Merging companies is a common practice in the market, and in recent years, the market has experienced the effects of corporate mega-mergers. These effects can be positive, but they can also be negative. With their unpredictability and significant influence in the market, should corporate mega-mergers be allowed to form? Through this series of blogs, I will take a look at the fundamental idea behind mega-mergers and then analyze the effects of several mergers to develop a stance on whether corporate mega-mergers should be allowed or prohibited and potential ways to successfully regulate these types of entities.
Companies tend to merge when stock prices are high and growth peaks because this signifies the end of the market cycle. However, companies aim to continue growing by merging with others (McMillan). With the United States’ mixed economic model, mega-mergers are affected by both the private nature of economic freedom and government regulation. With economic freedom, companies can merge with others, but these mega-mergers threaten the opportunity to maintain competition in the market. Competition is critical to maintain consumers’ influence in the economy. For instance, in a competitive market, consumers have the freedom to choose between producers based on price, quality, and more. However, if corporate mega-mergers wipe out all smaller competition, consumers will no longer have a choice.
The government has established antitrust laws with the goal of “protect[ing] the process of competition for the benefit of consumers, making sure there are strong incentives for businesses to operate efficiently, keep[ing] prices down, and keep[ing] quality up” (“The Antitrust Laws”). There are three core antitrust laws: the Sherman Act, the Federal Trade Commision Act, and the Clayton Act. The Sherman Act works to prevent monopolization of the market and maintain competition as the driving force in the market, and the Federal Trade Commision Act works to maintain fairness in the market. The Clayton Act specifically pertains to mergers and acquisition and prohibits those that “substantially lessen competition, or to tend to create a monopoly” (“The Antitrust Laws”).
When mega-mergers pass these laws, they can operate in several ways. Centralizing brands under one company reduces costs. With lower costs, mega-mergers can lower prices for consumers. Additionally, with a larger network and pool of resources, corporate mega-mergers can produce better quality goods and services (Pierce; Thoma). However, they can also take advantage of their market power and set higher prices if there is not sufficient competition to keep prices down, and they can also continue to produce the same products as the lack of competition reduces the need to improve products (Pierce; Thoma).
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Now that the basics are covered, let’s take a look at one of the most famous mega-mergers: The Kraft Heinz Company. Kraft Heinz formed in March of 2015 between Kraft Foods Groups and H.J. Heinz, with financing from Warren Buffet and 3G Capital, a private equity firm (DiChristopher).
Kraft-Heinz passed antitrust laws since it combined companies with different products. Therefore, it would not monopolize the industry for the same product, but rather, this merger would centralize a wide variety of brands under a shared company. Some of these brands include Lunchables, Jell-O, Capri-Sun, and Velveeta. However, in today’s culture, these brands are no longer significant assets because they are processed foods, and healthier, less processed brands are on the rise.
Think about it: If you were a parent, how inclined would you be to pack your child a Lunchable? With increased awareness on nutrition and the downsides of processed foods, I would not fuel my child with a Lunchable. People look for foods that are organic, natural, and other things along those lines. Since that is not the nature of many of Kraft-Heinz’s brands, the longevity of this mega-merger’s success seems to be dwindling (DiChristopher).
When the companies merged in 2015, Kraft-Heinz generated $28 billion in revenues (Creswell). With this early success, Kraft-Heinz had the potential to be revolutionary in the market. It could have used this success to further develop its brands and keep up with changes in the market and consumer culture, but Kraft-Heinz did not take this approach. 3G Capital was accused of taking a “zero-based budgeting” approach to minimize costs rather than improving its products. In order to cut its costs, Kraft-Heinz laid off significant percentages of its workforce, no longer provided free office snacks from its product lines, and cut its Research and Development costs (Creswell). Kraft Foods spent $149 million on Research and Development in 2014, but in 2019, the Kraft-Heinz merger spent only $93 million on R&D (Creswell). This reduction in R&D signifies that Kraft-Heinz rested on its market power to succeed rather working to improve its products and enhance its industries. As a result, Kraft-Heinz felt the backlash with billions of dollars of asset reduction and plummeting stock prices.
