Next Merger Wave Coming? Hart-Scott-Rodino 2011

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The Federal Trade Commission has released the Hart-Scott-Rodino Annual Report 2011.  Each year, it summarizes the number of  mergers and acquisitions, their size, and some trends in antitrust enforcement. At least in my reading, the data in the report hints that a new wave of mergers may be on the way.

The Hart-Scott-Rodino legislation requires that when businesses plan a merger or an acquisition above a certain price--typically $66 million in 2011--it must first be reported to the Federal Trade Commission. The FTC can let the merger proceed, or request more information. Based on that additional information, the FTC can then let the merger proceed, block it, or approve it subject to various conditions (for example, requiring that the merged entity divest itself of certain parts of the business to preserve competition in those areas).

Here are the total mergers reported for the last 10 years. You can see the wave of mergers and acquisitions that peaked in 2007--and what appears as if it could be the start of a new merger wave in the last couple of years.



The total value of merger transactions reported under Hart-Scott-Rodino isn't completely comparable across years, because the threshold at which transactions need to be reported has risen over time. But for what it's worth, here's the pattern of the total dollar value of reported transactions since the late 1990s.

"The total dollar value of reported transactions rose dramatically from fiscal years 1996 to 2000, from about $677.4 billion to about $3 trillion. After the statutory thresholds were raised, the dollar value declined to about $565.4 billion in fiscal year 2002, and $406.8 billion in fiscal year 2003. This was followed by an increase in the dollar value of reported transactions over the next four years: about $630 billion in fiscal year 2004, $1.1 trillion in fiscal year 2005, $1.3 trillion in fiscal year 2006, and almost $2 trillion in 2007. The total dollar value of reported transactions declined to just over $1.3 trillion in fiscal year 2008, and to $533 billion in fiscal year 2009, increased to $780 billion in fiscal year 2010, and $979 billion in fiscal year 2011."

And here's a table showing the size distribution of the reported mergers in 2011. About 28% of the transactions exceeded $500 million; 11% exceeded $1 trillion in size.

The FTC allows most mergers to proceed, which makes sense in a competitive market economy. As a general rule, those who run businesses are in a better position than government economists to plan strategies for their firms. In 2011, about 4.1% of the mergers reported to the FTC has a request for additional information. At the end of the day, the FTC actually challenged 20 mergers in 2011. Thirteen of these challenges went to court; 11 were settled by consent decree. Perhaps the best-known of these cases in 2011 was the FTC decision to block AT&T’s proposed acquisition of T-Mobile. With the other seven, two of the deals were abandoned, and the other five led to restructuring of the deal or changes in conduct.



There are a number of reasons to suspect that a new wave of mergers may be coming, nicely reviewed in an article in the Economist magazine of May 19 called "Surf’s up: Merger waves mean that markets can consolidate rapidly. The next one is coming."' Mergers often happen when there are lots of struggling firms and excess capacity, which creates lots of willing sellers and good deals for possible buyers. When firms have a lot of cash on their balance sheets, like now, mergers start to look attractive. When interest rates are low, borrowing money to finance a merger or acquisition looks more attractive, and the alternative possible investments for corporate funds look less attractive.  
Waves of mergers often happen in waves. Once a few mergers happen in an industry, other companies start to feel as if they need to find a merger partner as well. In short, the broad economic conditions are ripe for a wave of mergers and the data for 2011 suggests that such a wave may just be getting underway. The FTC and the antitrust division over at the U.S. Department of Justice should be on their toes. 

Teacher Attendance and Digital Cameras: An Experiment

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One of the hot new trends in economics over the last decade or two is carrying out randomized controlled trials, and one of the most talked-about examples of this approach is now officially published. The study looks at whether providing teachers in low-income countries with a digital camera and then requiring them to take a time-stamped picture at the beginning and end of the school day--and then linking this to financial incentives--can reduce teacher absenteeism. The study is called "Incentives Work: Getting Teachers to Come to School," by Esther Duflo, Rema Hanna, and Stephen P. Ryan, and it appears in the June issue of the American Economic Review. The article isn't freely available on-line, but many academics will have access through their libraries.

