Despite weak economic growth and dim forecasts for more robust growth in the future, large corporations are taking advantage of weak sales and declining profits to make big on mergers and acquisitions. This week the boards of both American Airlines and U.S. Airways approved an $11 billion merger that has been in the works for almost two years while American has sought bankruptcy protection after losing over $12 billion over the last decade.
Analysts say mega-mergers like the one by the two airlines are back in vogue for some very specific reasons. First, the climate of fiscal austerity after the financial collapse led to firms downsizing and laying off thousands of workers. As a result Fortune 500 companies are now sitting on $1 trillion in cash reserves that are being used to make big plans for a period of future growth.
In addition, credit and finance appears to be on healthier footing than the last few years as banks and lending institutions begin to lend again. Also, private equity firms are once again bargain shopping after consolidating their credit lines and divesting themselves of toxic holdings.
Finally, financial analysts and investors are cautiously looking to the future in which a period of growth will mean expansion and larger shares of profit. The 500 stock index of the S&P reached its highest levels since 2007 signaling to investors that the time for growth is coming and encouraging companies to go bargain shopping for other firms.
When combined together these different factors are behind the mega-mergers. For example, Dell Computers announced last week as well that it was planning a $24 billion buyout by owner Michael Dell in order to take the company private again. Also, Virgin Media announced a $16 billion acquisition deal by media mogul John Malone for Liberty Global.
The new wave of mega-mergers brings with it mixed results, however. Mergers and acquisitions always lead to downsizing and layoffs, which cripples effective demand further during recessions. Moreover, the promise of improved products and better deals for consumers almost never turn out to be accurate. Profits are the primary concern of such large commercial transactions, and as its been the case historically with other large airline mergers, lower airfares will not be forthcoming.