Let Takeovers Take Over


Competitiveness. It's the latest political buzzword. President Reagan is all for it—he said so in his State of the Union address. House Speaker Jim Wright calls it the "dominant economic issue of the remaining years of the 20th century." Roger Smith, chairman of General Motors, wants "a national commitment to competitiveness, just as we had a commitment to put a man on the moon."

But what exactly is competitiveness? It must have something to do with foreign trade, because whenever politicians and their business buddies invoke the term, they inevitably follow it with a rousing cry for tariffs, subsidies, import barriers, and other signs of trade-deficit hysteria. Never mind that the rest of the world is shipping us real goods in exchange for IOUs. This has got to stop—and "competitiveness" is the way to stop it.

But even as they prate about competitiveness, politicians are trying to clamp down on the very forces that are making U.S. business more competitive. Because, believe it or not, there is a sensible way to think about industrial competitiveness. In broad terms, what businesses need to compete is simply economic efficiency.

Efficiency is not a matter of creating jobs—we could do that by outlawing machines and issuing everyone a tiny plot of land and a hoe. Nor does it mean replacing workers with shiny robots that cost more than they save. Simply put, efficiency means making the most from the least, spending as few resources to produce as much (in quality or quantity) as possible.

Profit-maximizing companies try to do just that. But sometimes something gets in the way. More often than not, that something is management.

In a publicly held company, the owners, or stockholders, generally leave operations to managers. This situation, while better than having thousands of shareholders decide how many computers to buy for the accounting department, lets managers not maximize profits—at least temporarily.

They may nickel and dime the company with perks. More importantly, they may be reluctant to close down money-losing operations or may build empires by buying new divisions for more than they're worth.

The market has a solution for this problem. Takeovers.

When top managers get too sloppy, outsiders who think they could manage the same resources more profitably will try to buy the company. These "raiders" figure it will be worth more with someone else running it, so they offer shareholders a premium price. And, as often as not, stockholders sell.

In the last few years, some twists have been added to the takeover game. High-yield, high-risk securities called junk bonds have let smaller businesses and even individuals buy out larger companies. Leveraged buyouts, in which the buyer borrows against the company's assets to finance the purchase, have encouraged companies to spin off divisions they couldn't run well and made some managers into owners. And such takeover artists as T. Boone Pickens, Carl Icahn, and Sir James Goldsmith have restructured companies and struck fear and discipline into the heart of many an executive.

The result has been the widespread streamlining of American industry, with many benefits for efficiency and real competitiveness. Take one small example. In 1982, after slowly accumulating a stake in the company, Sir James bought out a sprawling conglomerate called Diamond International. At the time, the company owned divisions selling matches, playing cards, paper egg cartons, and lumber; these products used to grow on, but they didn't make much money.

Goldsmith sold many units to managers, who, once on their own, cut costs and improved production. The egg-carton maker, for example, is now a private company owned by two managers who used to face three levels of bureaucracy between them and corporate decisionmakers. Sales and profits are up and, although they've cut the number of workers from 300 to 275, the new owners haven't closed the plant, as Diamond had planned.

To take a broader view, reports Fortune, the productivity of the businesses most affected by mergers and acquisitions—those in mining and manufacturing—has jumped 3.3 percent a year since 1980, three times as fast as that of the overall nonfarm economy. And, says Business Week, the rate of return on corporate assets has risen from 4.7 percent in 1982 to 7.7 percent last year, largely because of restructuring.

Yet Congress now seems determined to attack the source of these improvements. Overreacting to the latest insider-trading scandals, congressional leaders are pushing bills that would make hostile takeovers more difficult by wiping out most junk bonds, curbing risk arbitrageurs, and making it harder for potential corporate raiders to acquire stock on the open market—all of which would entrench management and decrease the stock market's efficiency.

We may well end up with new laws ending the restructuring that has restored some of American industry's worldwide competitiveness. And managers like Roger Smith, who recently spent millions of GM dollars to buy efficiency-minded H. Ross Perot out of the company, will come begging for protectionism or handouts. That's a strange way to get competitive. We're much better off with takeovers.