Teacher absenteeism at rates of 20 and 30% and more have long been recognized as a severe problem in many low- and middle-income countries. For example, in a Winter 2006 article in my own Journal of Economic Perspectives, Nazmul Chaudhury, Jeffrey Hammer, Michael Kremer, Karthik Muralidharan and F. Halsey Rogers wrote "Missing in Action: Teacher and Health Worker Absence in Developing Countries."

Here's the Duflo, Hanna, and Ryan description of this randomized controlled trial run under the auspices of a nongovernment organization called Seva Mandir in India (footnotes and citations omitted):

"Seva Mandir runs about 150 NFEs [nonformal education centers] in the tribal villages of Udaipur, Rajasthan. Udaipur is a sparsely populated, hard-to-access region. Thus, it is difficult to regularly monitor the NFEs, and absenteeism is high. A 1995 study found that the absence rate was 40 percent, while our first observation in the schools included in our study (in August 2003, before the program was announced) found that the rate was about 35 percent.  Before 2003, Seva Mandir relied on occasional visits to the schools, as well as reports by the local village workers, to monitor teacher attendence. They then use  bimonthly teacher meetings to talk to delinquent teachers. Given the high absence rate, they were aware that the level of supervision was insufficient.
 
"Therefore, starting in September 2003, Seva Mandir implemented an external monitoring and incentive program on an experimental basis. They chose 120 schools to participate, with 60 randomly selected schools serving as the treatment group and the remaining 60 as the comparison group. In the treatment schools, Seva Mandir gave each teacher a camera, along with instructions for one of the students to take a photograph of the teacher and the other students at the start and end of each school day. The cameras had a tamper-proof date and time function that made it possible to precisely track each school’s openings and closings. Rolls were collected every two months at regularly scheduled teacher meetings, and payments were distributed every two months. If a camera malfunctioned, teachers were instructed to call the program hotline within 48 hours. Someone was then dispatched to replace the camera, and teachers were credited for the missing day.
 
At the start of the program, Seva Mandir’s monthly base salary for teachers was Rs. 1,000 ($23 at the real exchange rate, or about $160 at purchasing power parity) for at least 20 days of work per month. In the treatment schools, teachers received a Rs. 50 bonus ($1.15) for each additional day they attended in excess of the 20 days (where holidays and training days, or about 3 days per month on average, are automatically credited as working days), and they received a Rs. 50 fine for each day of the 20 days they skipped work. Seva Mandir defined a “valid” day as one in which the opening and closing photographs were separated by at least five hours and at least eight children were present in both photos. Due to ethical and political concerns, Seva Mandir capped the fine at Rs. 500. Thus, salaries ranged from Rs. 500 to Rs. 1,300 (or $11.50 to $29.50)."

What was the result? 

"The program resulted in an immediate and long-lasting improvement in teacher attendance rates in treatment schools, as measured through monthly unannounced visits in both treatment and comparison schools. Over the 30 months in which attendance was tracked, teachers at program schools had an absence rate of 21 percent, compared to 44 percent at baseline and the 42 percent in the comparison schools."


Of course, the Duflo, Hanna and Ryan analysis goes much deeper than this graph. The research paper is technical, and it slices and dices the data with care and expertise to consider alternative explanations, alternative payment schedules, and more. But one basic message is that the combination of monitoring with the digital cameras and providing financial incentives did seem to improve attendance. Another message is that when teachers were in school more, students had more days of schooling, and their test results showed significant gains in learning. "Two and a half years into the program, children from the treatment schools were also 10 percentage points (or 62 percent) more likely to transfer to formal primary schools, which requires passing a competency test."

Even teachers seemed pleased by the program, although they of course griped about some of the rule that the photos be taken five hours apart on a given day.

"Overall, teachers did not complain about the principle of the program, although many teachers had some specific complaints about the inflexibility of the rules. For example, many did not like the fact that a day was not valid even if a teacher was present 4 hours and 55 minutes (the normal school day is 6 hours, but slack of 1 hour was given). On the other hand, many felt empowered as the onus of performing better was actually in their hands: “Our payments have increased, so my interest in running the center has gone up.” Others described how the payment system had made other community members less likely to burden them with other responsibilities once they knew that a teacher would be penalized if he did not attend school. This suggests that the program may actually have stronger effects in the long run, as it signals a change in the norms of what teachers are expected to do."

