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Al-Ahram Weekly 17 - 23 February 2000 Issue No. 469 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 17 - 23 February 2000 Issue No. 469
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Features Focus Profile Travel Living Sports People Time Out Chronicles Cartoons Letters Merger mania
By Faiza Rady
In the wake of January's sensational merger between entertainment titan, Time Warner, (TW) and the largest US Internet service provider, America Online (AOL), an unprecedented flurry of activity has descended upon the corporate world. At the dawn of the new millennium, the race is on between transnational corporations to see who can create the largest monopoly and thus most effectively control global market prices.
The TW-AOL blockbuster deal -- in which AOL paid out a whopping $131 billion -- has, in the words of the Wall Street Journal, unleashed "synergies that make some observers drool". No wonder then that it swiftly found itself dwarfed as Vodafone, the UK-based mobile phone giant, last week pulled off the hostile takeover of its German counterpart, Mannesmann, the bill for which will come to a staggering $190 billion. "Big, bigger, now biggest", quipped Newsweek, commenting on this most sensational of telecommunication marriages, which will bring together within a single accountant's spreadsheet 42.4 million customers scattered across 25 countries.
Not to be outdone, American pharmaceutical heavyweight, Pfizer, promptly announced its merger with Warner-Lambert. The combined company's arsenal will include the notorious treatment for male impotence, Viagra, as well as star anti-cholesterol drug, Lipitor. Although the price tag Pfizer had to pay is a mere trifle by recent standards -- $90 billion in stock -- the seemingly lacklustre marriage effectively creates the world's second largest pharmaceutical company, with estimated annual profits of $4.9 billion. It follows hard on the heels of Glaxo Wellcome's January bid to buy out SmithKline Beecham for $76 billion. Glaxo SmithKline is now the number one drug company in the world.
Do such mergers affect the consumer? Or are they simply part of the surface noise generated by an increasingly overheated stock market? While many commentators see these recent events as a sign that the recent bull run has finally lost all touch with reality, history teaches us that reducing competition through corporate consolidation inevitably leads to price manipulation and market control.
A simple example can be found in the Egyptian pharmaceuticals market. According to one 1996 price list of imported drugs, 30 mg of Taxol -- a medication used for cancer therapy -- sells here at LE670 per 5 ml vial. A three-week treatment of 10 vials would cost the patient LE6700. Thanks to its patent and monopoly supply, Bristol-Myers-Squibb, Taxol's manufacturer, is thus able to sell one mg of the drug in Egypt for 25 times its production cost. Nor can this obscene mark-up be justified by the need to reclaim research and development expenses, which in this case were heavily subsidised by the US government, to the point that they cost the company next to nothing.
How did these elite corporations manage to invade the market and displace the competition? The AOL success story has relied heavily on its power to seduce Wall Street. Where other Internet service providers have struggled, AOL has grown into a billion-dollar mega-enterprise by pursuing aggressive, quasi-militaristic marketing strategies. Besides pocketing considerable revenues from its 24 million subscribers in North America, AOL has also invaded cyberspace with advertisements selling every available product under the sun.
Some observers, indeed, contend that AOL is less a means of accessing the Web and collecting one's e-mail, than a virtual shopping centre. "Like a mall, AOL controls who gets to display their goods, who can shop there and how, where the advertising goes and what it looks like," notes the Los Angeles Times.
Thanks to its skill in outmanoeuvering such mammoth competitors as Yahoo! and Amazon.com -- the giant Internet book distributor, whose worth tops that of all the other major American book chains combined -- AOL has, for the time being, succeeded in reaching the zenith of speculative cyberspace entrepreneurship.
Is there a simple recipe underlying AOL's success, or are we witnessing the pure magic of the Web -- powerfully backed by the Street's recent speculative run?
Perhaps the truth lies somewhere in between the two explanations. Certainly, in the case of the recent TW-AOL merger, the formula being followed was devastatingly simple. AOL wanted TW's extensive cable TV network, while TW needed AOL's know-how and superior cyberspace technology. TW's wires, which are worth their weight in gold, point the way to the future for those companies which are defined in the current jargon as "second or third-generation" net service providers.
