Merger mania

Temasek, a Singapore-based investment company is looking to buy 30% of the London Stock Exchange; Dubai recently gobbled up a chunk of a Las Vegas casino and is on the verge of acquiring a Swedish exchange; Warren Buffett's conglomerate is ready to deploy its US$50bn war-chest. It seems that mega-mergers are being closed every day, and major players are expanding in leaps and bounds.

Of course, deals have been going on from time immemorial, but the complete eradication of cultural, religious, and political barriers is unique to this new era of hyper-globalisation. Nothing is surprising anymore: Dubai World has admitted that it is investing in hotels that contain casinos, Bear Stearns is shilling Sharia-compliant financial instruments, and the Communist Chinese are buying banks, industrial giants, and lots of dollars. It is only a matter of time until a private company (or wealthy entrepreneurial government) reaches annual revenues of a trillion dollars, employees in the tens of millions, and a footprint that spans the globe (and beyond).

Unless you are living in a cave, you are constantly targeted by companies and are factored into their bottom line. The most benign of activities, such as walking down a street, is studied by businesses to gauge footfall to know where to place stores, and by advertisers to predict where to place ads. Turn on a light, and under closer inspection, you may find out that General Electric made the bulb. GE also makes jet engines, medical equipment, dabbles in finance (with assets exceeding US$500bn), and beams movies, news, and television programmes all over the world through NBC and Universal Studios. The expanding portfolio of corporations does not only increase profitability and diversify revenues. The mergers, acquisitions, and consolidations of the last few decades have placed the major industries of the global economy in fewer hands, giving a small cadre of individuals great power, and ensured that the long tentacles of the corporation touch us all on a daily basis.

Growth is the major driver of this expansion. As individuals, if someone earns US$200,000 in 2006 and roughly the same the next year, you would say that they are doing well. This is not the same for companies, especially big ones. If a large holding company achieves revenues of US$150bn in a year, the pressure is on to find another US$15-20bn more. Very few regions and sectors enjoy such levels of organic growth rates, so the natural strategy is to acquire.

The impersonal, faceless giants we see today are not the inexorable outcome of the original concept of the corporation. Noam Chomsky, the MIT linguist and renowned intellectual, is a vociferous critic of the consolidation of power and wealth in the hands of the few (through massive holding companies). He explains that the original intention for creating the legal regimes that gave birth to the corporation was for specific, limited projects that governments or groups wanted to accomplish. They were considered "artificial entities with no rights". This changed in the mid-19th century, and corporations were "accorded all the rights of persons, and far more, since they are ‘immortal persons', and ‘persons' of extraordinary wealth and power. Furthermore, they were no longer bound to the specific purposes designated by State charter, but could act as they choose, with few constraints."

The companies that flourished in the industrial age form the basis of the modern corporation, but none have influenced the current structures and practices more than John D. Rockefeller's Standard Oil. In 1863, at the age of 24 and four years after the discovery of oil fields in the American Midwest, Rockefeller invested US$4000 to build and operate a refinery. The early days of the oil industry were extremely competitive and many speculators went bust within months of beginning operations. Railroad companies had a monopoly on delivery, and it was they that set prices as they pleased.

In order to grow, Rockefeller realised that he would need to buy more refineries and lower the cost of production. He expanded capacity by borrowing money. (His partners were concerned about the levels of debt the company carried, so he bought them out in what may have been the first leveraged buyout). The company (then called Excelsior Works) was still a small operator and did not have the economies of scale advantage to negotiate with the railroads; cost cutting came in the delivery system.