The M&A Typhoon

Another day, another series of mergers and acquisitions. Among the most prominent announcements today, we have Carl Icahn’s offer to acquire Clorox Co. and BHP Billiton’s takeover of Petrohawk Energy Corp. While the buyout frenzy of the last few quarters hasn’t reached the maniacal level (with its infamous Merger Mondays) that led up to the financial crisis, it is nevertheless blowing across the country with considerable violence. And just like the last buyout typhoon, it will leave behind massive job destruction.

If you’ve ever worked anywhere near a private equity shop or corporate M&A, you know how they evaluate target companies. They look for potential “efficiencies,” among other things.

So their youngish analysts build fancy spreadsheets with multi-colored 3-D graphs to show the costs they can wring out of a target company. And they don’t dillydally around or grapple with the esoteric. They focus on low-hanging fruit. In most companies, the largest portion of operating expenses, often around 65%, is associated with people—salaries, bonuses, commissions, benefits, employment taxes, and so on. With a few clicks, analysts can show how cutting 10% or perhaps 20% of the workforce will produce gangbuster financial results. I’ve done it too. It works every time. On a spreadsheet. Or is there now an app for that? If they can figure out how to outsource another 20% of the work done in the US to cheaper countries, well, that’ll make the buyout look outright stellar. Since the soon-to-be-laid-off people use office space and equipment, analysts insert rows into their forecasts that recalculate lease expenses and capital expenditures as a function of headcount reductions. And it becomes one heck of a beautiful forecast.

Yes indeed, that’s what American businesses excel at: Finding efficiencies, unlocking value, being creative … and whatever other hackneyed terms we have in our canon. If one company is acquired and layoffs ensue, it’s no big deal. If it happens on a daily basis to a lot of companies, it adds up, and sooner or later, the layoffs overwhelm the job creation engine of our economy, as exemplified by our last crisis.

Now, we’re dancing to the same tune again. But this time, our unemployment rate is already a staggering 9.2%, or more accurately, 16.2% (U-6, as defined by the US Bureau of Labor Statistics), and these buyouts are compounding the debacle with their layoffs.

Alas, in the end, people have to be employed so they can pay their debts and spend the rest of their hard-earned money on consumer baubles and unneeded surgeries or hand it over to Wall Street where it will be ground into find sand. That’s what makes our economy tick.

Every time you see merger or acquisition, think layoffs. And if you see them gather into a typhoon, it’s a precursor of economic disaster. Meanwhile, we’ve conveniently forgotten how the piles of crappy debt and even more crappy equity from the last buyout frenzy contributed to the financial crisis. Because on Wall Street, history doesn’t exist. But that’s another story.

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