Cable, many experts believe, holds the key to circumventing the current clogging up of telephone lines and the constant modem jams which so irritate the average Internet user. "Fat pipes" will provide both faster and more efficient access to the Web, while also facilitating the fusion of television, mobile phone and Internet services into a neat all-in-one package deal that pundits believe represents the future of these industries, for domestic and corporate users alike.
It was against this background that AOL was able to deploy its perfect sales pitch, gobbling up the giant TW's cable along with its many other highly profitable properties, such as Time Magazine and the Warner music and cinema portfolios. The result is a virtual monopoly of the "infotainment" space. Radiating synergies all the way to the bank, AOL's market capitalisation reached a staggering $165 billion on 10 January, the date the spectacular merger was announced. For its part, TW, the older yet poorer bedfellow in this marriage made in Goldman Sachs, scraped in second at a paltry $111 billion.
Thus, in effect, TW is playing Goliath to AOL's David. "Until recently," notes Newsweek, "AOL buying TW was as likely as a flea buying an elephant." Last year, in fact, TW disclosed total revenues of $26.6 billion versus $5.2 billion for AOL. Moreover, TW's profits reached $1.2 billion -- two and a half times AOL's $500 million. In terms of real existing dollars, rather than hope and speculation, it is clear that TW was still the true heavyweight in the equation.
A stock market nouveau riche, AOL has leapfrogged from near-oblivion in the early 90s to present-day super stardom, the value of its shares having multiplied some 800-fold since its uncertain beginnings in 1992. Wall Street analysts now contend that one dollar's worth of AOL's operating profit is worth between 8 and 12 times one dollar of TW's earnings.
Consolidating its early opportunistic strategy into an increasingly well-organised all-out market assault, AOL has seduced the Wall Street gurus through a utopian -- and perhaps delirious -- vision of the infinite potential of its own future development, what is now commonly referred to as the "New Thing". According to political analyst Serge Halimi, speculative value rather than tangible assets and profits increasingly determine the price people are prepared to pay for a public company, as virtual reality spills over into the real economy.
The reasoning is simple, if not simplistic. "The future will in no way resemble today's world," explain the AOLists and their cohorts, "therefore you cannot determine our value by looking at the present. You have to close your eyes and imagine a new world".
Yet in reality this is a not-so-new world, one in which the stock market is king. The recent merger mania has amply demonstrated that deregulated speculation and liberalised money markets have the power to make and break corporations employing many thousands of workers, depending on the "market" credibility of some futuristic venture, and how ably it is embellished by the hip new speak.
Over and above the profit motive, the logic of this kind of savage capitalism has pushed corporations to branch out, consolidate and merge in order to resist the potential onslaught of the "New Thing". Like the genie in the bottle, this sinister spirit of the times is doubtless already lurking in some dark corner of the hallways of corporate power, biding its time, and ready to emerge when the signal is given.
In a world which thrives on disruptive change and radical uncertainty, nobody is safe, no matter how big and strong.
Take EMI, for example. No sooner had its merger with AOL been consummated, than TW pounced on the largest British music business player, swallowing it up in a single mouthful. Analysts predict that 3,000 workers out of a workforce of 22,500 will be sacked, in order to reduce operational costs by many millions of dollars. The deal will shrink the number of major international record companies to four corporations, who now effectively monopolise the global music market.
The song is eeringly familiar. The 1998 merger of Universal and Polygram which created Universal, the world's largest music company, similarly led to the dismissal of some 3,000 employees out of a combined workforce of 15,500. In that same year, the American car and arms manufacturer Chrysler -- another industrial giant -- merged with the German Daimler-Benz corporation, leading to yet another round of massive lay-offs. Following Chrysler's takeover, two lone companies, GM and Ford, were left to monopolise the US auto market, where as recently as the 1970s there were still some 25 independent manufacturers.
As merger mania continues to rampage through the global market in the wake of Wall Street's rampant over-valuation of largely earnings-free stocks, workers will continue to lose their jobs and livelihoods left, right and centre. In the words of political analyst Daphne Wysham, "If the past performance of mergers is any guide, thousands will lose their jobs, while executive bonuses and shareholder profits skyrocket."
