Will next year’s M&A boom be even bigger?

Will next year’s M&A boom be even bigger?

Recent economic news seems p to bear out the charge that the poor are getting poorer and the rich richer. If this is so, regardless of whether the news is welcome or not, it will certainly cause an upswing in M&A. Why? Because the wealthiest entrepreneurs and companies will have more money for acquisitions, and the lower purchasing power of the majority of people will increase pressure for lower prices, which only larger of economies of scale will be is able to satisfy. It’s a rather ominous thought, but consider the data before rejecting the conclusion.

The census bureau has reported that median family income has declined more than 7% from $39,800 in 1989 to $37.000 in 1993. We published a chart showing the change in median family income from 1981 through 1993 on page 7517. The recent recession caused a loss of many jobs as companies downsized to cope with declining sales. A few weeks ago, the New York Times reported that more jobs are being created now, but other statistics show that while the higher level jobs still pay premium rates, most of the jobs being created are lower-level, and are paying less than before.

On the other hand, people whose earnings are in the top 20% of the pay brackets are getting a 1.3% greater share of the nation’s total earnings, from 4.9% 48.2%. Also, the recent statistics on the third quarter shows an unusual and unexpected increase in corporate earnings. This is the second straight quarter that earnings have increased by 45% over the same quarter a year ago. The chart on the front page shows the percentages of increased earnings in the ten best and worst industries versus last years 3rd quarter. It’s interesting to note that the quarter was so good, only 9 industries actually lost ground. One of the biggest factors contributing to the rise is lower wage costs. Unit wage costs, which is the total labor cost to produce an individual product, are at the lowest percentage of increase since the early 1960’s. The prices charged for those goods has increased more than the wages, so business enjoyed a windfall in earnings. While many expect this to change soon, as competition for labor raises the pay rates, don’t forget that demographic changes have created a huge labor pool out there. While unemployment is said to be low, what actually seems to be going on is that many people are underemployed; there are more people wanting jobs than there are jobs to be had. If so, this will have a deterring effect on wage increases.

This all adds up to the poor getting poorer and the rich richer, which means M&A will be up next year, too. The only way for business to continue to sell to consumers will be to do so at lower prices. As sales stall and the market shifts to lower cost and discount retailers, we’ll see pressure brought to find every possible economy of scale. We’re already seeing this trend with Wal-Mart. It will continue and increase. That will make the upcoming boom in M&A bigger than any we’ve seen in the past.

Copyright Quality Services Company Nov 14, 1994

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