Abstract
This cliometric study evaluates efficiency outcomes from America’s telecommunications sector acquisitions, based on data for 1988–2001, as the sector’s horizontal acquisition processes have repeated themselves. Sector ownership has been comprehensively reconcentrated. Concepts from the size and structural capital literatures enable defining mechanisms to establish causality between horizontal ownership influence and efficiency. For the measure of size, smaller-sized firms display positive efficiency impacts, while medium-sized firms display lower performance than average and large-sized entities display substantially lower performance. Entities experiencing a lesser level of structural capital influence enjoy better performance, while entities experiencing a medium level of structural capital influence experience lower performance than average and entities experiencing a high level of structural capital influence experience much lower efficiency. The evidence implies that negative motivations associated with size and power acquisition may be spilt over to acquired entities, and increasing negative size impact suggests these motives have strengthened as larger controlling entities have brought more units under their ambit. Restraining concentration is a fundamental policy concern to restore competitive economy fundamentals and prevent ruining America’s entrepreneurial spirit.
I. Introduction
This article deals with a cliometric evaluation of efficiency outcomes from the occurrence of serial acquisitions in a key sector of America’s economy and assessing whether permitting such deals has been justified. 1 Using historical data, the analysis deals with the issue of performance improvements, 2 as acquisition processes have repeated themselves in the U.S. telecommunications sector. 3 These consolidations had taken the form of acquisition deals between holding company owners of local exchange carriers, leading many holding companies to lose identity while others became bigger. These deals were expected to be beneficial. 4 Resultant size- and power-related outcomes have been evaluated.
The outcome evaluated has been operating companies’ efficiency levels. 5 The literature 6 suggests that the impact of horizontal ownership spread is negative. Also, one’s a priori premise is that negative outcomes are probably observable. Thus, in the light of Yogi Berra’s eternal words, that “It’s deja vu all over again,” what warrants another analysis? This article contributes significantly over previous works. First, it tracks explicit horizontal ownership changes, over a sustained period, for the sector operating firms and associates their evolving ownership identities with specific holding companies’ ownership changes. The holding company numbers have reduced over time, denoting concentration occurrence. Progressively fewer holding company controllers, respectively, spreading horizontal ownership tentacles widely, have survived. Each survivor has become increasingly larger. Those surviving have become the sector oligopolists.
Second, temporally changing horizontal ownership indicators are linked with year-wise and firm-wise performance indicators, for each operating company observation, to tease out exact acquisition-specific impacts. 7 This analysis generates metrics of how evolving horizontal ownership concentration and coming under the umbrella of emergent local market oligopolists have explicitly influenced observation-level efficiencies. Two sets of ownership concentration indicators are used. First, a size-based ownership indicator evaluates a bigness idea. Second, a power measure, which measures the means to exercise economic, political, and social asset control, has been used in assessing impact. The size logic is discussed next. The power issue is discussed thereafter. A brief efficiency mention is then made.
A. Size Concerns
For the past century, the question of large firm size, resulting from consolidation processes in the American economy, has been flagged as important. Contemporary gigantism facts are stark. In the last two decades, the captures of sectors by a few firms have been ubiquitous, globally 8 and in America. 9 Disproportionate size symptomizes a structural malady that may erode the competitive process. The presence of large-sized firms is associated with market concentration, or asset control, and monopoly or oligopoly creation. 10 The American economy, variously, suffers a curse, 11 a complex, 12 or a problem 13 of bigness defined by oligopolistic market structures, 14 rising markups, 15 and continuing inefficiency patterns. 16
Such economic concentration compromises consumers’ and stakeholders’ welfares. Corporate market colonization leads to a brutal imperialism of extraction and the industrialization of penury. 17 Threats posed by giant firms have meant that their control over resources would effectively make them a State within the State, impervious to laws and operating imperiously, in their own way with a rigged set of economic principles only benefiting themselves. 18
Conversely, many take firm size to be associated with superior economic performance. Economic efficiencies would arise, were firms permitted to attain a large size, via consolidating numerous firms’ activities into one entity. This rationale, for allowing consolidations, has been staple in the literature, submissions, deliberations, and thinking. 19 Guided by this ideology, and extensive financialization of the economy, 20 institutional authorities have let mergers and acquisitions deals occur in abundance, 21 their numbers rising by four times over three decades in the United States, 22 and their value accounting for over 10% of the gross domestic product. 23
By consolidating fewer entities’ holds over utilizable resources, these practices and processes alter business structural characteristics, change sectoral economic power balance, and impact economic performance. Via ownership and control transaction processes, horizontal ownership concentration occurs, whereby investors end up owning major portions of companies, or complete companies, operating in the same market spaces. A few firms end up with control of a sector’s economic resources and centralized control over key assets, causing ownership concentration, creating oligopolies and monopolies and enhancing market power. 24
B. Power Concerns
Key to understanding size consequences is the issue of power exercise. Power permits control. Disproportionate size leads to dominance. This feature, coupled with the absence of constraints, lower accountability, and greater freedom from sanctions, enables applying the power of control. 25 An ability to exercise control, over customers, competitors, employees, and agencies, leads to transformations of consumption and production environments.
