ABSTRACT
Corporate acquisitions were big business during the 1980s. Their financing was an integral part of the revolution that took place in financial markets and practices and played a central role in creating the leverage mania of the decade. The 1980s corporate restructuring went beyond mergers per se, as a great many companies borrowed money to buy back stock or issue special dividends. The net effect of all this merger-driven activity was the same: equity was replaced with debt on corporate balance sheets on a massive scale.
The way for this leveraged restructuring boom was paved by the 1980s experiment with a radical laissez-faire approach to financial and antitrust policy. The results are now in, and they are devastating. Rather than mergers increasing productive efficiency, the search for speculative financial gain increasingly replaced production efficiency as their motive force as the decade evolved. And instead of pricing assets and allocating credit optimally, deregulated financial markets poured a trillion or so dollars of credit into this speculative asset shuffling.
It must be noted that in many cases and many ways, American corporations are in dire need of restructuring. Productivity growth has lagged; product quality has eroded; human resources are woefully mismanaged; and nowhere else in the industrialized world is the gulf in income and authority between top managers and those who actually produce the goods and services so wide. But the leveraged restructuring movement of the 1980s did not reduce the “short term-ism” underlying America’s corporate woes—it made it worse:
There were few systematic gains from mergers. While there were immense profits for some financial participants, others, such as acquiring-firm shareholders and the targets’ bondholders, did not fare so well. And investor profits by themselves should not be interpreted as signs of enhanced productive efficiency. 254The weight of the evidence suggests both that mergers brought ever-fewer economic benefits and that the corporate restructuring of the 1980s failed to achieve significant or lasting cost improvements.
Significant and long-lasting costs were imposed on the American economy. The available evidence supports the public perception that workers, both blue and white collar, suffered major losses from leveraged mergers and acquisitions. Still needed is research into the spillover costs to families, communities, and the public sector. And instead of the lean-and-mean corporations that these cuts were supposed to buy, the leveraged restructuring movement left in its wake debt-constrained investment and R&D spending and a fragile financial structure.
A regulatory rethinking is needed. Policy reforms are required in order to allocate credit away from the short-term speculation of the 1980s toward investments that are economically and socially efficient in the long run, as follows.
Discourage lending by regulated financial institutions for highly leveraged restructuring, by manipulating existing policy levers (for example, deposit insurance coverage).
Encourage long-term financial investment by taxing short term securities gains sharply and all secondary market trading modestly.
Reform corporate governance to similarly tilt the playing field toward long-term-oriented behavior by recognizing the roles played by all corporate stakeholders and by encouraging pension funds as shareholders to ply their activism with an eye on the long term.
End the tax advantage of corporate debt financing.
Revitalize public investment in America’s human, technical, and physical capital, providing examples and offering incentives to those firms willing to stake their own future on our country’s.