This study and this topic are heartbreaking in so many ways. The extremely high levels of teacher absenteeism are grim. The notion that a "successful" program for reducing teacher absenteeism gets the rate down from two out of every five days to one out of ever five days is grim. The thought of impoverished children faithfully showing up each day in the face of this absenteeism (students attendance doesn't seem higher when teachers show up more often) is grim. Just to help keep the students in mind, here's one of the actual photos from the project, taken from an article by Duflo and Abhijit Banerjit in the Winter 2006 issue of my own Journal of Economic Perspectives called "Addressing Absence."



Perhaps most grim of all is that the entire Seva Mandir study was carried out in "nonformal education centers," rather than schools, and using "para-teachers," rather than regular teachers. The reason is that in India, as in many other low- and middle-income countries, teachers are a highly organized labor group that politicians don't dare to cross, and so proposals to increase the dismally low levels of teacher attendance don't even happen in the regular school sector. But there is something optimistic about the use of inexpensive digital technology as a way of addressing the problem--and perhaps even of eventually altering the social norms about what kind of teacher attendance should be expected.

Eight Bon Mots from Milton Friedman

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 Allen S. Sanderson has a nice tribute marking the 100th anniversary of Milton Friedman's birth in "Remembering Milton," which appears in the Second Quarter 2012 issue of the Milken Institute Review. (Available on-line, but free registration required.) The article offers a number of nice reminisces from Friedman's colleagues and students (two groups that often overlap).
Along with Friedman's status as one of the handful of most prominent economists of the 20th century, he also had a nearly wicked rhetorical ability to turn a phrase. Here are a few of Friedman's one-liners collected by Sanderson:

Concentratedpower is not rendered harmless by the goodintentions of those who create it.

Historysuggests that capitalism is a necessary condition for politicalfreedom. Clearly it is not a sufficient condition.

The problem ofsocial organization is how to set up an arrangementunder which greed will do the least harm; capitalism isthat kind of a system.

With somenotable exceptions, businessmen favor free enterprise in general butare opposed to it when it comes to themselves.

The free manwill ask neither what his country can do for him nor what he cando for his country.

The case forprohibiting drugs is exactly as strong and as weak as the case forprohibiting people from overeating.

If you put thefederal government in charge of the Sahara Desert, in five yearsthere’d be a shortage of sand.

Only a crisis —actual or perceived — produces real change. When thatcrisis occurs, the actions that are taken dependon the ideas that are lying around.

Wealth by Distribution, Region, and Age

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The Federal Reserve has published results from the most recent Survey of Consumer Finance, the triennial survey that is the canonical source for looking at the wealth of households. The results are in an article in the June 2012 issue of the Federal Reserve Bulletin called "Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances," by a team of authors led by Jesse Bricker, Arthur B. Kennickell, Kevin B.Moore, and John Sabelhaus.

The headline finding from the report is that the median household wealth level fell from $126,000 in 2007 to $77,000 in 2010. Mean wealth is of course far higher than median wealth. It fell from 584,000 in 2007 to $499,000 in 2007. During a three-year period when housing prices and the stock market declined, a fall in wealth is expected. I'm still trying to digest the data, but here, I'll focus on three patterns in the evolution of wealth that just happened to catch my eye: changes across the distribution of wealth, across regions, and across age groups. Here's a table with the mean and median household values for the 2001, 2004, 2007, and 2010 surveys.


Changes in the Distribution of Wealth

Those in the 90-100th percentiles of the wealth distribution have median wealth of $1,864,000, and mean wealth of $3,716,000 in 2010. That's also the part of the wealth distribution that had the smallest percentage decline in the median and the mean from 2007 to 2010. 

"Median net worth fell for all percentile groups of the distribution of net worth, with the largest decreases in proportional terms being for the groups below the 75th percentile of the net worth distribution. From 2007 to 2010, the median for the lowest quartile of net worth fell from $1,300 to zero—a 100 percent decline; at the same time, the mean for the group fell from negative $2,300 to negative $12,800. For the second and third quartiles, the median and mean declines in net worth were smaller but still sizable; for example, median net worth for the second quartile fell 43.3 percent. Median and mean net worth did not fall quite as much for the higher net worth groups. For the 75th-to-90th percentile group, the median fell 19.7 percent while the mean fell 14.4 percent. For the wealthiest decile, the 11.0 percent decline in the mean exceeded the 6.4 percent decline in the median for that group; as was discussed earlier in the case of family income, this pattern of the changes in
the median and mean suggests that there was some compression of higher values in the wealth distribution."