The ability to exercise control, through power, can incite structural changes, in industries or markets, benefiting large incumbents. 26 Firms within such structures affect competitors and consumers adversely, 27 through a licensed looting process. Major concerns about posttransaction consolidation of product or service markets, where transactions have involved horizontal acquisition deals, with both entities operating in the same product or service markets, 28 are economic performance declines and asset control concentration. 29 Asset control concentration and power manifestation have multifarious linkages and outcomes. Some outcomes are anticompetitive behavior occurrence, 30 consumer price rises, 31 declining competitiveness, 32 existing jobs and wages patterns disruptions, 33 and negative real-sector investment. 34
Causal reasoning linking horizontal ownership concentration and firm-level behavior is incomplete. 35 Power distribution matters in concentrated ownership settings. 36 Consolidations permit sector power coalescence. 37 C. Scott Hemphill and Marcel Kahan have broached the idea of a key owner-controller as being a cartel ringmaster directing owned firms’ behavior. 38 Coalition formation is a useful function for owners’ goals achievement, 39 as it plays a key role in effecting economic, social, and political outcomes. 40 A cartel ringmaster can engage in coalition formation, to assert views over firms’ management and deepen the intensity of resolve required on matters. 41 A collective grouping of entities, led by a cartel ringmaster, can energetically interact in markets.
Horizontal ownership concentration processes create such a grouping, as concentrating power can be engendered through ownership transactions. To address how coalition formation might proceed, structural capital literature concepts 42 are brought in. These concepts permit articulating mechanisms tying emergent horizontal ownership contingencies, via possible coalition formation pathways, to observation-level performance outcomes. 43
Horizontal acquisitions undertaken augment controllers’ structural positions. 44 Such position augmentations permit crossing structural holes, as defined in the structural capital literature, and in generating social capital. Idiosyncratic deals alter each specific ownership situation. 45 The subsequent continuing acquisition-related aggregations of connections provide the controlling firms with strategy-impacting and performance-enhancing benefits, 46 as structural capital is augmented via information and knowledge-flow brokerage. 47 A set of structural capital variables are used for explaining efficiency variations. These measures are computed based on the structural holes idea. 48 The structural capital measures permit capturing underlying factors motivating presumptive cartel ringmasters to engender coalition formation, via acquisitions, to attain market power and forcefully influence controlled entities’ behaviors.
C. Efficiency
Efficiency criterion validity, in deciding an acquisition deal to be in the public interest or not, has been substantially pondered over for decades. 49 A criterion component is that efficiency outcomes be deal-specific. The estimation approaches, based on assessing statistical causalities, help tease out specific acquisition-related efficiencies.
D. Article Flow
Section II describes the contextual setting, lists sector acquisitions, and discusses horizontal ownership concentration emergence. This section is followed by Section III that describes the details of analysis, including variable computation, testing strategy, and results related to the size measure. Section IV discusses the structural capital concept, variable computation, testing approach, and results related to the power measure. Section V contains the discussion, while the final Section VI contains the conclusion.
II. Evaluation of Horizontal Ownership Concentration
A. Context and Horizontal Acquisitions Tracked
Based on materials in related works, 50 this section deals with sector horizontal ownership transactions, control shifts over assets, and power emergence. The Communications Act of 1934 formalized telecommunications firms to be regulated utilities. 51 In the 1990s, the Congress opened local markets for competition, via the Telecommunications Act of 1996 (TA 1996) legislation. 52
The unit of analysis for tracking horizontal ownership change and concentration evolution has been each of the forty-one incumbent local exchange carriers (ILECs) operating in its territory, in every year over the period. Each ILEC has operated as a regulated entity mandated to a specific market. They did not face direct-market horizontal competition. 53 Acquisitions predicated by performance concerns 54 have been evaluated. Even if networks were not contiguous, larger size would enable negotiating leverage in obtaining cheaper access charge rates. Also, by enabling controlling companies to pool resources, merging companies would acquire intangible assets. 55
B. Horizontal Ownership Concentration Evolution
The sector history is of concentration, deconcentration, and reconcentration. Prior research 56 contains details of horizontal ownership evolution at the holding company (controller) level. The TA 1996, by opening markets to competitive local exchange carriers, motivated large-value horizontal acquisitions by Regional Holding Companies (RHCs). 57 The unit of analysis for coding horizontal ownership evolution has been each ILECs, in each year, for the entire fourteen-year period, yielding 574 total observations. This section describes horizontal ownership change at each operating company level. Table 1 lists the number of RHCs and other company groupings, all of which are called horizontal ownership controllers. It lists the number of operating companies under each horizontal ownership controller in each year.
