2017 A Banner Year for Corporate Mergers, Which Further Deepens Inequality
Low interest rates, “quantitative easing,” and the mitigation of antitrust laws led to more mergers and acquisitions in 2017, but that’s only going to fuel greater wealth inequality and tighten the corporate grip on the political system, explains economist Michael Hudson
GREGORY WILPERT: Welcome to The Real News Network. I’m Gregory Wilpert coming to you from Quito, Ecuador. The year 2017 is turning out to be another banner year for the centralization of capital, that is, according to an article in the Financial Times this week, “Global mergers and acquisitions exceeds three trillion dollars for the fourth straight year.” The article goes on to point out the following: Faced with the prospect of Amazon’s entry into the pharmacy business, the US’s biggest drugstore chain, CVS Health, agreed to acquire health insurer, Aetna for about $69 billion. Encroachment by Facebook and Netflix into sports, media and film production led Rupert Murdoch to sell most of his 21st Century Fox empire to Disney in a $66 billion deal.
The US remained the most active region for mergers and acquisitions with $1.4 trillion in deals. The numbers of US deals struck in 2017 combined climbed above 12,400 for a record figure. The largest deal in 2017 has yet to be resolved as Broadcom pursues a hostile $130 billion bid for rival chip maker, Qualcomm. Joining me to analyze the causes and consequences of this massive centralization of capital in 2017 is Michael Hudson. Michael is a distinguished Research Professor of Economics at the University of Missouri–Kansas City. He’s author of several books. The most recent among them is J is for Junk Economics. Welcome back, Michael.
MICHAEL HUDSON: Good to be back here.
GREGORY WILPERT: So, what at heart is causing all of this frenetic activity for companies to gobble up one another and thereby creating and ever greater centralization of capital?
MICHAEL HUDSON: Well, it’s part of the neoliberal strategy to inflate the wealth of the 1%, basically by inflating the stock market and the real estate and the bond prices. At the same time, the central banks are pursuing quantitative easing that offer money at almost zero interest rates. You have the tax system, tax giveaways, to the… sector, which are encouraging these mergers and acquisitions by, essentially, dismantling the antitrust legislation that has been in place since the New Deal, and the tax giveaways that make it possible for all of this huge, hundreds of billions of dollar tax giveaways in the Republican tax law of two weeks ago that enables companies that have kept hundreds of billions of their earnings tax-free in offshore banking enclaves and tax avoidance centers.
Since 2004, all this money can now be replaced under the name of the head companies instead of their just-pretend foreign affiliates in these tax avoidance centers. So, the companies are going to be very tax rich. They’ve anticipated most of this and essentially, you can look at these mergers and acquisitions as part of an arbitrage operation. If you can get money at about 1%, if you’re a hedge fund, a bank or a large corporation, if you can borrow at 1%, then you can borrow stocks that are yielding 10% or even more. Or, for that matter, even less and you can make up all the difference between the 1% you pay and the stocks whose dividends pay a higher rate of return, 5, 6, 7, 8, or 9%.
So, when you buy enough stocks to give you control of a target company, that’s called mergers and acquisitions or corporate raid, and hedge funds have been doing this, corporate financial managers have been doing this. And essentially, with borrowed money, you can even borrow to take over or to raid a foreign company. So, you’re having a whole consolidation process and that’s pushed up the market. Because in order to buy a company, to have a merger, you have to offer more than the market price is. You have to convince existing holders of a stock to sell out to you by paying them more than they’d otherwise get.
But suppose you’re a company and you don’t want to be bought out. Suppose you’re a corporation that is trying to defend yourself from this merger and acquisition movement. What you do is what they’ve done since the 1980s, and that is you take a poison pill by using your earnings to buy your own stock, or some companies even borrow to buy up their own stock, or they simply increase their dividend payouts so much that that pushes up the stock and leaves nothing in the corporate treasure chest to be raided by these raiders. So, on the part of attackers and defenders alike, you have a process that bids up the stock prices and since the vast majority of stocks are owned by the 1%, and certainly by the 10%, the effect is to increase the wealth of the 1 to 10% in comparison to the wages the bottom 99% get.
So, that, basically, is the financial and fiscal war in a nutshell.
GREGORY WILPERT: Just a quick question. You’re saying that low interest rates and quantitative easing are among the key factors here, but aren’t those policies also good for the bottom 90%? I mean, since it keeps interest rates low for ordinary borrowers such as people who have mortgages or credit cards to pay off and also that it helps keep unemployment low? Isn’t that, perhaps, I mean, what would be the alternatives if you don’t want to cause unemployment to go up by raising interest rates?
MICHAEL HUDSON: Why on earth would the 1% want to help the 99%? No, it hasn’t helped them at all. If you’re a member of the 99%, you don’t get to borrow at 1%. Banks and hedge funds get to borrow at 1%. If you’re a credit card customer, you’re paying the same credit card rate as you’re always paying and if you miss a payment, even to a utility company, then your rate still goes up to 29% or whatever. And if the bank won’t lend you, you still have to pay 50% or 100% or 500% to the payday loan people. So no, the 99% have not benefited from quantitative easing. Quantitative easing is only to benefit the 1%, not to benefit the rest of the economy.
