would have expected more payroll than employment advances among the acquired companies. The fact that this frequently did not happen in companies acquired by out-of-State firms would lead one to believe that their acquirers have transferred a portion of the higher salaried employees to a location outside Wisconsin. Such transfers mean a loss of talent, retail expenditures, and personal income taxes in the economies of Wisconsin's communities and the State.

5. The average annual growth of aggregate payrolls among companies acquired by Wisconsin firms has declined 30 percent since the mergers. The premerger rate of payroll growth was 8.96 percent; the postmerger rate was 6.31 percent. However, the 6.31 postmerger payroll growth compares favorably with their 1.04 percent postmerger employment growth.

6. The average annual growth of aggregate payrolls among companies acquired by out-of-State firms has declined 65 percent since the mergers. The premerger payroll growth rate was 10.47 percent; the postmerger rate was 3.68 percent.

7. The majority of the firms acquired by conglomerates have experienced substantially reduced employment growth. In general, Wisconsin firms acquired by conglomerates and quasi-conglomerates were rapidly expanding businesses. Their average annual growth of employment from 1960 to the year preceding the merger was 8.4 percent. While 9 of the 24 firms involved enjoyed an accelerated employment growth following their acquisitions, the average post-merger growth of the 24 firms was 1.3 percent. If acquisitions by quasi-conglomerates are not included in the calculation, the average pre-merger employment growth rate rises to 11.6 percent and the post-merger rate declines to -1.8 percent. 8. The 24 companies acquired by the conglomerates and quasiconglomerates had an average annual payroll growth of 11.5 percent between 1960 and the year preceding the merger. The postmerger growth of payrolls was 2.8 percent. Despite the substantial decline in payroll growth, 10 of the acquired companies had a larger post-merger than pre-merger rate of payroll growth. In other words, some acquisitions by conglomerates have contributed substantially to the economic prosperity of the State.

Considering these conclusions, it is apparent that Wisconsin's economy has fared far better among those companies acquired by Wisconsin firms than among those acquired by out-of-State conglomerate corporations. The changing rates of payroll growth are especially significant because they affect both the prosperity of employees, the sales of Wisconsin's retail industries, and the tax revenues of the State. In other words, any change in the rate of payroll growth induced by a merger has a multiplier effect above and beyond its immediate effect on the company's employees.

Findings of the United Fund Study

The comparison of United Fund contributions of 30 Milwaukee companies acquired by out-of-State corporations with the contributions of 30 similar companies that have not been acquired reveal the following:

1. The total United Fund contributions of the six companies acquired in the 1959-63 period rose more rapidly than those of companies acquired since 1963. In addition, they rose more rapidly than the contributions of the nonacquired companies.

2. The total 1968 contributions of the 24 companies acquired in the 1963-68 period were less than their contributions in 1963.

3. The total 1958 to 1968 rise of United Fund contributions of the 30 acquired companies was less than half as large as the increase of the nonacquired companies. Contributions of the acquired corporations rose 16 percent during the ten years, while those of the nonacquired companies rose 34 percent. However, the premerger growth of contributions indicates that the 30 acquired firms would not have increased their giving as much as the nonacquired companies even if there had been no mergers.

4. The total growth of employment of the acquired companies was considerably less than the nonacquired companies. Recommendations

Because the effects of mergers vary widely, care must be exercised in any effort to prevent potentially undesirable acquisitions. Many mergers have been socially advantageous, and general anti-merger legislation might prevent both undesirable and beneficial mergers. For example, one would not want to preclude mergers which are needed by companies in industries with rapidly rising economies of large scale. To prevent such mergers would promote inefficiency and weaken the competitive position of the State's industry.

Existing State and federal statutes should be sufficient to prevent those horizontal and vertical mergers that are likely to be socially undesirable. As a practical matter, it would be difficult for Wisconsin, or any other State, to outlaw conglomerate mergers as long as they are legal nationally. Furthermore, more conglomerate mergers are desirable. For example, the conglomerate has the potential advantage of allocating the merging firms' resources to those ends having the greater needs, thus increasing profitability and service to society. However, national legislation is needed to prevent the undesirable financial maneuvers used by some conglomerates to finance the acquisition of other companies. The large but thinly financed conglomerate is likely to be in a precarious position during a period of economic weakness. A substantial number of such companies could easily endanger the total economic system, to say nothing about their possible effect on competitive processes and other undesirable consequences.