Number of Local Operating Companies Associated with Each Horizontal Ownership Controller over Time.
At the beginning year of the analysis, there were fifteen horizontal ownership controllers, including seven RHCs, that controlled forty-one ILECs. Over time, acquisition activity led to a decline in numbers. A smaller ILEC entered the data set in the early 1990s. As at the ultimate year of analysis, there were eight horizontal ownership controllers for forty-one ILECs: Verizon, Bell South, Southwestern Bell Telephone Company (SBC), US West, Cincinnati, United, Citizens, and Lincoln.
Table 2 lists the relative size of ILECs under the horizontal operating company controllers, as of 1988 and 2001. As of 1988, fifteen entities existed and the largest was Bell South with a share of sector total assets at 14.31%. The smallest was Lincoln, with a share of sector total assets at 0.16%. All entities had under 15% share of sector assets. SBC was seventh in the list, and last among all RHCs, with a share of sector assets at 8.93%. Based on standard approaches, in the antitrust and industrial organization fields, an Asset Hirschman Herfindahl Index (AHHI) value calculated (though this is not the exact measure for estimating market concentration) shows concentration of asset control to have been mild. The AHHI was 1056.45.
Relative Sector Assets Controlled in 1988 by Horizontal Ownership Controllers.
Of the eight entities in existence in 2001, the top four were Verizon, SBC, Bell South, and US West. Each of them controlled at least one of the largest among the top five ILECs. United was a distant fifth. The largest such horizontal controller, ranked by the number of companies controlled (eighteen), was Verizon; at that time, it was also the largest operating company controller ranked by the share of sector assets. The AHHI, as calculated, now shows greater concentration of asset control. The AHHI was 2747.56, and the ratio of the 2001 AHHI to the 1988 AHHI was 2.60 times. The AHHI change (ΔAHHI) was 1690.20 and 1.60 times larger than the original 1988 AHHI. Material sector consolidation had occurred.
Relative Sector Assets Controlled in 2001 by Remaining Horizontal Ownership Controllers.
A postscript is relevant. A few years after the end date for this analysis, in the mid-2000s, Bell South was acquired by SBC. The combined entity called itself AT&T, though this was not the erstwhile monopolist AT&T to be restructured in the 1980s. With the mid-2000s takeover of Bell South, the market became further consolidated. SBC renamed as AT&T emerged as the dominant entity. If the assets as at 2001 of Bell South and SBC were to be combined, the putative combined entity would control over 49% of sector assets. SBC, now AT&T, has enhanced its share of sector assets from less than a tenth, at the start of this analysis date, to almost half in less than two decades. By then, the AHHI had risen to 3807.83, a figure 3.60 times larger than the value in 1988. See the details in Table 3.
This process of creeping centralization, and sector reconcentration, is brought out by evaluating the share of (1) the largest, (2) the two largest, (3) the three largest, (4) the four largest, and (5) the three smallest entities’ share of assets between the mid-1980s and the mid-2000s, by when the sector was reconsolidated. Details are in Table 4. The largest entity in 1988 was Bell South, which disappeared in the mid-2000s, with 14% share of sector assets. By the mid-2000s, the largest entity was Verizon with control over 35% of sector assets. After consolidation, the largest entity has controlled two and a half times the sector’s assets relative to the largest entity’s asset control ratio prior to the consolidation process. In the late-1980s, the largest two entities (Bell South and Nynex) controlled 28% of sector assets. After consolidation, the two largest entities (Verizon and SBC) have eventually controlled 85%, or three times, the sector’s assets relative to such asset control in the preconsolidation era.
Note: SBC = Southwestern Bell Telephone Company.
In the late-1980s, the three largest entities (Bell South, Nynex, and Verizon [Bell Atlantic]), controlled 40% of sector assets; by the mid-2000s, the three largest entities (Verizon, SBC, and US West) controlled 95% of sector assets. In the late-1980s, the four largest entities (Bell South, Nynex, Verizon [Atlantic], and Ameritech) controlled 51% of the sector assets; by the mid-2000s, the four largest (Verizon, SBC, US West, and United) controlled 99% of sector assets. Correspondingly, the three smallest entities (Cincinnati, Rochester, and Lincoln) controlled 2% of sector assets in the late-1980s, and the three smallest (Cincinnati, Citizens, and Lincoln) controlled 1% of sector assets in the mid-2000s. Sector reconcentration through various horizontal acquisitions has been comprehensive.
