Monday, September 27, 2010

Public Company M&A: Good for Wall Street, Bad for the Real Economy

There has beeen a spate of mergers and acquisitions among publicly traded companies, including some apparently puzzling moves by Intel and others. 

Today's announcement of Southwest Airlines' proposed acquisition of AirTran Airways provides an excellent opportunity to discuss why such acqusitions are actually a bad thing for the economy.  Although this particular deal, which looks like a relative bargain for Southwest in view of the fact that AirTran has one quarter the top line revenue and the same net income after taxes, does not seem to have the hallmarks of "stupid accounting tricks" (i.e., cost arbitrage through accounting rules) that provide the illusion of increasing shareholder value, the deal is a horizontal combination that will clearly reduce competition and lead to increased costs for consumers while shedding jobs due to "consolidation."

While we're at it, we might as well discuss other attempts to prove shareholder value, such as MSFT's recent move to borrow money to pay dividends in order to avoid paying taxes on repatriated funds.

The fact is that corporate behavior is being shaped by tax laws and accounting rules, and the Obama administration really needs to think about ways to at least temporarily change that behavior to revitalize the economy.

Anyway, I plan to update this post today or tomorrow to flesh out the discussion.