At the State level, several steps can be taken to prevent undesirable mergers and promote local economic development:

1. Greater emphasis should be placed on premerger investigations by those who are contemplating a merger. Many companies, especially acquired firms, have merged without adequately considering all alternatives and without sufficient knowledge of what the merger entails. Surprisingly, post-merger evaluations. are often more intensive than premerger investigations. Just

7 Post-merger evaluations are, among other reasons, necessary to evaluate the assets of the companies for financial management and tax purposes.

the opposite should be true. Better and more extensive premerger investigations would increase the probability of success and reduce the number of unsuccessful mergers. Consequently, both private industry and the society would benefit.

Companies about to be acquired should investigate the postmerger history of any other companies acquired by the potential acquirer. To facilitate investigations, Wisconsin's businesses should be provided with a checklist or manual to aid them in evaluating merger proposals. Many companies might find it feasible to utilize professional services to assist in premerger


2. Industry should be encouraged to consider the likely future growth of the company and other potential social and economic consequences when evaluating a merger proposal. While personal economic considerations are bound to be major in any merger decision, management and owners should also consider the future welfare of their employees and the community.

3. Wisconsin suppliers, and especially the service industries, should be especially alert to preserving their relationships with Wisconsin's business. Financial institutions might make a concerted effort to increase the supply of capital available to Wisconsin's industry, thus reducing one incentive for entering a merger. When an acquisition does occur, the suppliers of the acquired company should establish rapport with the parent company and effectively communicate information relating to the value of their services. In so doing, some suppliers will be able to obtain additional accounts, rather than losing an existing


4. The State might consider legislation to reduce the estate tax incentive for mergers. Estate taxes are considerable, and privately held businesses are sometimes sold because the financial security of the heirs would be endangered upon the death of the owner. Perhaps estate taxes could be spread over a period of years, thus reducing the likelihood of forced sales in order to pay

estate taxes.

5. When a Wisconsin company is acquired, the management of the acquiring company should be visited by representatives from Wisconsin, welcoming the company as a new corporate citizen to the state. The visitation team might consist of one or more members of the Board of Economic Development and perhaps executives from Wisconsin companies supplying the acquired company with goods or services. Government officials from the state or community of the acquired company might also be represented. In addition to welcoming the company to Wisconsin and discussing the advantages of the state, the team could discuss any locational problems which the parent company might have. Such an effort should help to increase the acquiring company's commitment to Wisconsin, and might lead to the location of additional corporate facilities in the State.


Studies by the Staff

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Study Paper Number 2

Industrial Structure and Competition Policy

LTHOUGH THE SIZE and character of business enterprise have changed greatly in recent decades, market competition reinains a powerful and pervasive force disciplining private decision-making in the greater part of the American economy. The unparalleled economic growth record of the 1960's is a reflection of the dynamic responsiveness of free competitive enterprise to growth opportunities in a buoyant economy. Because competition plays a central role in promoting economic growth in a free economy, the Employment Act of 1946 calls upon the Federal Govcinment to "foster and promote free competitive enterprise."

Effective market competition promotes efficient resource allocation, economic growth, price stability and full employment. A breakdown in market competition tends to distort efficient resource allocation by raising an industry's prices and lowering its output. Without the spur of competition, firms are slow to adopt innovations and the most efficient production processes. If firms can readily pass on higher costs to customers, they will be less concerned with keeping costs to a minimum. Most relevant to our purposes, firms with considerable discretion over wage and price decisions may cause inflationary pressures even in the absence of full employment.

This study is divided into four sections. The first discusses both the ways in which business enterprises with discretionary market power may exert inflationary pressures and recent empirical findings that demonstrate a critical link between market power-of both labor and business-and the inflation problem. The second section discusses briefly the growing body of empirical evidence identifying the sources of discretionary power: market concentration, barriers facing new competitors, product differentiation, industrial conglomeration, and various ties among business enterprises. The third section, the main body of the study, deals with recent and prospective changes in the structure of the economy that promise either to diminish or to increase the discretionary power of business enterprise. Subjects covered are changes in industrial concentration, business conglomeration, joint ventures, and other ties among leading business firms. The section also discusses the underlying causes for these changes in industrial organization and examines whether these changes are rooted in technological or other economic imperatives. The final section makes a number of recommendations to maintain competition and to reduce discretionary power without impairing economic efficiency.

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