A horizontal operating company controller, US West, acquired by Qwest in 2000, was later acquired by Century Link, an internet service provider. Qwest lost its identity; Cincinnati, United, Citizens, and Lincoln have remained as providers but have controlled only a trivial portion of the sector’s assets. Ownership reconcentration, via horizontal acquisitions, has been all-encompassing. Horizontal ownership concentration has resulted in two ultra-large companies: namely, SBC (now AT&T) and Verizon, eventually collectively controlling 85% of the sector; one small-sized company, namely, United whose brand name is Sprint (now owned by Softbank of Japan); and three tiny companies in small markets: Cincinnati, Citizens, and Lincoln.
C. Explanatory Variables and Horizontal Ownership Classification
The explanatory ownership concentration variables quantify asset control as a measure of size and measure relative control over assets as an index. The exact horizontal ownership coding process is given in Appendix A. Details of specific horizontal ownership identification and coding are given in Table A1 of Appendix A, derived from prior data. 58 The table lists each ILEC studied in terms of ownership status and takeover activity. For each ILEC, its ownership status as belonging to any of the initial fifteen horizontal ownership controllers (Table 1) has been noted.
First, three ownership category variables are created. These are (a) the small asset control (Small Asset Control), (b) medium asset control (Medium Asset Control), and (c) large asset control (Large Asset Control) categories. For the first small asset control category, in this category, based on Table 2 and panel (A) data, in the initial year stand-alone entities Cincinnati, Lincoln, Rochester, and Southern New England Telephone, and operating entities belonging to the Centel and United groupings are placed. An individual operating company, Puerto Rico Telephone Company, though under the GTE umbrella, does not operate in any of the fifty states, including Alaska and Hawaii, but in a U.S. overseas territory; it is placed in the small asset control category for the full period.
Should these companies, initially placed in a specific category, be taken over in a later year, by a group to be classified as either the medium asset control or large asset control category, the code assigned is appropriately modified from that year onward to reflect its ownership status as an entity under a medium asset control or a large asset control umbrella. Citizens is classified as a small asset control category entity from the year it appears and for the rest of the period.
For the initial year, all the companies belonging to the other horizontal controllers, such as Ameritech, Bell South, Contel, GTE, Nynex, Pacific Telesis, SBC, US West, and Verizon, are coded as medium asset control entities. Panel (B) of Table 2 shows that by the end of the period, Verizon and SBC are the two largest sector asset controllers and between them control 69% of the sector’s assets. All operating companies that have come under the ownership umbrella of Verizon and SBC over time have been classified in the large asset control category. From the mid-2000s, after SBC acquired Bell South, the share of the assets controlled by the entities classified as large asset controllers have risen to 85%. The data analyzed do not cover this particular deal.
Coding outcomes are as follows: For the fourteen-year period, each of the forty-one observations has a specific code assigned to it as to whether it has belonged to the small asset control, medium asset control, or large asset control category. Of 574 total firm-level observations in the sector, 68, 320, and 186 observations have belonged to the small asset control, medium asset control, and large asset control categories, respectively. These make up 12%, 56%, and 32% of total observations.
III. Cliometric Analysis
A. Data and Efficiency Variable
Historical balanced panel data (fourteen years [1988–2001]) are used. 59 The efficiency variable (Economic Performance) is a ratio measure of cash flow to total assets, capturing the ability of observation to turn over its resources for generating income and earning returns with maximum efficiency and effectiveness. Clearly, the larger the fiscal outturns relative to the base of assets invested, the greater is the efficiency of resource utilization. It is a standard performance measure, widely used, and recommended by scholars evaluating similar topics. 60
B. Matching Method for Causality Evaluation
Treatment effects modeling, a long-standing approach to establish causal relationships, has been used to examine linkages between horizontal ownership concentration and efficiency. In this approach, a treatment effect captures the average causal effect of a variable on an outcome. 61 Firms experiencing an ownership contingency are subject to a treatment with efficiency outcomes. The treatment contingency for an observation is belonging to a particular horizontal ownership controller; 62 the counterfactual effects of horizontal ownership on efficiency are evaluated as an outcome in comparison to a control group of firms not experiencing ownership associated with a horizontal operating company controller. See Appendix B for details related to estimation methods.
Using a binary treatment variable, with the value of one indicating an observation comes under the purview of a horizontal ownership controller and zero as the non-horizontal ownership control, potential outcomes are defined for each observation as results under treatment (under a specific horizontal ownership category) and control (not under that specific horizontal ownership category) conditions. Based on one or zero horizontal ownership indicator variables, outcome differences, for each firm if it had experienced a particular horizontal ownership contingency for the period, and relative to other companies in its annual cross section, are evaluated. 63
C. Covariates
Based on prior research, 64 a set of covariates influencing efficiency are included as controls. A variable, Regulation, measures a price caps regime existence, a contingency with significant positive incentive properties to enhance performance. A variable, Wages, measures the ratio of average wages per person for each observation to industry-wide average wages, based on an idea that better people can positively impact efficiency. A control is included to account for market contingencies. The variable included is Relative Entry. The variable is a ratio measure of the entry for each firm’s territory compared to the average level of entry in the industry. The nearest neighbor matching approach, based on calculating the Mahalanobis distance, 65 is suitable for a model containing few covariates. 66 See Appendix B for details.
