Mergers and Monopolies

Mergers and Monopolies

Merger Mania

For three consecutive years, between 1995 and 1997, the value of mergers and acquisitions in the United States increased to record levels. Some 27,600 companies joined forces, more than in the entire decade of the 1980s. In 1999 even more companies hastened to unite into behemoth corporations created by the "merger mania."

Rockefeller's Revenge

When in December 1998 Exxon and Mobil agreed to merge, pundits immediately labeled the $86.355 billion deal "Rockefeller's Revenge." Both companies originated as part of John D. Rockefeller Sr.'s Standard Oil monopoly, together accounting for more than half of the Standard Oil Trust until the Supreme Court disbanded it on 15 May 1911. In 1998 as well, Amoco, also a scion of Standard Oil, agreed to be purchased by British Petroleum (BP) for $55 billion. The following year, BP acquired the Atlantic Richfield Company (ARCO), another successor of Standard Oil, for $33.7 billion. Initially, the U.S. assets of BP derived in large measure from the absorption of another offspring of Standard Oil, Sohio. What the judiciary put asunder at the beginning of the twentieth century, entrepreneurs have been busy putting back together at its end. During the 1990s "Big Oil" got even bigger. Historical analogies, however, only go so far. At the zenith of its power, Standard Oil controlled 84 percent of the petroleum market in the United States. Exxon-Mobil, although the largest oil company in the world, by contrast, controls approximately 22 percent. Yet, the economic conditions that prompted Exxon and Mobil to merge bore a striking resemblance to those that prevailed in the past. Ron Chernow, author of Titan: The Life of John D. Rockefeller, Sr. (1998), said in an interview that "the economic environment was absolutely the same in the 1870s, when Rockefeller began the trust, as it is today." When the Exxon-Mobil merger was proposed and completed, there was a worldwide glut in crude oil that kept prices low. Although they rose considerably afterward, in December 1998 gasoline prices hovered around 97 cents per gallon, the equivalent of 23 cents per gallon in 1970 dollars. In addition, the price of crude oil fell from $23 a barrel in 1997 to $11 a barrel in 1998. The reason, of course, was supply. In 1998 the oil industry produced approximately one million more barrels of oil per day than it sold. The surplus, in part triggered by the decrease in the consumption of oil in depressed Asian markets, drove down the price. Throughout its history the oil industry has been plagued by overproduction. "The challenge has always been to control the surplus," explained Leo Drollas, deputy director of the Centre for Global Energy Studies in London. Excess supply and falling prices created a strong incentive for consolidation. By merging, Exxon and Mobil cut production and distribution costs and maintained their profit margins, as had their common ancestor, Standard Oil. Another factor prompting the union was the increasing supply of capital necessary to develop new sources of oil. Virtually all potential oil fields are in areas that are geographically remote and politically unstable, such as those located in West Africa and along the Caspian Sea, By combining, Exxon and Mobile hoped that they would attain greater leverage in negotiations with foreign governments and thereby enhance their competitive advantage in the global marketplace.

Media Moguls

On 22 April 1999, just six weeks after completing the $69.9 billion acquisition of cable giant Tele-Communications, Inc., Michael Armstrong, CEO of AT&T, announced plans to make a $63.1 billion deal This time the target was the MediaOne Group. Armstrong's offer trumped an earlier $48 billion bid that Comcast Corporation had made. If approved, the merger will make AT&T the single largest cable operator in the United States, reaching no fewer than 60 percent of households with telephone, cable, and Internet services. Another merger, announced on 28 July 1998 (and approved by the Federal Communications Commission [FCC] in June 2000) brought together two prominent media and telecommunications firms, Bell Atlantic and GTE. The $70.9 billion deal created the largest local telephone company and unleashed a telecommunications colossus in an already rapidly consolidating market. The new company, known as Verizon Communications, will sell communications packages ranging from long-distance and local telephone service to wireless and high-speed Internet access. Industry analysts also expect Verizon to expand into video entertainment and interactive gaming. "They certainly control a huge, huge, area," commented Meredith Rosenberg, an analyst with the Yankee Group in Boston. "They have the direct pipe line to the consumer, and they can really control the customers. It's just a huge opportunity in terms of selling bundled services. The possibilities are endless." The merger brought sixty-three million local telephone lines, or 33 percent of all lines in the United States, under the control of Verizon. In addition, Verizon has approximately twenty-five million wireless telephone customers, more than twice the number of AT&T, making Verizon the largest wireless operation in the country. Company officials reported that Verizon had a market worth of nearly $150 billion with annual revenues of $60 billion. As such, the deal dwarfs the $15.1 billion merger of Time-Warner in 1990 and even the $18.3 billion acquisition of Capital Cities/ABC by the Walt Disney Corporation in 1996. All, however, may be surpassed by the proposed purchase of Sprint by MCI WorldCom for $129 billion, a merger still pending at the end of 1999.

