Merger Mania and Economic Decline

Merger Mania and Economic Decline

The “leveraged buyout,” dramatized last fall by the struggle over RJR Nabisco and the $25 billion paid by a Wall Street firm mostly through debt instruments, has been only part of the wave of mergers and acquisitions, by far the largest in American economic history, that began in 1981. This wave has been linked to an increase in corporate debt unprecedented in volume. In terms of the constant-dollar value of assets (represented by shares of stock) acquired from target firms, this wave has been twice as great as the merger booms of
1965-70 and 1898-1901.’ During the eighties nonfinancial corporate debt grew at a rate roughly half again as much as the national product (growth in the national product serves as a crude indicator of debt-servicing ability). True, the rise in corporate debt has not impaired the value of corporate assets as expressed in the price of shares. Much of that rise, however, has been applied to buying back shares by the issuing firms, so that their higher values are due wholly or in part to their relative scarcity rather than to a genuine appreciation in underlying (real) assets and potential yield.

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