D. Results
Size and efficiency-related relationship results are shown in Table 5. Column (A) lists the average value of the efficiency variable. For each size classification category, column (B) lists the average treatment value estimated on the dependent variable. In Table 5, panel (A) lists results in respect of the Small Asset Control ownership category, after the inclusion of covariates in the matching model. The average treatment effect of this ownership variable on Economic Performance is positive and statistically significant, at p < .05.
Analysis of Asset Control Effects on Economic Performance.
Panel (B) lists the results in respect of the Medium Asset Control ownership category; the average treatment effect of this ownership treatment turns negative and significant. Thereafter, panel (C) lists the results in respect of the Large Asset Control ownership category; the average treatment effect of this ownership treatment is negative and again significant (at least at p < .05). Column (D) lists the significance test outcomes.
In panel (A)–(C), column (C) displays the results of the impact analysis, when the magnitude of the average treatment effects estimates, for each ownership category, are evaluated with respect to the overall efficiency value of 0.518, for all firms over all years assessed. The impact of belonging to the Small Asset Control ownership category is for firms to experience 10.74% better performance than average (panel [A]), while the impact of belonging to the Medium Asset Control ownership category is for firms to experience 5.21% lower performance than average (panel [B]). Firms that have belonged to the Large Asset Control ownership category have experienced 19.17% lower performance on average. Thus, a transition toward the large size of holding companies, and increasing sector ownership concentration, has been associated with a significantly negative average efficiency impact.
IV. Structural Capital Perspectives
A. Main Ideas
Further analysis has been carried out based on the structural capital framework. Built on the late James Coleman’s ideas, 67 the structural capital view brings together the ideas of social capital and structural holes. The term social capital is a metaphor about advantage, 68 agency use, 69 and how firms engaging in horizontal acquisitions may exert power. Social capital is a useful construct denoting relations between and within firms. Human social capital sums up to organizational social capital. 70
Better connections permit enjoying many advantages. Firms augment networks to obtain worthy structural positions via acquisitions. 71 Participation in connected networks enables a central entity to benefit from and control information flows and access, derive value from knowledge streams, and take performance-enhancing actions. 72 This process enhances social capital worth 73 and leads to pecuniary and nonpecuniary resource accumulation and utilization prospects. These resources generate rents or produce better economic outcomes to benefit all stakeholders. 74
Organizational connections define structural holes’ presence. The extent of connected relationships is positive in consequence; the greater the exposure gained from such connections, the greater can be generation and diffusion of information. What matters are non-redundant and non-contiguous connections between entities. 75 A structural hole is the separation space between two, or more, non-redundant contact sets for a central entity. 76
A structural hole connects non-redundant contacts. If more network relations are linked to a central entity through common ownership ties, the more structural holes a central entity can span. 77 Relative to the central entity, entities on either side of a structural hole will circulate in different knowledge streams, experiencing heterogeneous contingencies. The extent of structural holes spanned enhances a central entity’s structural capital.
A series of deals synergistically alters a combined entity’s situation. 78 A buyer obtains control of an acquired company’s contractual and external relationships. Enhanced structural capital permits a central entity to broker information and knowledge, exercise powers of agency, and exert control over outcomes from initiatives bringing together units from both sides of the hole. 79 The larger the size of each non-contiguous network on different sides of a hole spanned by a central entity, the more influential a central entity’s structural capital becomes.
B. Horizontal Ownership and Structural Capital
The horizontal ownership concentration process, whether through acquisitions, private equity investments by venture capitalists or fund managers, or by market stock purchases, enhances the structural capital of an acquiring entity, or cartel ringmaster, and enables it to span structural holes. The acquisition of similar non-contiguous firms, which operate in the same line of business and can contribute to a central entity’s profit flow, enhances a central entity’s structural capital and coalition formation abilities.
Hole-spanning leads to the creation of market cliques, which are cohesive groups of firms behaving consistently, 80 without necessarily colluding, tacitly or explicitly, in implementing aggressive strategic actions or behaving anticompetitively. A cartel ringmaster may have engaged in acquisitions processes and thereby performed prior coalition formation tasks. For a purchased entity, becoming part of such a clique consequent to its acquisition, its bargaining power vis-à-vis a variety of stakeholders increases as a function of its position enhancement in the overall structure. 81 Conversely, firms not benefiting from being acquired by a powerful central entity (such as a cartel ringmaster) with substantial structural capital, and remaining a part of a lesser clique, 82 may not be able to behave aggressively.
