Contemporary Americans are generally ignorant of the origins of the capitalist economy. While everyone has heard about the so-called Era of the Robber Barons, few have heard any details on the free-for-all that was launched by the inauguration of the republic. George Washington was speculating in western lands, and Benjamin Franklin was involved in a scandal rigged to deprive the Penn family of its land grant, in order to speculate in lands in Pennsylvania that would have been up for grabs. There is no end to the stories of greedy Europeans getting native Americans drunk, in order to "persuade" them to sign over their land; land that later became the source of great wealth. (The Indians never felt that they owned the land, so they never took the signing over of lands seriously, because they all knew that they had no authority to sell the land; in the end, the land was actually just taken). Additionally, the first economy in the U.S. was dependent upon a servile group that was divided into castes, which included indentured servants, free white laborers and artisans, and black and Indian slaves. Much is made about the universal practice of slavery during the colonial era, but in reality the type of chattel slavery practiced in the New World did not resemble the practice of slavery as it was known in Classical antiquity. Without defending the abomination of slavery during any historic epoch, the institution of slavery in the Americas had a racist component that was absent from classical slavery; additionally, the slaves known in Europe and ancient Rome and Greece, and Egypt, had certain legal rights, even as slaves, that were completely unknown in the type of institution introduced into north and south America. A slave's rights were minimal, at best, especially when held up against the rights of a nobleman, but there were instances of slaves rising up within the ranks of the master's household to the point of becoming powerful individuals in their own right. There were instances of kings actually entrusting so much power to slaves, that they became the equivalent of ancient prime ministers, something that was inconceivable to the slavemasters of the colonies. Furthermore, the racist form of slavery was not confined to the Americas, it was practiced everywhere Europeans set up colonies, including India, Africa, Asia and Polynesia.

The colonies, above all, were meant to be profit-making ventures. Poor Europeans moved to the colonies generally to strike it rich, in order to return to the Mother Country as Self-Made-Men. The same Europeans who languished at the bottom-rungs of European society while in Europe, suddenly became important when holding down a job in a colony, supervising a native workforce on behalf of absentee European owners, and thus was born the nonsense we call "racial solidarity." This has had a long-term impact on the human community of former-colonies, where left-over racism is still at work undermining human connections, and substituting commerce for human relations. The entire issue of a free market economic system is an unexplored future potential, because free enterprise has never been allowed to flourish anywhere, especially in the United States. The U.S. republic was designed from the start to facilitate the control over the government by the commercial interests of the nation. This is powerfully asserted in the writings of Alexander Hamilton, who devised the original compact between business and the new Federal Government, when he engineered the financing of the national debt. The end result was a police state designed to protect property over and above the legal rights of people. Under this regime corporations came into their own, changing them from the rare chartered institutions that were once set up by elite groups of businessmen, into a manufactured legal entity that were now mass-produced by what could be called corporation factories. It was under the auspices of the republic that corporations came to enjoy the definition of being "legal persons," something that had never been asserted previously. While there is nothing wrong with capitalism when it is practiced according to law, and with moral scruples, cartel capitalism is ultimately no better than the totalitarian form of communism that collapsed in the former-Soviet Union. The following article highlights the accidental nature of wealth-making, and it also focuses on the political factor in creating value. A merger of two institutions is really a political act rather than an economic act, because it is the result of persuasion and legal tricks; it does not create new enterprises, and it is a gamble involving serious risk-taking.

GLOBAL SWARMING

By Debora Vrana
Times Staff Writer
BUSINESS SECTION

Richard J. Heckmann built his company the 1990s way -- acquisition by acquisition. His U.S Filter Corp. in Palm Desert, Ca., has become a global player in water treatment by purchasing more than 100 companies worldwide in the last seven years, including 60 in the last 12 months. "You want to be the big guy out there," said Heckmann, chief executive of U.S. Filter. "It’s quicker, cheaper to buy. In all my years in the business, I’ve never seen an ‘urge to merge’ like I’m seeing now."

Although the number of U.S. Filter acquisitions is particularly dramatic, the firm’s basic strategy is hardly unusual. America’s companies are rushing to find strategic partners in a mergers-and-acquisitions bonanza like none this nation has seen, surpassing even those of the go-go 1980s, the conglomerate-driven 1960s and the roaring 1920s. The numbers are indeed mind-boggling. For the 11 months ended Dec. 1, nearly $835 billion worth of mergers-and-acquisitions deals were announced in the United States, more than the record $625 billion for all of 1996, according to Securities Data Corp., a New Jersey research firm. By year’s end, the total for deals in the U.S. could reach $880 billion, it said.

