The Political Climate and Corporate Mergers: When Politics Affects Economics

• Author: Thom Yantek,Kenneth D. Gartrell
• Published date: 01 June 1988
• Date: 01 June 1988
• DOI: http://doi.org/10.1177/106591298804100206
• Subject Matter: Articles

THE POLITICAL CLIMATE AND CORPORATE MERGERS:
WHEN
POLITICS AFFECTS ECONOMICS
THOM YANTEK, Kent State University
and
KENNETH D. GARTRELL, Rochester Institute of Technology
The arguments against large corporations (which economists con-
fuse with arguments against concentration in specific industries) are not
so irrational as economists paint them. Although some of
the arguments
have an economic base, they are essentially political arguments about
the distribution ofpower in society. Advocating thatgovernment avoid
action in this area is the same as advocating that the current distribu-
tion of power is acceptable. Such arguments, despite their reliance on
economic analysis, are essentially political.
-
Meier (1985), p. 265
[Tjhe pursuit of its economic objectives [by the megacorporationj has
become increasingly restricted by the changing climate of opinion con-
cerning socially permissible conduct. Ifpursuit ofprofit remains a ma-
jor objective of the game, the rules of the game have been changed. Public
expectations and demands cannot be ignored.
-
Blumberg (1975), p. 2
HILE
economists have examined the economic rationale govern-
ing corporate mergers, political scientists have not been analo-
gously interested in the possible political influences that have
shaped merger activity. Economic concerns certainly have been the pri-
mary motivation for business acquisitions, but a strong case can be made
for the secondary role of political factors as components in the corporate
calculus that has governed merger behavior.
This should not be read as an argument that corporate managers neces-
sarily seek to increase their companies’ political influence along with their
economic positions. Rather, as the second quote (above) indicates, po-
litical factors may function as important, systematic constraints upon cor-
porate merger activity. While such a statement will hardly surprise even
those who are only passingly familiar with this area of academic inquiry,
it may come as a surprise to discover just how little empirical work has
been undertaken on this question of political influence upon business
decision-making.
In this paper we will develop and test a model which combines both
economic and political explanations of mergers and acquisitions. It is as-
sumed that the topic, although ostensibly &dquo;economic&dquo; in nature, needs
no
justification for treatment by political scientists. Few behaviors have

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implications for the economy as weighty as those dealing with economic
concentration. While much attention has been paid to the subject by
economists, political scientists have been conspicuously quiet on this most
important question - particularly so from a quantitative point of view.
With this paper we hope to begin to redress that imbalance.
EMPIRICAL STUDIES OF CORPORATE MERGERS
One of the earliest attempts to trace the factors which contribute sig-
nificantly to merger activity was made by Weston (1953), who found that
measures of stock prices and inflation -
but not of industrial produc-
tion -
were significantly related to the level of mergers. Similarly, Nel-
son (1959) finds an effect for stock prices but not for industrial
production. Gort’s (1969) approach is somewhat more sophisticated. Not
only does he, unlike his predecessors, find that industrial production is
a significant predictor of merger rates, but also he finds significant ef-
fects for technical personnel and industry-concentration ratios and
changes in productivity.
Adopting a slightly different and more extended kind of analysis of
corporate-acquisitive behavior Blumberg (1975: 13) finds that the tradi-
tionally ascribed motive of profit maximization is no longer a major oper-
ating constraint for businesses. In its place have been put the twin
disciplines of the capital and stock markets. Management now feels pres-
sured, in other words, to finance new operations through reliance on
the financial markets and to give primary attention to the performance
of the corporation’s shares in the stock market.
Beckenstein (1979) provides the exception that proves the rule of ex-
clusive concentration on economic variables as likely influences on merger
activity. While he finds significant effects for both the prime rate and
stock prices (although not for GNP), Beckenstein also examines for its
possible impact on merger decisions an index of antitrust litigation. This
lone attempt at tapping into the political world comes up empty,
however.
In an elegant extension of earlier analyses Schwartz (1983) concludes
that variables measuring costs of capital and corporate cash flows are im-
portant predictors only during exceptional periods of merger activity.
Further, there is a suggestion that dividends compete with mergers for
corporate resources but that capital expenditures do not (contrary to
general belief). The heart of Schwartz’s analysis, however, is his theory
of growth-maximization and life-cycle effects on acquisitive, business be-
havior. Corporate growth becomes a goal of managers who seek to pro-
mote
greater stability/security by separating ownership and control. That
separation is accomplished by having the corporation grow so large (via
mergers and acquisitions) that the continued conjunction of ownership
and operating control becomes unworkable. In pursuing growth, how-
ever, firms that are more mature within their respective industries (i.e.,
farther along in the corporate life-cycle) are forced to search among extra-
industry sources for the desired growth opportunities, as intra-industry

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opportunities gradually disappear. In spite of its logical appeal, however,
the growth-maximization-cum-life-cycle model receives, at best, only very
weak empirical support.
Finally and most recently, Becketti (1986) attributes the lion’s share
of merger activity to general economic conditions, with real interest rates
the most important factor, but with significant effects also found for GNP,
the capacity utilization rate, and the stock of domestic, nonfinancial debt.
While no consensus emerges from these studies as to the most obvi-
ous influences on
merger activity, there does appear to be moderate sup-
port for both interest rates and stock prices, with general economic
growth (whether measured as industrial production or gross national
product) also receiving support from several quarters.
The more important aspect of the preceding literature review, how-
ever, is the lack of concern shown by the various investigators for pos-
sible political aspects of merger behavior. While it is to be expected that
economic considerations will be paramount in decisions governing
mergers and acquisitions, nevertheless there is good reason to look to
governmental sources to provide additional explanatory power with re-
gard to mergers. Indeed, given the extent of governmental involvement
in the economy it should come as something of a surprise if corporate
managers did not respond to political stimuli. In the next section we de-
velop a rationale for including political variables in models of merger
activity.
POLITICAL INFLUENCES ON CORPORATE DECISION-MAKING
To attribute purely rational, economic motivations to those contem-
plating mergers or acquisitions is to overlook the public nature of the
modern mega-corporation. Blumberg (1975: 13-14) has noted that the
heightened social/political awareness of corporations constrains them in
much the same manner as the behaviors exhibited by large, public
bureaucracies. In return for its greater willingness to behave in a public-
minded fashion, however, the business community has demanded a
greater role in the public decision-making process.
Accordingly, in order to facilitate its growing public role, business
has become much more attentive -
and
responsive - to governmental
activity in general. Rather than retain a purely pragmatic (i.e., decision-
specific) approach to political information-gathering, corporations have
adopted a monitoring approach that is much more sensitive to politics
at the margins. As Marcus (1984: 31) notes, the surest way to maintain
a role in the policy-making process is to be informed, interested, but low-
keyed. Or, as Sam Rayburn used to advise his congressional apprentices,
to get along you have to go along.
That type of behavior involves not only an increased investment of
time but also a more fundamental change in terms of a heightened sensi-
tivity to the ebb and flow of political sentiment in Washington. The justifi-
cation of the costs to the organization of such general, on-going
attentiveness should be obvious:

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Virtually all large corporations, of necessity, carefully monitor the po-
litical environment, one of the...