C. Structural Capital Coding Process
Measures of structural capital enhancement, due to horizontal ownership concentration, are based on estimating Linton Freeman’s betweenness measures. 83 These measures are used as explanatory variables in explaining efficiency variations. The betweenness measure is a count of the structural holes to which a central entity, in this case, a horizontal operating company controller, might have exclusive access to. 84 For each operating company, for each year, a value of one is assigned and zero otherwise, if it belonged in that year to a central entity with a level of high betweenness (High Betweenness), or to a central entity with a level of medium betweenness (Medium Betweenness), or to a central entity with a level of low betweenness (Low Betweenness).
The specific high, medium, or low markers assigned, based on each of the horizontal operating controllers (central entities), have been as follows: SBC’s companies, including those earlier belonging to Ameritech and Pacific Telesis, have been assigned a high marker for the years they came under the SBC umbrella. Through these acquisitions, SBC would become a vital central entity, spanning many structural holes nationally, and influence strategic behavior of operating entities in a number of ways. SBC’s own operating companies have been assigned a high marker after the implementation of TA 1996, as the collective grouping could engage in aggressive strategic behavior, restrain trade, behave anti-competitively, and exercise material market presence, by virtue of the central entity spanning holes in its augmented areas.
Similar principles are applied to the Verizon collective. The Nynex, GTE, and Contel operating companies have been coded as high for the period they began becoming a part of the Verizon collective. The Contel and GTE companies before their Verizon takeover had been non-contiguous operators, nationally; their horizontal operating company controllers (Contel and GTE) could span structural holes, in regulatory matters, and have been coded as medium. Other operating company observations have been coded as low.
D. Structural Capital–Related Results
Results are given in Table 6. For each structural capital category, column (B) lists the average treatment value estimated for the dependent variable. Panel (A) lists results in for the Low Betweenness ownership category. The effect of this variable on Economic Performance is positive and significant, at p < .05. Panel (B) lists results for the Medium Betweenness category; the effect of this treatment turns negative and significant. Panel (C) lists the results for the High Betweenness category; the effect of this treatment is also negative and significant (p < .05).
Analysis of Structural Capital Effects on Economic Performance.
In panels (A)–(C), column (C) displays the results of the impact analysis, when the magnitude of the average treatment effects estimates, for each category, are evaluated with respect to the efficiency value of 0.518. The impact of belonging to the Low Betweenness category is for firms to experience 11.81% better performance than average (panel [A]), while the impact of belonging to the Medium Betweenness category is for firms to experience 15.95% lower performance than average (panel [B]). Firms that have belonged to the High Betweenness category have experienced 19.17% lower performance.
The Medium and High Betweenness categories experience negative efficiency patterns. The increasing negative size impact, from the Medium to the High category, suggests that the undesirable x-inefficiency generating motives among the larger controllers have become stronger as the larger controlling entities have brought more units under their ambit.
V. Discussion
A. The Bigness Complex Redux
The results show that worrying about the contemporary bigness complex is legitimate. Gigantism, through the spread of M&A deals, horizontal acquisitions, and consolidations, has had negative outcomes. Firm size may affect economic performance in many ways. There is equivocality on size and performance relationships. 85 Large firms can have diverse pools of capabilities; they can exploit economies of scale and scope; they may be professional in management and have formalized, versus ad hoc, procedures. These characteristics make task implementation effective, allowing larger firms to generate superior performance. Edith Penrose advanced these, now standard, arguments six decades ago favoring the growth of firms. 86
Conversely, size correlates with concentration and market power; 87 market power correlates with x-inefficiency increase; 88 and x-inefficiency growth correlates with many options for enjoying a quiet life. 89 Indeed, Woodrow Wilson had stated that “There is a point of bigness—as every businessman of this country knows, though some of them will not admit it—where you pass the limit of efficiency and get into the region of clumsiness and unwieldiness.” 90
Thus, there could be such a thing as optimal firm size, defined by a range of outputs in which there would be increasing returns to scale and after which inefficiencies might set in. 91 The present analysis has shown that smaller units have been efficient, but as size has evolved, efficiency outcomes have been negative. 92 Such processual factors can engender anti-competitive predilections. 93 At some point, the U.S. telecommunications sector entities have become too big. Given negative efficiency outcomes associated with evolving size, the possibilities that other negative repercussions of gigantism, associated with an eventual sector AHHI outcome of 3807.83, may have occurred are palpable. These possible outcomes await evaluation. 94
B. The Power Issue
