AMES, Iowa – Investment in research and development is dwarfed by the money corporations spend to acquire other firms. And the return on that investment is not always beneficial for business or consumers, said David King, an associate professor of management in Iowa State University’s College of Business.
In 2014, worldwide merger and acquisition activity exceeded $3.1 trillion, said King, who co-edited a recent book on the subject. The most recent data from the National Science Foundation shows worldwide R&D spending was $1.4 trillion for the same period. This means companies are spending twice as much on mergers and acquisitions than what corporations, universities and governments invest to create and improve products.
King says consumers should better understand the impact mergers have on businesses and the lives of everyday people. From air travel to pork production, the effects are felt here in Iowa and throughout the world, said King, a panelist for the 2015 Iowa M&A conference.
“The impact of acquisitions is felt beyond the people working at an acquired company. For example, the Iowa Farmers Union is protesting the anti-competitive effects of a recently proposed JBS-Cargill pork packing acquisition to the Department of Justice. The combination of JBS-Cargill would concentrate over 90 percent of pork processing in Iowa with four firms, and increase the bargaining power of pork processors that could translate into lower prices for farmers and higher prices for consumers,” he said.
Improving the bottom line
Instead of investing in improving processes, corporations can improve their bottom line through mergers that increase their economies of scale. King says this is beneficial because it can lower costs by spreading costs over additional output and give the corporation bargaining advantages.
For example, Walmart as the world’s largest retailer is able to offer everyday low prices largely due to its ability to pay suppliers less. However, not considering the secondary effects of regulations and subsequent acquisitions is a common problem as firms seek to achieve an advantage in competitive markets, King said.
Regulation and the benefit of hindsight
Changing regulation also fuels some mergers. King says the Affordable Care Act has generated a lot of merger activity in the insurance industry, which may not be good for consumers.
“While the Department of Justice has announced plans to carefully review insurance industry mergers, the likely result of those that are approved will be fewer options for consumers and increased bargaining power for health insurance companies,” King said.
Airline mergers are yet another example. King says consumers are paying more in fees, while airlines have cut flights in and out of many cities. As a result of the reduced service, there are fewer flight options and ticket prices have gone up.
While these events can be explained in retrospect, it is harder to predict which acquisitions will succeed. Research suggests that roughly half of acquisitions fail to meet planned objectives. However, research is unable to consistently predict what pre-acquisition characteristics or post-integration activity can improve success, King said.