A wave of ground breaking mergers is again sweeping through the developed world and which would have significant repercussions on global economic developments.
Within a week’s time frame, Shell, the energy giant, announced its acquisition of British Gas in a deal worth $50 billion (Dh184 billion), which came just three days after Finland’s Nokia confirmed plans to buy rival Alcatel-Lucent, the French telecom company, for $15 billion.
Last month, Kraft and Heinz announced a merger that will make the $28 billion unified entity the third largest food company in the US and the fifth largest in the world. The total size of mergers and acquisitions amounted to $3.34 trillion last year, up 5 per cent compared to 2013.
This concentration of capital will have repercussions on future trends, in view of the steady decline of the state’s economic role and the growing dominance of mega-sized companies whose assets often exceed the budget and capacities of a mid-sized nation’s economy.
Among other things, a continuation of this approach in tandem with the evolution of the economic system will lead to a strengthening of monopolies and their control over fixing prices. This has taken on a progressive aspect in recent years and coincides with the spike in mergers and acquisitions.
Reduce expenses
This will reduce competition between companies operating in the same sector as a result of the decline in their numbers. The primary goal of any merger is to reduce expenses, and in the case of the Kraft-Heinz deal, the savings can be a staggering $1.5 billion annually.
This capital concentration coincides with the extension of activities by these companies to almost all countries in the world, which means another opportunity to maximise profits and increase the transfer of such windfall to their country of origin, which may deprive others of significant investments within their borders. Consequently, unemployment will worsen and growth rates will decline sharply, particularly in poorer countries.
On the other hand, mergers will also shrink the capacity of emerging and developing economies to compete in international markets, despite having strong competitive advantages such as cheap labour and the availability of raw materials at convenient prices.
However, such advantages are helpless before the dominance of monopolies. It seems companies intentionally resort to such mergers to cope with the conditions in their countries that ban monopolisation, which is punishable in accordance with regulations in force in the US and the European Union countries.
In fact, the degree of capital concentration in emerging and developing countries does not allow mergers and acquisition as easily as in developed countries, which need a high degree of production in parallel to technological advancement and focused capital resources.
Global competition
This is said with the knowledge that all such deals involve publicly listed entities, unlike most large companies operating in the developing countries, which tend to be not publicly owned.
In such instances, it requires the development of economic and business structures to cope with the intense global competition. For example, some important industries in the GCC, such as petrochemicals and aluminium, occupy a prominent place in the economies of developed countries and contribute large proportions to their GDPs.
Thanks to the Gulf common market, the merger of these competing companies must be discussed to reduce expenses, strengthen their positions in the international market and raise their competitiveness, especially as the raw materials for these industries have become available in many countries in the world, including those of oil and gas importing economies.
This will yield positive results and be to the advantage of Gulf economies at more than one level.
Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.