Breaking Up Is Hard to Do

On 18 May 1998 the Department of Justice and twenty states filed an antitrust suit in U.S. district court in Washington, D.C., against the Microsoft Corporation. The suit alleged that Microsoft illegally manipulated technology to control the software industry and undermine its competition, particularly Netscape Communications Corporation, the maker of Netscape Navigator, which Microsoft executives feared would marginalize the Microsoft Windows program. At the time the suit was filed, some critics of Microsoft, such as Payam Zamani, cofounder and executive vice president of Autoweb.com, went so far as to claim that "if Microsoft wins this battle, it means the Information Age will be Bill Gates's." For his part, William Henry "Bill" Gates III, the chairman of Microsoft, maintained that his company had done nothing illegal. "All the contracts we did are perfectly normal, legal contracts that have in no way made it impossible for Netscape to market their products," Gates asserted in 1998. The Justice Department won round one. On 7 June 2000 U.S. District Judge Thomas Penfield Jackson ruled that Microsoft was a monopoly. Calling Microsoft "untrustworthy" and characterizing its executives as "unwilling to accept the notion that [they] broke the law," Judge Jackson ordered the company be split in two, one branch controlling the Windows operating system, which runs 90 percent of all personal computers (PCs), and the other incorporating all additional applications, including the Internet Explorer, web-browsing software, Microsoft Office, Microsoft Network, and WebTV. Jackson also imposed stringent restrictions on the conduct of Microsoft in an attempt to remedy its antitrust violations. If the ruling is carried out, Microsoft will have to disclose the inner workings of the Windows program to competitors to make certain it is compatible with their systems; offer the manufacturers of PCs uniform pricing for all Microsoft products; and permit PC manufacturers to customize the main Windows screen and to delete Microsoft browsers, email, and other software from their systems. Jackson's ruling marked the most severe antitrust prescription since the breakup of AT&T in 1984. Gates criticized the decision as "an unwarranted and unjustified intrusion" that in effect meant the "government can take away what you created if it turns out to be too popular." Other Microsoft officials called Jackson's ruling "draconian" and a "corporate death sentence" that will disrupt the computer industry and damage the economy. Although appeals could delay implementation of the decision for years, Justice Department officials remained optimistic that the division of Microsoft will encourage the sort of accelerated technological innovation and development that they believe Microsoft inhibited. The most likely to benefit are such companies as Sun Microsystems and Palm and Psion, which are creating the wireless operating systems of the future. If these companies flourish, bulky PCs will be displaced by an assortment of Internet appliances, such as digital assistants and digital cellular telephones, that run on non-Windows operating systems such as Linux, Macintosh, and Unix. Many within the computer industry, such as Mike Pettit, president of ProComp, an industry trade association that lobbied the government to investigate Microsoft, regarded the decision as ultimately to the benefit of Microsoft. On balance, Pettit concluded, the split "opens up opportunities … for them to innovate and market creatively. They no longer can fall back on illegal business practices." Rob Enderle, senior analyst at Giga Information Group in Santa Clara, California, added that "Microsoft is big and unwieldy at a time when they [sic] face more competition than ever. This gives them the ability to focus and shape their company accordingly." Whatever the final outcome of the case, Microsoft is unlikely to lose its customer base. Industry estimates suggest that it will take at least five years for its market share to fall below 50 percent, if it ever does. Tom Kemp, vice president of products at NetlQ, a systems management software firm also located in Santa Clara, pointed out that companies invested a fortune in Windows and other Microsoft products during the 1990s and are not about to "abandon Microsoft overnight."

Sources:

Ron Chernow, Titan: The Life of John D. Rockefeller, Sr. (New York: Random House, 1998).

Amy Cortese, "The Battle for the Cyber Future," Business Week (1 June 1998): 38-41.

Paul Davidson, "Appeal Could Go Directly to Supreme Court," USA Today, 8 June 2000.

Davidson, "Microsoft Awaits a New Hand," USA Today, 8 June 2000.

Mike France, "What Penalties for Microsoft?," Business Week (22 February 1999): 76, 80.

Steve Hamm, "Microsoft: How Vulnerable?," Business Week (22 February 1999): 60-64.

Philip J. Longman and Jack Egan, "Why Big Oil is Getting a Lot Bigger," U.S. News & World Report, 125 (14 December 1998): 26-28.

Stacy Perman, "Is Bigger Really Better?," Time, 151 (27 April 1998): 56.

Gary Rivlin, The Plot to Get Bill Gates: An Irreverent Investigation of the World's Richest Man —and the People Who Hate Him (New York: Times Books, 1999).

Richard Siklos and Amy Barrett, "The Net-Phone-TV-Cable Monster," Business Week (10 May 1999): 30-32.

Jon Swartz, "Microsoft Split Ordered," USA Today, 8 June 2000.

"Telephone Giants Cleared to Merge," Richmond Times-Dispatch, 15 June 2000.