Merger Mania

WE HAVE BECOME ACCUSTOMED to seeing their major industries changing before our very eyes. For investment bankers, these restructurings produce a fee bonanza that sends the prices of New York condominiums soaring, and puts smiles on the faces of Porsche dealers, as thirty-something masters of the universe share their new-found wealth.

The good news is that the investment bankers are not the only beneficiaries of the over-$100 billion in mega-deals that have been done so far this year. Consumers also gain from what that great economist, Joseph Schumpeter, called the gale of creative destruction.

In some instances that gale is unleashed by a change in government policy. The deregulation of the airline industry has resulted in fares so low that consumers who previously couldn't afford to visit grandma for Christmas are now able to complain that they are squeezed into seats shrunken to accommodate the millions for whom air travel is now affordable. The old-line airlines may be bankrupt or headed there as they struggle to find a business model appropriate to an age of competition, but consumers are benefiting from what is a massive transfer of wealth from shareholders and unionized pilots to travelers.

In other instances restructuring is triggered by a combination of changes in government policy and new technologies. The ongoing restructuring of the telecoms industry is the best current example. When the court ordered the dissolution of AT&T's monopoly, separating the long-distance and local calling businesses, the results were lower prices and a variety of new services.

Unfortunately for its shareholders, Ma Bell never did find a way to cope with the competition it faced in the long-distance market. Just as the airlines were burdened with the legacy costs of generous labor contracts, AT&T was handicapped by the high costs of much of the equipment that changing technology had made economically obsolete. And now it will disappear, so weakened that it could not even charge a premium for its shares when it was swallowed up, ironically, by SBC, one of the Baby Bells, that was spun off in the original dissolution. Whether SBC's $16 billion acquisition will pay off for its shareholders is unclear. SBC chief financial officer Rick Lindner claims that the combined company will shed 13,000 employees and reap synergies with a net present value of $15 billion, and that the acquisition of AT&T, along with SBC's majority ownership of Cingular, America's largest mobile carrier, will enable it to offer an attractive bundle of services to meet the competition of cable companies.

Perhaps. But much will depend on whether the combined carrier can persuade congress to preserve a regulatory regime that continues to favor incumbents, and whether new, low-cost technologies win consumer acceptance. One thing is clear. The SBC-AT&T reintegration of local and long-distance services has put pressure on other players to form similar combinations. At this writing it is not certain whether long-distance carrier MCI will be taken over by Qwest, a local carrier so weakened by its $17 billion in debt that it has been unable to roll out Internet service in its entire market area, or by another, stronger Baby Bell, Verizon. But one way or another, MCI, established in 1968 as the first competitor to AT&T, will be history soon, marking the end of the independent long-distance business. If the Qwest-MCI deal happens, it would bring together two companies that have managed to lose $80 billion between them since 2000. Meanwhile, Verizon is also considering making a bid for Sprint, which has just agreed to acquire Nextel.

Less visible to most consumers is the major restructuring now underway in the retail sector. Yes, they have noticed the Wal-Mart phenomenon--the relentless drive by this retailer to lower costs and therefore the prices of everything from t-shirts to trainers to television sets. That has forced competitors to respond either by meeting the lower prices, or upgrading their services, or departing the retail business, as it is rumored Toys 'R' Us might be about to do rather than go head-to-head with Wal-Mart for the children's toys market.