Despite the fears, the merger mania is expected to continue through most of 1998, given the current economic climate. Only a major market shift, such as a severe global stock market downturn, might slow things, experts say. Unlike in the 1980s, when hostile deals and junk-bond-driven restructurings ruled, these new mergers are typically friendly, strategic ventures fueled by record-high stock prices and cash. Unlike in the 1960s, when major conglomerates were created from groups of dissimilar companies, these new deals are often combinations of near-equals in the same industry, and are designed to increase efficiency through size and to boost shareholder value. In an echo of the 1920s, a soaring stock market is serving as a catalyst for the deals.

But this global merger trend is more akin to the situation at the beginning of the century, market specialists say, when companies were scrambling to compete for the first time in a national market. Now, on the verge of a global marketplace and another century, corporations in America and in Europe are again positioning themselves for power and profits. This time the world is their market.

"It resembles the early 1900s – except it’s global and it’s bigger," said Robert R. Sobel, a business historian at Hofstra University on Long Island. "Companies think, ‘I have to be overseas and I have to be bigger.’ And technology also plays a big part. If you told anyone 20 years ago that Disney would be a global powerhouse, they would wonder what you were talking about."

In the U.S., such deals as World-Com Inc.’s $41.8 billion pending bid for MCI Communications Corp. and Boeing Co.’s acquisition of McDonnell Douglas Corp. for $16.3 billion have captured the headlines and the market’s attention. Each deal seems bigger than the last. So far this year, 1.5%, or 146, of all 9,831 mergers-and-acquisitions deals were at least $1 billion in size, Securities Data found. That’s up from less than 1% in 1996, it said.

In California this year, such historic deals as Lockheed Martin Corp.’s $11.8 billion acquisition of Northrop Grumman Corp. and Washington Mutual Savings’ $6.8 billion acquisition of Great Western Corp. have forever changed the state’s corporate landscape. (Not to mention the flight of corporate headquarters out of California as land prices sky-rocketed, and extremist regulations took effect, literally strangling enterprises that weren’t willing to pump money into the coffers of victorious politicians, WFI Editor).

"What’s remarkable is the sense of strategic urgency," said Herbert Lurie, head of financial institution mergers and acquisitions at Merrill Lynch and Co. in New York. (The same outfit that "helped" Orange County (California) speculate, and lose, $1.7 billion, sending it into bankruptcy, WFI Editor). "Each time a deal happens, a company looks around and sees there is a smaller universe of potential partners."

Lurie noted that the financial services industry, which includes banks, insurance companies and investment banks, have accounted for 20% of mergers and acquisitions this year. Many of the nation’s other major industries are just beginning to consolidate. "It’s especially busy in California with defense almost done but health care and technology still consolidating," said Peter K. Barker, a managing director at Goldman, Sachs & Co. in Los Angeles, California.

Desite the economic turmoil in Asia and the market jitters in the U.S., more consolidations are expected, bankers say, because fueling the trend is a powerful combination of major forces, including:

1. The still-strong stock market. With share prices so high, companies find it quicker and cheaper to buy businesses than to start them from the ground up. In fact, nearly half of all 1997 deals are being paid for with stock, Securities Data found, including some of the biggest, such as NationsBank Corp.’s $14.6 billion purchase of Barnett Banks.

2. The wave of globalization. Companies are searching for partners that will lead to efficiency and increased value for shareholders, and as long as markets and the economy stay strong, deals will continue, experts say. Also, as long as the reigning philosophy is that bigger companies are better competitors in the global arena, firms will look for partners.

3. Government’s laissez-faire attitude when it comes to anti-trust regulations and approval of mergers. Spurred by recent deregulation, combinations in similar industries that wouldn’t have passed muster in previous decades are eagerly put together on Wall Street and approved by the government in the interest of international competitiveness. With a few recent exceptions, such as the Federal Trade Commission’s decision to block the merger of Staples, Inc. and Office Depot, Inc., most are cleared. (Apparently, someone bribed the wrong politicians, WFI Editor). "There are better reasons and worse reasons for some of these," said FTC Chairman Robert Pitofsky. "The better reasons are adapting to the global economy and deregulation. The worse are to eliminate their most vexatious competitors."

4. Investors have generally welcomed the merger bonanza. Whereas acquisitions in the 1980s typically sent an acquiring company’s stock price down, stock prices of acquiring companies in the 1990s often rise if Wall Street thinks the deal makes strategic sense.

Now the only thing worrying Wall Street is the impact of another correction like the 554-point drop (plunge?) in the Dow Jones industrial average that occurred Oct. 27. Still most financiers believe that even if stock prices begin to decline steadily or languish, other sources of financing will become popular, such as leveraged buyout funds. "A correction allows the LBO guys to be more competitive," said Peter Nolan, partner Leonard Green & Partners, a leveraged buyout fund in Los Angeles.