Changes in Wealth by Region

The drop in housing prices hit especially hard in the western states, and the decline in median wealth was by far the highest in that region. Here's the Fed report: 

"Between 2007 and 2010, median net worth fell dramatically for families living in all regions of the country, but especially for those living in the West—a 55.3 percent decline. This pattern reflects the effect of the collapse of housing values in several parts of the West region. Median wealth in every other region fell 28.2 percent or more. As with the overall population and most other demographic groups discussed earlier, the decline in mean net worth within every region was smaller than the drop in the median. In the South and Midwest regions, the percentage decline in the median was about twice as large as the percentage decline in the mean, but in percentage terms, the median for the West fell four times as much as the mean."

Changes in Wealth by Age

The age 35-44 group experienced the biggest falls in net worth. Oddly enough, the over-75 age group saw a modest rise in net worth from 2007 to 2010. This must mean that the over-75s were not as heavily exposed to the drop in housing prices and and the stock market. Here's the Fed:

"The survey shows substantial declines in median and mean net worth by age group between 2007 and 2010, with the exception that mean net worth rose modestly (1.3 percent) for the 75-or-more age group. The 35-to-44 age group saw a 54.4 percent decline in median net worth during the most recent three-year period, and the mean for that age group fell 36.4 percent. The wealth decreases for the less-than-35 age group were also large; the median fell 25.0 percent while the mean fell 41.2 percent. The declines in median and mean net worth for middle-aged families (the 45-to-54 and 55-to-64 age groups) were also large."

Next Merger Wave Coming?

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The Federal Trade Commission has released the Hart-Scott-Rodino Annual Report 2011.  Each year, it summarizes the number of  mergers and acquisitions, their size, and some trends in antitrust enforcement. At least in my reading, the data in the report hints that a new wave of mergers may be on the way.

The Hart-Scott-Rodino legislation requires that when businesses plan a merger or an acquisition above a certain price--typically $66 million in 2011--it must first be reported to the Federal Trade Commission. The FTC can let the merger proceed, or request more information. Based on that additional information, the FTC can then let the merger proceed, block it, or approve it subject to various conditions (for example, requiring that the merged entity divest itself of certain parts of the business to preserve competition in those areas).

Here are the total mergers reported for the last 10 years. You can see the wave of mergers and acquisitions that peaked in 2007--and what appears as if it could be the start of a new merger wave in the last couple of years.



The total value of merger transactions reported under Hart-Scott-Rodino isn't completely comparable across years, because the threshold at which transactions need to be reported has risen over time. But for what it's worth, here's the pattern of the total dollar value of reported transactions since the late 1990s.

"The total dollar value of reported transactions rose dramatically from fiscal years 1996 to 2000, from about $677.4 billion to about $3 trillion. After the statutory thresholds were raised, the dollar value declined to about $565.4 billion in fiscal year 2002, and $406.8 billion in fiscal year 2003. This was followed by an increase in the dollar value of reported transactions over the next four years: about $630 billion in fiscal year 2004, $1.1 trillion in fiscal year 2005, $1.3 trillion in fiscal year 2006, and almost $2 trillion in 2007. The total dollar value of reported transactions declined to just over $1.3 trillion in fiscal year 2008, and to $533 billion in fiscal year 2009, increased to $780 billion in fiscal year 2010, and $979 billion in fiscal year 2011."

And here's a table showing the size distribution of the reported mergers in 2011. About 28% of the transactions exceeded $500 million; 11% exceeded $1 trillion in size.

The FTC allows most mergers to proceed, which makes sense in a competitive market economy. As a general rule, those who run businesses are in a better position than government economists to plan strategies for their firms. In 2011, about 4.1% of the mergers reported to the FTC has a request for additional information. At the end of the day, the FTC actually challenged 20 mergers in 2011. Thirteen of these challenges went to court; 11 were settled by consent decree. Perhaps the best-known of these cases in 2011 was the FTC decision to block AT&T’s proposed acquisition of T-Mobile. With the other seven, two of the deals were abandoned, and the other five led to restructuring of the deal or changes in conduct.