The power concentration issue has again reared its head. 95 In conjunction with the continuous spread of horizontal ownership, markups, as an indication of firms’ abilities to exercise power in markets, have increased across the board. 96 Profit rates have been at their highest since the 1920s. 97 This historical data-based analysis shows that acquisition deals have perpetrated a horizontal ownership concentration process in the sector with negative efficiency outcomes. Coupled with the fact that proposed efficiencies remained unachieved, structural presumption-based speculations as to oligopolistic behavior by firms in the sector, because of the concentration of asset control that has evolved, are warranted. 98
Agencies may have committed Type II errors, of the false negatives variety, in allowing potentially harmful deals to go ahead. The evidence, as a whole, shows increased concentration being associated with higher prices, reduced choice, and a loss in innovation, while mergers cause losses to buyers. Hence, the problem with antitrust proceedings has been in perpetrating false negatives, by not holding back negative outcome deals, and not in false positives, by holding back positive outcome deals. 99
Walter Adams and James Brock 100 had remarked that economists had ignored the element of power in analysis since the discipline lacked a theory of the origins and utilization of power. The structural capital idea used has demonstrated an approach as to the mechanisms firms deploy to utilize power in commercial matters. Firms improve performance through information broking and resource sharing among collective members. 101 Similarly, they can collectively generate rents through using privileges that special-interest grouping processes may allow. Such speculations invite further assessment of firms’ behavior, in strategic areas such as pricing, technology deployment, and the treatment of their human capital, based on the structural capital idea.
A key policy element is restricting acquisition transactions, to preempt concentrated market and industry structures’ emergence. Popular writing highlights antitrust law as focusing on combating two innate human proclivities: to bully customers and competitors, through anticompetitive actions, and to gang-up, through collusion, or via consolidations to engage in mass bullying. 102 Thus, permitting consolidations enables the acquisition of scale economies in ganging-up to engage in mass bullying. Conversely, disallowing acquisitions prevents ganging-up, of a variety that diminishes competition and encourages bullying competitors and customers, from occurring.
A competitive market is a deliberately created entity that can be internally subverted because the concentration process creates vested interests. Such special interest groups can create “a pernicious type of cost-push or ‘entitlements’ inflation. It creates a persistent upward pressure on the price level, because ‘the sum of the shares claimed by the various pressure groups exceeds the available social product,’” 103 through rent-seeking activities upon eliminating rivals. The belief that Schumpeterian creative destruction gales would blow monopolies away is facile since large firms, in concentrated settings, may control public agencies via regulatory capture. 104
With active rivalry, competitiveness conditions are most fertile. Conversely, a fatal cause of lost national position is loss of domestic rivalry, 105 and high concentration retards progress by restricting initiative. 106 A free enterprise economy should take deliberate actions to restrain the competitive market from internal subversion and erosion. Restraining market concentration is today’s most important policy concern, predicated on political considerations, 107 to restructure the foundations of a competitive economy and prevent internal market destruction.
C. Efficiency Doctrine Implications
The efficiency justification is institutionally important. 108 The future of antitrust and regulatory policies, based on efficiency outcomes, hinges on ex post achievement of performance gains. Since it is difficult to prove, ex ante, what subsequent actual outcomes will be, the test of whether allowed deals have been in the public interest, and to persist with this review approach, rests on material ex post evidence. The results steadily show post-consolidation efficiency nonrealizations. Consistently negative results abound. This finding is unsurprising. Therefore, two questions arise. So what and who cares?
In response to the questions, this article posits that worry many have about the quality of contemporary institutional practices, such as merger approvals by antitrust authorities, 109 is entirely legitimate. From the 1990s, updated versions of the horizontal merger guidelines, last in 2010, have made it necessary for permission-seeking companies to demonstrate, to agencies’ satisfaction, that proposed mergers would not enhance firms’ market power and profitability. Instead, efficiencies would enhance firms’ competitiveness and benefit consumers through lowered priced and better quality products, achieved through better resource utilization. 110
The deals studied that had taken place would have been approved deals. Even if eventually anticompetitive, the results of the efficiencies gain vis-à-vis market power exploitation loss analysis would have led to granting of permissions. Approval-granting agencies’ staff would be aware of negative results, both from the literature and from common subject knowledge. Thus, approvals, particularly for the megadeals reviewed, would be granted on the assumption that this time, perhaps once, efficiencies would be achieved. 111 Yet, antitrust agencies have regularly faced a moral hazard problem. In a sense, antitrust entities have consistently been like Charlie Brown. The companies seeking approvals have been like Lucy van Pelt, constantly pulling the football away at the last moment when the kick process has just been launched. Poor Charlie Brown has always missed the ball and placed his kick into the thin air!