In fact, LBO funds right now have a record amount of cash. As of October, LBO funds had raised $19.5 billion, an increase from the $14.9 billion raised by the same time last year, according to Buyouts newsletter. Although the market has partially rebounded, many believe a real market shift, especially a global correction, could put a chill on future mergers and acquisitions. But some believe another scenario is even more ominous: Poor long-term performance of some of these high-profile merged corporations if they are unable to successfully integrate their many acquisitions.

"There’s no doubt we will look back a few years from now on some of the deals and say, ‘What was the buyer thinking?’" said Steven Rattner, deputy chief executive at Lazard Freres & Co., who worked on the mega-acquisition of Paramount Communications Inc. by Viacom, Inc. "It’s hard to know which ones or how many, but the pricing we’re seeing implies growth rates that are simply unachievable," said Rattner.

Although mergers and acquisitions may provide price boosts in the short term, many deals don’t live up to initial expectations. In fact, nearly half the mergers done during the 1990s have created companies whose stocks don’t perform as well as those of their industry peers, according to Mercer Managing Consulting. Only 52% of the stocks of companies participating in mergers in the 1990s have outperformed those of their industries as a whole when tracked by return to shareholders after three years, Mercer found. Although that’s a higher proportion than the 37% that outperformed their industries after three years in the 1980s, it’s still low, the study found.

"It’s very poor performance given the amount of money being poured into these deals," said Ken Hodge, a vice president at Mercer. Some critics take it a step further. The basic idea that bigger companies are better competitors in the global arena is just flawed, said James Brock, an economist at Miami University in Oxford, Ohio, and author of several books, including "Dangerous Pursuits: Mergers and Acquisitions in the Age of Wall Street."

"Beyond a certain point, big is worse. They become bureaucracies and stagger under the weight of their own inefficiencies," Brock said. "They become like big government. This merger trend ought to be a cause for alarm, not jubilation." Brock believes these major combinations could very well lead to a lessening of competition, higher prices, less innovation and huge increases in costs to consumers. They also lead to layoffs and a more vulnerable corporate work force, with many workers too worried about job security in the next restructuring or merger to give their jobs their best, he said.

"I’m not saying the whole world should be… hot dog stands – but the deals we’re seeing now involve shuffling paper-ownership shares – it’s a charade, basically. When two companies merge, it doesn’t tighten one nail or screw or put one board into place." Money that could be creating new industries, employment or products is used to buy what already exists and doesn’t do much to strengthen the economy, Brock said. What we’re seeing in the 1990s is just another in a long historical cycle of companies combining and then breaking apart, which doesn’t do much for the economy but makes Wall Street and CEOs rich, he said.

"Investment bankers make millions of dollars in fees putting these companies together, and then millions of dollars years later when they come in and advise them on how to bust them up again," Brock said. "What’s productive about that? It’s just a lot of financial razzle-dazzle." (When Merrill Lynch sold stocks and bonds to bankrupt Orange County, they received their commissions, even if the stocks were bad investments; schools were closed, libraries were closed, public services laid off thousands of workers, and the hours of all county agencies were reduced, none of which bothered the executives of Merrill Lynch, who profited from the destruction of the county government; even the school districts lost $50 million invested in the shady investment pool of Bob Citron, former Orange County treasurer [who never spent a day in jail], WFI Editor).

Not so, say Wall Streeters and many others familiar with the roles of investment bankers, lawyers and accountants in mega-merger deals. Although it’s true that many of the conglomerates created in the 1960s were busted apart in the 80s, the combinations being created now are different, they say, because they are strategic alliances being formed as part of a business philosophy of globalization. Companies that might have eventually gone out of business are instead purchased. Investment bankers and others play a key role in helping companies find partners. (Ironically, one of the arguments against monopolistic capitalism was the fact that the government tended to keep inefficient businesses alive beyond their real usefulness; i.e., in some instances it can be better if some companies are allowed to go out of existence, WFI Editor).

"Americans and other people have a classic distrust of middlemen," said Sobel, the market historian. "But investment bankers are extremely important people. Their basic job is the heart of the system. It pumps out the money." And for CEOs like Heckmann, more acquisitions and mergers are eagerly awaited in 1998. "We’re grappling with that right now – what is too big?" said Heckmann, who has grown U.S. Filter to an expected $3 billion in revenue in this year, from $17 million when he took over in 1990. "Once you cross the bridge into the big company, I think the bigger you get, the easier it is to win," he said. "I don’t see anything else for us to do but keep growing. If we stopped acquiring, I think it would really hurt us."

SOURCE: The article by Debora Vrana appeared in the Business Section of the 14 December, 1997 Los Angeles Times, Orange County Edition. Reprinted in the public service of the national interest of the American people.