Industry Consolidations

Stephen DeAngelis

February 16, 2007

Last month I wrote that this current wave of globalization is fostering transnational industry consolidation as a natural outgrowth of increased connectivity [Consolidating Industries & Critical Infrastructure Platforms]. That post was about the New York Stock Exchange’s attempt to acquire Euronext. Since then, NASDAQ failed in a hostile takeover attempt to acquire the London Stock exchange. To strengthen its position, the London Stock Exchange may seek alliances with other international exchanges [“LSE likely to seek alliances after Nasdaq bid fails,” by Louise Heavens and Pete Harrison, Reuters].

The financial sector is not the ony one experiencing this consolidation trend. There are also movements afoot in the drug industry. BusinessWeek, among others, is reporting that “France’s Sanofi-Aventis [may be] mulling a bid for beleaguered U.S. drugmaker Bristol-Myers Squibb to create the world’s largest pharmaceutical outfit, with $56 billion in sales” [“Drug Merger Talk,” 12 February 2007]. Now the Wall Street Journal reports that consolidation may be taking place in the mining industry and natural resources sectors [“For Aluminum Companies, A Crush of Consolidation?” by Patrick Barta and Paul Glader, 14 February 2007].

“Aluminum companies may be next in line for consolidation as mining conglomerates scour for takeover targets. Speculation is building that BHP Billiton Ltd., Rio Tinto PLC or another mining titan could bid to buy one of the world’s aluminum heavyweights, particularly Pittsburgh’s Alcoa Inc. or Alcan Inc. of Montreal. Doing so would enable BHP or Rio Tinto to consolidate its position in the growing aluminum market, while preventing competitors from snatching up the few remaining blue-chip players at a time of accelerating consolidation in the natural-resources sector.”

In an interesting sidenote, the article indicates that aluminum industry has “lagged behind some other metals in the recent commodity boom. In part, that is because China — a driver of demand — produces significant quantities of its own, diminishing the need for imports.” The article goes on to explain why consolidation might take place:

“There are good reasons why a big aluminum deal might be attractive. Mining companies have struggled in recent years to find and develop new sources of raw-material supplies, and many of them believe it is safer to pick up assets through acquisitions than attempting higher-risk exploration projects. Also, mining companies are awash in cash on profits earned since the commodity boom took off four years ago. Shareholders are clamoring for the companies to find new ways of spending that money to ensure they have strong growth prospects in the next decade.”

As multinationals seek to expand, there remains a fear that it means the loss of more U.S. jobs. Statistics, reported by BusinessWeek, would seem to bear this out:

“Foreign direct investment by U.S. businesses and investors in 2006 is on track to be the second highest on record. Meanwhile, manufacturing payrolls fell for a ninth straight year. Based on those trends, it would be easy to conclude that Corporate America is engaging in widespread outsourcing with potentially detrimental effects on the U.S. economy.” [“Multinationals: Expanding Abroad–And Growing at Home,” by James Mehring, 12 February 2007]

Dig deeper Mehring says and you will come to a different conclusion.

“About 88% of sales among foreign affiliates of U.S. multinationals are made in the local country and other places outside the U.S. … Plus, domestic operations of U.S. multinationals ‘have maintained a steady share of the economy,’ says Daniel J. Meckstroth, chief economist at the Manufacturers Alliance/MAPI, a nonprofit policy research organization. … The results do not imply a large-scale movement of operations abroad by U.S. business. Rather, companies want to expand their global presence, and this larger scale of operations requires more workers at home to manage the business, says Meckstroth. That means greater demand for high-skill jobs in areas such as professional and business services, where hiring is strong. With global growth expected to hold up quite well this year, U.S. multinationals are likely to keep up with their foreign expansion plans and invest heavily abroad. Expanding into faster-growing markets should bolster both profits for multinationals and hiring at home–not a bad combination.”

The key, of course, is that the demand will be for “high-skill jobs,” which are generally very different skills than those required in manufacturing. Adapting training and education programs to match anticipated trends will go a long way towards easing people’s fears about consolidation and overseas expansion.