About the authors: Alden Abbott is a senior research fellow with the Mercatus Center at George Mason University who formerly served as the Federal Trade Commission’s general counsel. Adam Thierer is a Mercatus senior research fellow and the author of Evasive Entrepreneurs and the Future of Governance.There is a major push underway for expanded federal antitrust regulation, with many policymakers and pundits arguing that some industries are becoming too consolidated and that corporate giants are only getting bigger. At the same time, many industry leaders are currently deconsolidating by spinning off units and assets. It’s the latest example of how dynamic markets and technological change routinely decimate the power of well-established firms in ways that are both unexpected and
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About the authors: Alden Abbott is a senior research fellow with the Mercatus Center at George Mason University who formerly served as the Federal Trade Commission’s general counsel. Adam Thierer is a Mercatus senior research fellow and the author of Evasive Entrepreneurs and the Future of Governance.
There is a major push underway for expanded federal antitrust regulation, with many policymakers and pundits arguing that some industries are becoming too consolidated and that corporate giants are only getting bigger. At the same time, many industry leaders are currently deconsolidating by spinning off units and assets. It’s the latest example of how dynamic markets and technological change routinely decimate the power of well-established firms in ways that are both unexpected and underappreciated.
Just recently, we’ve seen three new examples:
General Electric , founded by Thomas Edison, became a leader in jet engines, power turbines and appliances, and then expanded into health care, financial services and broadcasting. Following two decades of abysmal stock performance, it will split into separate aviation, health care and energy companies.
Johnson & Johnson , the world’s largest health care company, will spin off its consumer products division and concentrate on medical devices and pharmaceuticals. Other significant pharmaceutical producers also have shed their consumer arms (GSK and Pfizer most recently).
Toshiba also plans to split into three units—infrastructure, electronic devices and semiconductor memory—within a few years. This follows an earlier move by the Japanese company to unload other divisions, ranging from medical devices, personal computers and its U.S. nuclear-power unit.
This sort of natural churn and deconsolidation is nothing new, and it rarely garners much attention. When firms make acquisitions, it generates major news. By contrast, spin-offs and breakups often don’t get as much coverage, even though they are quite common.
Nevertheless, both mergers and spin-offs are similar in that they are part of an economic efficiency-inducing, dynamic process by which market participants seek to raise shareholder value.
Mergers often reflect an active market for corporate control through which bidders identify poorly utilized assets and put them to better uses within different corporations. Spin-offs enable a greater focus on a strategic direction, attract better management, and allow useful specialization that enhances economic performance.
What’s more, a spun-off unit may be able to focus on specialized innovation, which may also be transferred back to the parent company through a reacquisition or some other means.
For instance, genetic sequencing pioneer Illumina sought to reacquire Grail, which it had created and spun off as a separate entity to develop blood tests for cancer. The spin-off allowed Grail to specialize and focus on developing highly successful tests that allow early cancer diagnosis. Later, to promote widespread usage of these tests, Illumina sought to recombine with Grail. The Federal Trade Commission (FTC), however, has sued to block this efficiency-generating transaction, claiming without support that the merger would harm competition in a not-yet-existing market. The FTC’s ill-advised intervention interferes with the beneficial development of key cancer detection tests that hold great promise to help patients.
More generally, recent legislative proposals and antitrust enforcement actions aimed at arbitrarily discouraging mergers threaten to undermine market forces that generate economic welfare by reorganizing corporate assets. These initiatives stem from the mantra that the American economy has become more concentrated and less competitive due to lax antitrust enforcement—claims that have been debunked by economic research.
Real-world evidence demonstrates that rather than being stagnant and uncompetitive in recent decades, the American economy has been dynamic and free from supposed monopoly control. The media sector provides perhaps the most remarkable examples of the constant churn that occurs in dynamic markets.
A couple decades ago, critics were lambasting the mega-merger of AOL and Time Warner, fearing that the deal represented “the end of the independent press,” and was a harbinger of a “new totalitarianism.” But just two years after the merger took place, the firm reported a $54 billion loss, which grew to $99 billion by January of 2003. By September 2003, Time Warner decided to drop AOL from its name, and the marriage finally ended miserably in 2008 with AOL being spun-off entirely.
AOL’s decline continued, and not even its brief ownership by Verizon helped much. In May, Verizon sold both AOL and Yahoo!, another once-mighty tech company that was formerly considered the king of search. In the divestiture, Verizon lost about half what it paid acquiring both firms.
Many other companies have witnessed similar ownership rollercoaster rides. Satellite TV provider DirecTV has had many owners. After fighting a year-long political battle to win the right to acquire it in 2015, AT&T promptly abandoned DirecTV earlier this year. A decade prior, Rupert Murdoch aggressively pursued and eventually won the right to purchase DirecTV in 2003. Critics called it “Murdoch’s Digital Death Star,” but only three years later, Murdoch announced plans to divest the company to Liberty Media Corporation. Murdoch also made news by buying social networking leader MySpace for $580 million in 2005, only to unceremoniously abandon the firm at a major loss for just $35 million in 2011.
Similarly, at the turn of the century, many advocated greater antitrust action and regulatory scrutiny for older media enterprises like broadcast and cable giants. More remarkably, in 2005, the FTC moved to stop the merger of the two video-rental giants Blockbuster and Hollywood Video, forcing the deal to eventually be abandoned.
It became another example of why static “snapshot thinking” about markets is so misguided. Within a few years, Netflix was upending the home video rental market, and Apple and Google were launching a smartphone revolution that would completely alter the way Americans consumed video content. Thanks to all the new competition and options, consumers are “cutting the cord” in record numbers while headlines ask: “Is cable TV dying?” The natural wrecking ball of technological innovation is once again reordering markets more efficiently than government planners ever could.
This story never ends, and it explains why we’re witnessing numerous mergers and spinoffs in many other sectors today. Unwarranted legislation and antitrust suits that seek to undermine this dynamic process would stifle innovation and harm the American economy.
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