We are in the midst of a massive merger wave. Since the late 1990s, the number of major airlines has dropped from seven to four, and the number of major car rental companies has fallen from eight to three. There have been so many mergers over the past 20 years that the Wilshire 5000, a common stock index, contains only 3,500 firms because there aren’t enough eligible companies.
There are many reasons for this, but a key one often goes overlooked. Executives and bankers are paid a lot of money when they sell firms, regardless of whether it’s a good idea. If Congress wants to reduce unnecessary mergers, stopping these kickbacks is an important way to do it.
Take the AT&T–Time Warner merger. This was a controversial deal, challenged by the Trump administration. The government made the case that allowing the two companies to combine would be bad for consumers, while the CEOs — Jeff Bewkes for Time Warner and Randall Stephenson for AT&T — argued the opposite. During the debate over the merger, we heard a lot of talk about content, prices, and distributors, as well as Trump’s potential intervention. But what we didn’t hear was that Time Warner CEO Jeff Bewkes would make over $400 million for selling his company, in one of the largest "golden parachutes" of all time. And now the layoffs are starting, as they often do after mergers.
Such golden parachutes, or payouts to corporate executives when a company is sold, are common. This has transformed the corporation and turned it into a mechanism to extract cash for the wealthy. And it has become so pervasive that it is a de facto backdoor public policy.
Consider CVS’s $69 billion deal for health insurer Aetna. By combining thousands of pharmacies, urgent care centers, a health insurer, and an intermediary in the pharmaceutical business, this deal changed the way Americans produce, use, and distribute medicine. It’s a hugely consequential change that will have wide ramifications, some of which likely haven’t been imagined yet.
And a key reason we’re reshaping our health care system in this manner is because Aetna CEO Mark Bertolini earned roughly $500 million from the move, $85 million of which is directly tied to a “change in control” golden parachute package. So Bertolini has a huge incentive to find a merger, regardless of whether it is in anyone else’s interests.
This is not isolated to health care or telecoms, of course. Golden parachutes are everywhere. Former Time Warner Cable CEO Robert Marcus got $91 million after Charter closed on its deal for his company, which has implications for broadband systems and how news, sports, and entertainment are produced and distributed. Monsanto’s Hugh Grant got roughly $77 million for selling his company to Bayer, which will revamp our agricultural sector and change the deployment of seed genetics technology.
Mergers induce serious public policy problems. Scientists at a company called Cubist were trying to find treatments for antibiotic resistant bacteria, a serious health crisis. Then, in 2013, Cubist leader Michael Bonney sold his company to Merck and got $113 million for his trouble. Merck quickly shut down the company’s research operation. Similarly, Roche, which makes a hemophilia treatment, is buying Spark Therapeutics, which is trying to make a cure for hemophilia. The conflict of interest here is obvious and gruesome, yet Spark’s CEO Jeffrey Marrazzo is getting a $22 million payout.
From 1960 to 1980, golden parachutes were rare, and mergers were understood as a business strategy that meant giving up something valuable: the loss of an autonomous corporation, with its embedded industrial knowledge, culture, and production know-how. In the 1980s, junk bonds provided a means for financing a wave of mergers and acquisitions, but corporate raiders quickly realized that executives would oppose takeovers to protect the integrity of the corporation at which they had often spent their lives.
By 2006, roughly 77% of firms had some sort of golden parachute arrangement with executives. And the data backs up those anecdotes regarding how such payments drive merger activity. A 2012 study revealed that companies that have golden parachute deals with executives are 43% more likely to be acquired within the following year.
Golden parachutes, then, became a key tool to break the loyalty of a corporate executive and align him with the interests of financiers. It’s not just golden parachutes: lawyers, economists, and bankers get rich off investment banking and legal fees. Investment bankers at Morgan Stanley, Goldman Sachs, Credit Suisse, HSBC, and JP Morgan split up to $700 million in fees for the Bayer–Monsanto merger. Dennis Carlton, an economics professor at the University of Chicago, has personally made $100 million serving as an expert witness, often on behalf of merging parties making their case to the government. Lawyers at top-tier firms — some of them former politicians — profit as well.
The large fees connected to mergers and buyouts have changed corporations from institutions designed to make things to institutions designed to enrich the elite. And now, the merger industry is so accepted we allow bankers and executives to make the public policy choices we expect to be made by our democratically elected institutions, in realms as varied as health care, entertainment, and agriculture.
The consequences of the merger boom are clear. Corporate concentration has driven income, wealth, and regional inequality. Most Americans have access to at most two high-speed internet providers, a highly concentrated hospital sector, few health insurers, and so forth. There’s been a remarkable slowdown in productivity growth, as corporate executives are saddled with large, bulky corporations or focus on trying to find ways to sell their companies, instead of on managing them efficiently.
Even today, analysts are puzzled at the logic of the AT&T–Time Warner deal, which has, so far, not led to any remarkable breakthroughs — though it has saddled the company with large amounts of debt. The deal makes much more sense when the pay package for its CEO is factored into the equation.
Is this just business, or is it simply a form of normalized corruption? We think it’s time for Congress to pass a law making it hard to consummate mergers with golden parachutes. We also believe Congress should tax deal flow payments that go to investment bankers, lawyers, and associated actors like expert witnesses. We have fewer and fewer competitive markets — markets that are essential to our communities and our democracy. Congress must act before this situation gets even worse.
Matt Stoller is a fellow at the Open Markets Institute. He is writing a book on monopoly power in the 20th century. Sarah Miller is the deputy director of the Open Markets Institute.