Seeing the current results of Kraft-Heinz leaves me wondering if this outcome brought justice to the economy. Was it beneficial that Kraft-Heinz did not flourish in that it allowed competitors to succeed? With this competition, consumers have been able to make the choice and buy from other brands. However, what about the negative effects on the economy with many people losing their jobs? The ambiguity of the overall effect comes back to the core issue of this blog: whether or not corporate mega-mergers should be allowed to form. When analyzing this issue through the lens of Kraft-Heinz, it seems they should not be allowed to form at the corporate level. As separate entities, the companies could have remained focused on improving their brands with their network of employees. In forming this corporate mega-merger, the notion of market power took control and did not work in their favor.
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Works Cited
“The Antitrust Laws.” Federal Trade Commission, 15 Dec. 2017, www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws.
Creswell, Julie, and Yaffe-Bellany, David. “When Mac & Cheese and Ketchup Don’t Mix: The Kraft Heinz Merger Falters.” The New York Times, The New York Times, 24 Sept. 2019, www.nytimes.com/2019/09/24/business/kraft-heinz-food-3g-capital-management.html.
DiChristopher, Tom. “Buffett’s HJ Heinz to Merge with Kraft Foods.” CNBC, CNBC, 1 May 2015, www.cnbc.com/2015/03/25/kraft-foods-group-and-hj-heinz-merge-to-create-the-kraft-heinz-co.html.
McMillan, Brad. “Mega-Mergers and the Market: Have We Reached the Top?” Forbes, 26 Oct. 2016, www.forbes.com/sites/bradmcmillan/2016/10/26/mega-mergers-and-the-market-have-we-reached-the-top/#642f2201779c.
Pierce, Bruce A. BlonigenJustin R. “Mergers May Be Profitable, but Are They Good for the Economy?” Harvard Business Review, 15 Nov. 2016, hbr.org/2016/11/mergers-may-be-profitable-but-are-they-good-for-the-economy.
Thoma, Mark. “Are Mergers Good or Bad for the Economy?” CBS News, CBS Interactive, 29 Dec. 2016, www.cbsnews.com/news/mergers-and-acquisitions-good-or-bad-for-the-economy/.
It is surprising how many companies are actually owned by the same parent company. Most car brands are owned by three or four parent companies. There are two firms that own the majority of all sunglass companies. The last time there was a breakup of a monopoly was AT&T.
This is a very interesting topic to read about. It is scary to think about the possibility of giant corporations merging in order to take advantage of the lack of competition. Even though the Kraft-Heinz merger was approved, they still showed that the advantages of merging caused the two companies to slow down on research and development. If they are not improving their current products and doing work to introduce new ones, the market will become stale. They have no incentive to make advancements, that goes against the idea of the United State’s mixed economy. The small companies help keep large companies in check, by lowering costs and encouraging the advancements of products and technology.
Personally, I had no idea that Kraft and Heinz ever merged. In my opinion, this seems quite unfair. It seems like they have a huge proportion of the market that they are in. As you said, it also creates less incentive for innovation. If they already have such a large portion of the market they have no need to improve their products. In my opinion, this entire thing is bad for the economy.
I resonate with this blog as an Econ major. I think had an amazing explanation of mega-mergers and monopolistic power. Additionally, Kraft-Heinz displays a strong example of how merging can still result in failure. As for the final take, its really difficult to say whether merging should be heavily regulated. I do think that the market can only control their growth to a point and that government does have an important role in revitalizing competition. At the same time, having these larger companies is sometimes very productive and beneficial to consumers. I liked how you touched on their ability to merge because their products are so different, which is a huge component to monopolistic regulation. I’m excited to read about more in the future. If you need an idea, you could maybe discuss the development of Whole Foods which had an interesting growth in past years.