New York (CNN Business)Two of the most prominent progressive Democrats in Congress — Senator Elizabeth Warren and Representative Alexandria Ocasio-Cortez — have argued that big corporations should not be allowed to make sizable acquisitions during the coronavirus pandemic.
Warren and AOC proposed a moratorium on major deals by large companies, hedge funds and private equity firms last week. The so-called Pandemic Anti-Monopoly Act would temporarily crack down on big acquisitions.The pandemic “triggered an economic crisis that has hit small businesses especially hard, making them potential targets of large corporations seeking to increase their power through predatory mergers,” according to a description of the legislation on Warren’s web site.
But is this a fair argument?
Mergers are a part of a free market
Read MoreSome say the proposed bill, which probably stands little chance of passing a Republican-controlled Senate even if it is approved by the House, unfairly targets financially healthy tech firms like Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Google owner Alphabet (GOOGL) and Facebook (FB). “The bill prioritizes an anti-businesses ideology over protecting American jobs,” said Carl Szabo, vice president of NetChoice, a trade group that counts Facebook and Google as members, in a statement. “In hard economic times, often the only way to save a business and the jobs it provides is to seek investment from larger market players,” Szabo added, saying that a moratorium could lead to more small businesses going bankrupt as a result of the coronavirus.Some believe that consolidation is healthy and needed. In a free market economy, stronger companies often buy up weaker rivals. Merger activity, in turn, could drive stock prices higher as investors bet on takeover targets. That could help the economy by lifting the value of Americans’ retirement portfolios, leading to a proverbial wealth effect.Warren and Ocasio-Cortez aren’t buying that argument. Big Tech firms in particular have mountains of cash on their balance sheet. They don’t have to use it on mergers.”These companies should be using their cash reserves to help their employees not to acquire more power. If we don’t stop predatory M&As now, the actions of big corporations will have decades-long economic consequences,” Ocasio-Cortez said in a statement.Companies typically cut jobs after big mergers. Firms receiving loans from the government’s Paycheck Protection Program are encouraged to use them to help workers — if they keep a certain percentage of workers on the payroll, they’ll get their loans forgiven.There are also, of course, many big antitrust concerns if the Corporate America behemoths get even larger.
Deal activity may slow naturally due to Covid-19
Still, are the worries about a wave of mergers misplaced? Some experts argue that acquisitions are the last thing on the minds of corporate executives.”Companies are designed to withstand recessions, but not months of zero revenue. We’ve already seen some companies in deeply affected industries cut dividends and seek to raise capital to secure themselves greater liquidity,” said Tony DeSpirito, chief investment officer of US fundamental activity equity at BlackRock, in a report.”Many of these companies had more debt than they should have,” DeSpirito said, adding that the addition of debt to finance these deals may mean that “one upshot may be a decline in mergers and acquisitions (M&A), which had been elevated in recent years.” He conceded that “entities with ample cash could be positioned to make some extraordinary deals with companies that are cash needy in the wake of the crisis.”But the CEO of one of the most cash-rich companies, Berkshire Hathaway’s Warren Buffett, threw cold water on the notion that big firms like his are about to go shopping.At Berkshire’s virtual shareholder meeting on Saturday, Buffett said that many companies won’t want (or even need) to get bailed out by Corporate America’s titans because the Federal Reserve has already launched several loan programs for small businesses.
“A lot of companies that needed money and probably should have done their financing a little earlier… got the chance to finance in huge ways in the last five weeks or thereabouts.”Buffett praised Fed chair Jerome Powell for the swift actions the central bank has taken — even if it means that Berkshire’s giant cash pile, which swelled to more than $137 billion in the first quarter, may keep growing.
Source: edition.cnn.com