Second, adverse selection occurs. Michael Salinger has commented that consolidating firms have performed poorly on communicating and demonstrating efficiencies. 112 Although efficiencies may well be plausible outcomes of deals, agencies cannot conclude that an acquisition deal will generate efficiencies merely because the parties state it as an expectation. A deal can be proposed on the basis that an acquirer entity may know something about operating a combined business that the acquired entity may not. While parties may know what cost savings sources are, they can be unwilling to fully disclose these facts to agencies; such information may be commercially and politically sensitive and also contain many proprietary data elements.
Firms would be opportunistic, and a condition termed as information-impactedness would emerge. 113 The absence of correct disclosure implies that agencies are unlikely to accept assertions, which are neither proof nor evidence, at face value, as the contingency will lead to compromises in agency decision quality. Hence, faced with key behavioral problems associated with the efficiency doctrine, the structural presumption is the useful approach in undertaking institutional acquisition evaluation and control.
D. Other Similar Contingencies
Along with acquisitions occurrence, a critical concern in America’s economy is horizontal ownership concentration 114 engendered by the rising institutional investors’ presence. Institutional investors are key players, 115 and in the last two decades, there has been ample quantum of their ownership spread. 116 This process has fostered ownership concentration, 117 and institutional investors own major portions of companies operating in the same horizontal market space. 118 When holdings overlap across firms in the same category, investors are classified as horizontal or common owners.
Such owners influence firms owned to compete less vigorously with one another, to consumers’ detriment. 119 Ownership concentration implies that firms coming under horizontal owners’ purview may not make independent decisions, as large share block owners exert influence over strategies. 120 Along with evidence on American markets’ monopolization, 121 the negative impact of corporate ownership market monopolization, via horizontal ownership mechanisms, is considered grave. 122 The issue invites scrutiny because of stakeholder welfare compromises. 123
The separation of ownership and control 124 is now a myth. Similarly, prognostications about managerialism, with a technocratic cadre exercising power through bureaucracies, 125 is out-of-date in capitalist societies. From a political economy of power perspective, not only are firms in traditional industries and sectors big, and the market structures of such sectors concentrated, but their institutional investor owners are equally big and getting bigger. There has been equal, if not greater, concentration of power in the market for corporate ownership and control, which is a key element of overall capital markets.
Finance capitalism, 126 with its ramifications, has arrived in America. A fresh type of Nabob, the financial elite, capturing the bulk of increasing corporate profits, is in town. A new power game is in play. New questions arise. Who holds the balance of power in this setup? What are the implications of power exercise for strategic behavior and economic outcomes? How is control exercised? How is overall welfare affected? Hence, dealing with the issue of how members of this new club exercise market and fiscal powers is an important future agenda item.
VI. Conclusion
This article reports an evaluation of efficiency outcomes from acquisitions in America’s telecommunications sector, based on cliometric analysis of data for the period 1988–2001, as horizontal acquisition processes have repeated themselves over this period. Sector reconcentration has resulted in two very large holding companies, eventually controlling 85% of the sector, with smaller entities on the periphery. Size-related and power-related outcomes are evaluated.
Size-based indicators evaluate a bigness idea impact, and a set of structural capital variables assess power-related efficiency impact. Smaller-sized firms display positive efficiency, while medium-sized firms and large-sized entities display lower efficiency. Entities experiencing lesser structural capital influence enjoy better efficiency, while entities experiencing medium and high levels of structural capital influence experience lower efficiency. The facts imply that undesirable and negative motivations, associated with size and power, could be spilt over to entities acquired in consolidation processes. 127
Profound anxiety about the quality of antitrust policy is fully warranted. Agencies face moral hazard, adverse selection, and uncertainty issues, and the efficiency defense for merger approval becomes moot. Hence, a structural presumption, that a deal may possibly not create market power, would be the appropriate evaluation approach. Parallel anguish about America’s bigness complex is equally justified. Gigantism outcomes have been negative, and this factor is associated with market power exercise predilections. 128 Efficiency non-attainment implies that American competitiveness and global standing is being compromised, and the economy may become existentially distressed as competitiveness disappears.
In the light of emerging evidence, as to the quantum of possibly uncontrollable gigantism unleashed, political choices are obvious. Government’s role, as accepted in a market-based capitalist society, is to uphold the market’s authority as a governance system. That process involves maintaining the power balance between stakeholders, such as businesses, customers, employees, and suppliers. Limiting, and controlling, concentration is mandatory. Thus, the redesign of the economic policy architecture is vital to restore the fundamentals of competitive markets, prevent the destruction of America’s entrepreneurial spirit, and avert her economic downfall.
Footnotes
Appendix A
Appendix B
Acknowledgments
Comments from Bill Curran, Diana Moss, David Sappington, and Dennis Weisman on prior versions are warmly acknowledged.
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.