Business

The revolution in computer technologies in the late 20th century produced mixed results for American businesses. Since the 1960s, innovations in communication and data processing encouraged greater consolidation of resources, resulting in giant conglomerates and multinational corporations. Later innovations in personal computing and the advent of the Internet helped to moderate this trend by the mid-1990s. The rate of major mergers declined, while the number of smaller, technology-focused startup companies increased. The market adjustment during the first quarter of 2001 and continuing well into 2002 threatened to undermine the effect of this new technology sector, but the long-term changes remain undetermined.

In 2000 most American businesses fell into one of three categories: individual proprietorship, partnership, and corporations. Seventy-five percent of American companies are small businesses, while less than 1 percent are large corporations holding assets of $250 million or more. Yet that 1 percent dominates production and exchange in the national economy, causing some observers to fear that they hold an unfair advantage over small businesses that cannot enjoy similar economies of scale. This fear is especially pronounced when large corporations buy out their smaller competitors. Though mergers between corporations began in earnest in the late 1950s and early 1960s, the number of unfriendly mergers increased significantly by 1970. In 1968 Congress passed the Williams Act, limiting hostile takeovers by requiring aggressor companies to publicly notify targeted companies of their intent. The goal of the legislation was to allow targeted companies sufficient time to gather extra resources and purchase outstanding stock before control shifted to the aggressor company. The act enjoyed minimal success, and within two years, Congress passed even more stringent notification requirements. These new regulations were undermined by innovations in telecommunication and information processing, which improved the efficiency of large centralized administrations and generally encouraged more corporate mergers, friendly or otherwise, throughout the 1970s. The difficulty in amassing the billions of dollars necessary to finance these mergers remained the last obstacle limiting their size.

Several factors coalesced in the early 1980s to remove the remaining limits on the size of corporate mergers. With the election of President Ronald W. Reagan, the political environment became more conducive to large corporate takeovers; his business-friendly campaign created a sense that the Department of Justice would require a higher standard of evidence for antitrust suits than in previous administrations. Additionally, the Reagan administration deregulated a number of industries that had traditionally been heavily constrained by federal oversight agencies, including energy, broadcasting, airline and ground transportation, and finance. Deregulation of banking and securities industries encouraged novel forms of financing; American companies more actively sought foreign investment and experimented with nontraditional bond strategies, including leveraged financing and high-yield bonds. Financier Michael Milken dominated the investment banking industry with high-yield bonds; working on the assumption that traditional credit ratings were more conservative than actuality, Milken purchased bonds with poor credit ratings and then resold them to investors at a profit, based on the belief that most bonds would remain solvent long enough to yield high returns. His success earned Milken the often-pejorative title of “junk bond king.” At the same time, many oil and gas firms enjoyed unprecedented cash reserves as a result of profits gained through oil and gas prices created by the ENERGY crisis in the 1970s, which not only encouraged expansion into other areas, but also made them targets for takeover. Excess cash reserves cause a company’s value to exceed the stock-offering price, which attracts buyers who willingly go into debt to acquire the company knowing they can use the cash reserves to pay the financing. With innovative financing techniques, buyers with very little expendable cash were able to arrange takeovers of very large corporations on credit, and then use the targeted company’s cash reserves or liquidate its holdings to pay for the purchase.

These changes in the political environment, deregulation, and excess cash reserves forced a restructuring of the business community in America toward even larger conglomerate corporations. Restructuring affected industries with the most rapid technological development as well as those with inefficient management, including oil and gas, tires, broadcasting, financial services and insurance agencies. Some of the most famous mergers in 1989 involving a billion dollars or more include the $4.2 billion merger of Time and Warner communications and the $25 billion hostile takeover of Nabisco by R. J. Reynolds. In 2000 only eight nations had budgets as large as the transnational corporations General Motors, Daimler Chrysler, Ford, and Wal-Mart, each of which earned more than Canada, Spain, and Sweden combined.

Public reaction to the wave of megamergers during the 1980s was generally negative. Business journalists reported that financiers like Michael Milken made hundreds of millions of dollars in commissions, while other corporate raiders, like Ivan Boesky, made similar amounts for purchasing companies with the sole goal of liquidating their assets. Drawn by the public debate, the Department of Justice and the Securities and Exchange Commission (SEC) began investigating improprieties in the industry as early as 1985. Other critics included longstanding Wall Street investment houses, which felt threatened by the innovations, as well as big businesses that feared that these new financing schemes made even the largest corporations vulnerable to hostile takeovers. To add fuel to the fire, the stock market suffered the largest one-day crash in history on October 19, 1987. Though the crash failed to produce an economic depression, it nevertheless inspired great political distress.

Shortly thereafter, the savings and loan industry suffered serious setbacks requiring a multibillion dollar bailout from Congress. Problems arose in the saving and loan industry when Congress deregulated it, allowing companies to become overextended in poor investments, often engineered by unscrupulous managers. Public sentiment remained antagonistic to the new corporate culture, and the federal agencies responded with a series of highly publicized indictments based on laws against insider trading and other stock manipulation practices. The punishments

U. S. Economic Growth