We’re living in a world that’s divided into two economies: the economy of the 1%, and the economy of the bottom 99%. I guess you could say, the top 10% versus the bottom 90%, but there’s very definitely a stratification at work here.
GREGORY WILPERT: The Financial Times quotes analysts, also, who say that they expect mergers and acquisitions to accelerate even more in 2018, and you touched on this when you mentioned the tax reform, the Republican tax reform. So, would you basically agree with that, that will probably accelerate and what are some of the underlying causes for a further continuation of this process of centralization?
MICHAEL HUDSON: Well, there are two underlying causes. For one thing, now that the Republicans are in power in the United States, and I don’t think it would matter if Hillary’s Democrats were in power, they’re not enforcing the antitrust regulations. So, what deterred a lot of mergers and acquisitions in the past was, you’d be creating a monopoly and the antitrust laws prevented you. Now, they’re saying, make a monopoly just to make sure the 99% pay through the nose from quantitative easing. You can make a monopoly, and you can charge the 99% more for monopolized prices. So, what you’re having is an economic revolution. The aim of the 1% isn’t to make money by profits, by employing labor. It’s to make economic rent. It’s to make monopoly rent, land rent and financial rent.
So, if you end, for instance, ending internet neutrality and permitting mergers of the big information technology corporations, that’s a form of rent seeking. It’s a political revolution. Now, another part of the tax law that is going to encourage the mergers and acquisition is the 100% depreciation write-off and what that does is, suppose, usually if a company makes a capital investment in either a building, or in a railroad, or an airplane, you get a credit to recover your capital expense. You only pay income tax on the profits, not on the return of capital.
However, now, instead of taking maybe 5% of the cost of this investment in an airplane, or a railroad, or track, or a building for a year, you can take 100% of it off, up to 100%, in any given year. What this does is make the corporations tax exempt altogether because now, suppose you’re a company that actually simply lives on rent or even makes a profit but isn’t investing much and as we all know, corporate investment is scaled way back because corporations aren’t using their earnings to invest. They’re using 92% of their revenue for stock buybacks or for dividend payouts in the last five years.
So, now all of a sudden the companies can use these earnings to buy, say, a capital spending company, like a railroad, a trucking company, an airline that’s going to buy airplanes and by merging with this company, all of a sudden they get tax exemption on all of their other income that they earn because it’s such a huge gusher of tax write-offs for the immediate 100% depreciation. Now, the pretense of Donald Trump was, “Oh, this is going to encourage capital investment.” But the objective, the neoliberal objective, is not to make any real capital investment at all, not to employ any more labor at all, but just to get pseudo-investment by something that the tax law counts as an investment. And we don’t know whether they’re going to include research and development in this or market research. We don’t really know how widely and broadly they’re going to even define this capital investment write-off.
And of course the other point I mentioned is the ability to bring all this money back form offshore banking enclaves into the head office. That is going to be a flood of cash even greater than the quantitative easing at 1%, so the result is that there’s going to be a free-for-all as companies just try to absorb as many other companies, especially capital-intensive companies like in the transport industry, as they can.
GREGORY WILPERT: So, as the centralization effect continues, what effect do you see this having on politics, that is, how do you expect people to react at the voting booths? And then, what might the Democratic and Republican parties, the Republican Party probably won’t do anything since they’re the ones who perpetrated this particular latest change in the tax law, but what do you expect the Democratic Party to do if they were to come into power?
MICHAEL HUDSON: Well, my answer may seem counterintuitive. I think the Republican tax law is so bad that it almost guarantees a Republican victory because it’s so bad. But the seeming irony is, it’s so bad that it enables the Democratic Party to think, “A-ha, it’s so bad that all we have to do is be the lesser evil. We can now kick out all the supporters of Bernie Sanders, kick out anyone who supports Elizabeth Warren. We can now declare war on the pro-labor part of the Democratic Party whereas the Republican Party is the party of the 1%, we can be the party of the 10%, and we can all agree that we’re against the 90%.” And there’s going to be such a bloodbath in the Democratic Party as the Hillary supporters fight against the Bernie supporters, fight against labor, fight against unionization, fight against consumers. That’s basically the Democratic program and this is going to end up fracturing the Democratic Party.
I can’t believe that Bernie and Elizabeth and the others are going to stand by and let the Democratic Party be captured by the donor class that controls it now, and I think there’s going to be a bloodbath that is probably going to take more than four years. Finally, my hope is that the Democratic party will split, the donor class will go where it belongs with the rest of the Republican Party, leaving a rump party to become a new democratic party, either a democratic socialist party or something like the British Labour Party became when it threw off the Tony Blair overhead. That’s what it looks like is going to happen in America. The lesser evil policy of the Democrats isn’t going to wash much as really, a campaign against the awful Trump tax giveaway.
GREGORY WILPERT: Okay. Well, we’re going to leave it there for now. I was speaking to Michael Hudson, Professor of Economics at the University of Missouri–Kansas City. Thanks again for having joined us today, Michael.
MICHAEL HUDSON: It’s good to be here. Thanks.
GREGORY WILPERT: And thank you for joining The Real News Network. If you like our news and analysis, please don’t forget to donate to The Real News this holiday season.