Much of this year’s political debate is rooted in a sense of disaffection among the electorate given the lethargic pace of economic recovery and the recognition that the meager gains have not been shared proportionately by all workers. There is a sense that the system is broken for all but a select few.
Christopher HopkinsIronically, there is ample evidence that the system is indeed working; that free enterprise in America is alive and well and remains the most powerful driver of positive change over the long run. Two major business combinations were announced during the past week that highlight the remarkable ability of free market forces to adapt to economic imbalances well beyond the ken of regulators and bureaucrats.
Industrial powerhouse General Electric announced its intention to acquire oil service firm Baker Hughes, and telecom giant AT&T agreed to merge with Time Warner. Each of those deals in different industries accentuates the manner in which changing market conditions elicit responses by participants to remain competitive.
Interestingly, all four firms have long and storied histories through economic booms and busts. And none of the four would exist today had they not shown a remarkable capacity for adaptation.
Modern-day AT&T is a descendent of the original 1885 Bell system, the backbone of the nascent U.S. telephone network. Once possessed of a near-monopoly on long distance toll calls, the company was broken up by regulators in 1992 and subsequently reinvented in a series of combinations to become one of the largest communications firms. As the price of data bandwidth declines, AT&T is responding by branching into the production of content with the acquisition of Time Warner’s HBO, CNN, Warner Brothers and Time trademark brands. Already controlling a huge network of pipes, AT&T now seeks to control more of the material flowing through the pipes.
Only slightly younger, GE traces its history to Thomas Edison and his quest to electrify American cities. GE spent the past decade shifting away from financial services and into the production of oil and gas equipment, just in time for oil prices to plummet by 70 percent. Adapting to the new reality, the company is merging with another venerable industrial outfit, oilfield service firm Baker Hughes. The tie-up will give the new entity additional heft and create efficiencies in a newly competitive energy environment.
We often think of mergers in terms of combining two competitors (American Airlines joining with US Airways). This type of combination is called a “horizontal” merger, and can sometimes lead to monopoly power in a heavily concentrated industry, inviting additional regulatory scrutiny to avoid harming consumers.
Those most recent deals, on the other hand, are typical of “vertical” integrations, where one company merges with a complementary firm (often a customer or supplier) providing additional scope rather than economies of scale. An example might be an auto manufacturer purchasing a supplier of tires or glass. Those combinations rarely raise competitive concerns and much more typically lead to overall gains in efficiency.
Each of the recent deals was a reaction in real time to a threat posed by changes in market structure: the shift in focus to mobile broadband data transmission, and the new reality of cheap oil and gas thanks to hydraulic fracturing.
No regulator, planner or bureaucrat could mount a timely response to such shifts in basic competitive forces. But operating under the influence of profit-seeking shareholders, the free market guides each company to adapt to the new reality or die. Only the free enterprise system provides such powerful incentives, and there is ample evidence that it is alive and well.
Christopher A. Hopkins is a vice president and portfolio manager for Barnett & Co. in Chattanooga.