Thursday, February 22, 2018

Activist Hedge Funds and Anti-Competitive Mergers

Matt Levine call your office.*
From The Hill:

Antitrust policy must account for hidden culprits: hedge funds
The recent surge of corporate mergers — last year’s Amazon purchase of Whole Foods being a glaring example — is gaining ground on the left as a political issue.

Antitrust policies are an important but under-utilized set of tools for addressing these mergers and the drag they put on our economy while padding the pockets of the very wealthy.

Yet, to really get at the root causes of this trend, policymakers must look beyond traditional antitrust policy and crack down on the predatory hedge funds often pushing these mergers to make a quick profit with no concern for the wreckage they leave in their wake.

The scale of corporate power today is something we have not seen since the Gilded Age more than a century ago. Since 1990, America has seen a spate of sustained merger activity. According to one 2017 study, the average publicly-traded firm is three times larger today than it was 20 years ago.
Corporations are merging across a range of industries — from telecom to airlines to agriculture and food production —and working people feel the negative consequences every day.

Mergers push up prices for consumers in the long run (think cellphone and cable bills), diminish competition and the invention of new and better products (including medicines) and inevitably lead to declining wages and job losses. These newly formed behemoths also wield outsized political power, which only serves to exacerbate the issue.

After growing pressure from progressive economists and advocates, congressional Democrats have begun recognizing the problems of these merger trends.

Their late summer “Better Deal” economic platform argued for much stronger antitrust regulation, as well as enforcement of existing rules, to boost competition and business opportunities for small businesses and suppliers, lower the cost of everyday goods and put economic and political power back in the hands of the American people.

Yet, one thing that is missing from their proposals — and much of the recent attention on corporate consolidation — is the role that so called “activist” hedge funds play in driving this troubling wave of mergers.

(The term “activist” refers to investors — hedge fund or otherwise — who obtain enough corporate shares to garner influence and effect change at the company.)

Today’s activist hedge funds are akin to the corporate raiders of the 1980s and have profoundly shaped the way corporations do business in the 21st century.

Despite the fact that their share of ownership of any one company is brief (on average two years), many are able to put extraordinary pressure on executives and boards to abandon any existing long-term strategy for a quick boost in share price.

They push companies to cut costs by laying off workers and selling assets, and they implore them to use company coffers by buying back stocks to elevate price, which amounts to insider trading. On top of that, many hedge funds pressure companies to sell themselves to their competitors to bump up share prices before they themselves cash out....MORE
*Back in 2015 Mr. Levine had a few posts that riffed off a tangentially related topic, some commentary on the paper: "Anti-Competitive Effects of Common Ownership.", the exemplar that I remembered being his "Should Mutual Funds Be Illegal?"

I'm guessing Mr. Levine's mention of the paper helped it to attain its current position on the SSRN leaderboard, #441 in downloads with 38,489 views of the abstract.

Unfortunately for Levine fans the post I remembered only has six footnotes while I have a nagging para-memory that the others contained more.
Sorry about the recall fail.