There are a number of reasons to suspect that a new wave of mergers may be coming, nicely reviewed in an article in the Economist magazine of May 19 called "Surf’s up: Merger waves mean that markets can consolidate rapidly. The next one is coming."' Mergers often happen when there are lots of struggling firms and excess capacity, which creates lots of willing sellers and good deals for possible buyers. When firms have a lot of cash on their balance sheets, like now, mergers start to look attractive. When interest rates are low, borrowing money to finance a merger or acquisition looks more attractive, and the alternative possible investments for corporate funds look less attractive.  
Waves of mergers often happen in waves. Once a few mergers happen in an industry, other companies start to feel as if they need to find a merger partner as well. In short, the broad economic conditions are ripe for a wave of mergers and the data for 2011 suggests that such a wave may just be getting underway. The FTC and the antitrust division over at the U.S. Department of Justice should be on their toes. 

On the Job for 100 Issues of JEP

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I was hired by Joseph Stiglitz 26 years ago to start a new economics journal, the Journal of Economic Perspectives. It took us a year from the starting line to mailing our first issue in the mail, but the Spring 2012 issue, now available on-line, is the 100th issue. Like all issues of JEP back to 1994, it is freely available to all, courtesy of the American Economic Association. The first three articles are about the journal: one by current editor David Autor on the effect of the journal within the economics profession, one by Joe Stiglitz remembering the early years and commenting on how the journal has evolved, and one by me called "From the Desk of the Managing Editor."

Here are the two opening paragraphs and the closing paragraph of my essay:

"Editing isn’t “teaching” and it isn’t “research,” so in the holy trinity of academic responsibilities it is apparently bunched with faculty committees, student advising, and talks to the local Kiwanis club as part of “service.” Yet for many economists, editing seems to loom larger in their professional lives. After all, EconLit indexes more than 750 academic journals of economics, which require an ever-shifting group of editors, co-editors, and advisory boards to function. Roughly one-third of the books in the annotated listings at the back of each issue of the Journal of Economic Literature are edited volumes.

Editors are gatekeepers, and editors are road-blocks—or perhaps these are essentially the same task. Editors shape “the literature,” both what and who is included and how it is presented. I’ve come to believe that “editing” is no more susceptible to a compact single defifi nition than “manufacturing” or “services.” But here is one take on the enterprise of editing from someone who has been sitting in the Managing Editor’s chair for all 100 issues of the Journal of Economic Perspectives since before the first issue of the journal mailed in Summer 1987. ...

My job as Managing Editor of JEP has been a pride and a pleasure for these last 25 years. It’s consistently interesting work: after all, my job is to do close readings of the highly varied work of a succession of prominent economists who are trying to explain their thinking—and then to ask them questions until they explain it all to me! Editing an academic journal also offers the psychic frisson of leaving something behind: 100 issues and counting, to be precise. When I visit another college or university, I sometimes walk through the periodical stacks just to see JEP on the shelf. Running an academic journal for a long time offers a pleasing sense of place within the discipline of economics, spinning a web of personal contacts from the up-and-comers to the well-established in academic institutions around the world. Some of my friends refer to my job at the journal as “the guy who gets thanked” at the end of articles. There are worse epitaphs."

Unconventional Natural Gas and Environmental Issues

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"Unconventional" natural gas production is booming in the U.S.: that is, shale gas, coalbed methane, and "tight gas," which is similar to shale gas but found in low-permeability formations.  However, there are two sets of environmental concerns. One involves protecting the environment while actually extracting this gas. The second involves how finding a substantial new source of energy might affect air pollution, including the carbon emissions that pose a risk of global warming.  The International Energy Agency discusses the issues in "Golden Rules for a Golden Age of Natural Gas." (The IEA is an autonomous international agency with 28 member countries and a staff of 260. It was founded back in 1973-74 as part of the response to the oil price shock at that time.)

