ever. Now why would two rivals in the same industry want to join forces? Currently, oil prices are at its lowest in 12 years, and with a surplus of oil, prices will be low for a while. The prices on barrels are 25% to 45% below what they should be ( Reich ). What this means is a loss in revenue. What energy companies can do is to cut back on staff, cut back on supply, or merge with another company to get better prices on drilling and supply. Thatís what Exxon and Mobil are doing. They are going to merge, cut jobs, and negotiate a better price on drilling equipment. This will hurt the drilling contractors directly. An example is Global Marine Inc., a drilling contractor. Because of oil mergers, there arenít as many customers renting oilrigs and this results in a loss in revenue to drilling contractors. Now Global Marine is looking for a partner to merge with in order for them to stay profitable.
Many consumers and businesses oppose the deal and want the FTC to reject it. They argue that