As a starting point, here's an overview of the U.S. situation, with a map showing where the main deposits are located:

"Until recently, unconventional natural gas production was almost exclusively a US phenomenon. Tight gas production has the longest history, having been expanding steadily for several decades. Commercial production of coalbed methane began in the 1980s, but only took off in the 1990s; it has levelled off in recent years. Shale gas has also been in production for several decades, but started to expand rapidly only  in the mid-2000s, growing at more than 45% per year between 2005 and 2010. Unconventional gas production was nearly 60% of total gas production in the United States in 2010. While tight gas and shale gas account for the overwhelming bulk of this, shale gas is expected to
remain the main source of growth in overall gas supply in the United States in the coming
decades. The United States and Canada still account for virtually all the shale gas produced
commercially in the world ... There are large resources of all three types of unconventional gas across the United States. Of the 74 trillion cubic metres (tcm) of remaining recoverable resources of natural gas at end-2011, half are unconventional; in total, gas resources represent around
110 years of production at 2011 rates."


One part of the report tried to enunciate a set of "golden rules" that should be followed to protect the environment while extracting this gas. There is a lengthy discussion of these "golden rules," but the overall tone can be discerned from the main headings (each of which has several subheadings): Monitor, disclose and engage; Watch where you drill; Isolate wells and prevent leaks; Treat water responsibly; Eliminate venting, minimise flaring and other emissions; Be ready to think big; Ensure a consistently high level of environmental performance.

Intriguingly, the IEA finds that the costs of implementing this "golden rule" environmental agenda are quite manageable in the context of the overall cost of these projects: "We estimate that applying the Golden Rules could increase the overall financial cost of development a typical shale-gas well by an estimated 7%."  I would interpret this finding as saying that there is no cost-based justification for not undertaking at least this level of environment projection, if the exploitation of unconventional gas reserves is to proceed. 

The other main environmental issue is the concern that abundant natural gas will add to air pollution, including both conventional pollutants and carbon emissions that bring a risk of climate change. The IEA modelling suggests several effects would take place. Natural  gas will reduce the need for burning coal to generate electricity and burning oil for heating and transportation, which tends to reduce carbon emissions. But on the other side, cheaper natural gas will also slow the deployment of more expensive non-carbon energy sources, and the quantity demanded of natural gas will rise as it gets cheaper. Overall, these counterbalancing effects would lead to a modest reduction in carbon emissions. The IEA writes:

"[I]t is difficult to make the case that a reduction in unconventional gas output brings net environmental gains. The effect of replacing gas with coal ... is to push up energy-related CO2 emissions, which are 1.3% higher [without added natural gas] than in the Golden Rules Case. ...  Additional investment in coal-fired generation locks in additional future emissions, since any new coal-fired power plant has an anticipated operating lifetime in excess of 40 years. Though many of those concerned with environmental degradation may find it difficult to accept that unconventional gas resources have a place in a sustainable energy policy, a conclusion from this analysis is that, from the perspective of limiting global greenhouse gas emissions, a Golden Rules Case has some advantages ... while also bringing with it other benefits in terms of the reliability and security of energy supply."

The IEA immediately goes on to say that a strategy of encouraging development of unconventional natural gas isn't enough to ameliorate climate change concerns:

"[R]reaching the international goal of limiting the long-term increase in the global mean temperature to 2°C above pre-industrial levels cannot be accomplished through greater reliance on natural gas alone. Achieving this climate target will require a much more substantial shift in global energy use, including much greater improvements in energy efficiency, more concerted efforts to deploy low-carbon energy sources and broad application of new low-carbon technologies, including power plants and industrial facilities equipped for carbon capture and storage. Anchoring unconventional gas development in a broader energy policy framework that embraces these elements would help to allay the fear that investment in unconventional gas comes at the expense of investment in lower carbon alternatives or energy efficiency."

 My own grand compromise proposal is for the "Drill Baby Carbon Tax." On one side, it calls for making a national commitment to using domestic energy resources including natural gas, coal and oil, for the jobs, the lower energy prices, and the reduced dependence on imported energy. On the other side, it also calls for a carbon tax so that the prices paid by consumers for energy sources that pollute the air reflect the full social costs of that energy production, and thus will also encourage development of cleaner energy sources.  Indeed, one can envision a future for electricity generation where there is increasing reliance on noncarbon sources over time, but when the sun isn't shining and the wind isn't blowing, we have abundant natural gas as a reliable backup.