At one time or other, most of us have received a letter from our bank that says, “We’ve merged!”
Where there were two banks, now there is one. Do you remember how easy it was to contain your excitement? If so, to borrow from Jeff Foxworthy, you might be an economist.
Investors get excited about mergers and acquisitions; economists not so much.
It’s not that mergers and acquisitions lack economic consequences, and it’s not that there aren’t some mergers or acquisitions that are good for the economy.
But a typical merger is touted as bringing more efficiency to a market, usually by shutting down duplicate operations and cutting jobs. This is what attracts investors to run up the stock price of the acquiring company.
So, after the merger, there is an initial reduction in employment. In many cases, though, the cost savings fail to materialize despite the cuts, and the promised increase in efficiency may take years to show up, if ever.
And since most mergers and acquisitions are doomed to fail because of cultural clashes or other obstacles, the subsequent cost-cutting necessary to make up for that failure means even more job losses.
Mergers and acquisitions also reduce competition in the market. When you add it all up, what you have in most cases are inflated stock prices, less employment, reduced competition and elusive production efficiencies.
For economists, there is little risk of irrational exuberance.
It is a lot easier to be optimistic about a merger when the economics and the technology seem right, that is, when the corporate happy couple complement each other in the marketplace and their technological bases are compatible.
Amazon.com’s recent acquisition of BookSurge fits that category of merged operations where you can see some real economic potential, instead of just market consolidation.
BookSurge is a Charleston, S.C., company that prints books on demand, including many out-of-print books. But unlike many of the bookstores and booksellers in that industry niche, BookSurge doesn’t have rooms with shelves bursting with dust-laden volumes, or even a warehouse of any kind.
It doesn’t print a book until a customer orders it. Modern word-processing and printing technology allow the company to print, bind and ship the book – not quite instantly, but close enough.
To be honest, economists probably have more interest in out-of-print books than most people. Economics books, like volumes of poetry, have notoriously short print runs because publishers, wisely enough, realize that the market is very limited. Most economics books are fated to go out of print almost immediately.
The complementary aspect of the Amazon.com-BookSurge marriage is striking, and becomes even more so as we consider the possibilities. The basic problems of the book-publishing industry are simple and straightforward enough, but have proved to be tough to solve.
One big problem is inventory, and this is true for giant operations such as Barnes &Noble or Amazon.com as well as for smaller, independent bookstores – the kind run by Meg Ryan in “You’ve Got Mail.” Inventory with its promise of quick delivery is what attracts buyers, and yet it is expensive to carry. And books, like fresh produce, can have a very limited shelf life.
Another problem for the industry is that books are heavy. They cost a lot to ship, so a nationwide seller such as Amazon.com has to replicate its inventories at regional distribution centers in order to contain its delivery costs.
Given this background of warehousing and distribution costs, it’s not difficult to imagine how attractive an inventory-free book-selling operation would be to Amazon.com. It must be like Pinocchio dreaming of a life without strings.
Stock market analysts noted that BookSurge was a supplier to Amazon.com, and believe that the merger is a strategic move by the latter to “eliminate the middleman.”
But while this is true, it may not be the whole truth, because it doesn’t include the dream. And Amazon.com’s dream is undoubtedly to get into the publishing business – big time. The acquisition of BookSurge will allow it to apply its greater capital and marketing resources to an already successful business operation in order to kick the technology into high gear so that mass-market books produced on demand can be successfully sold to consumers.
From an economics standpoint, this is the part of the merger that is interesting. For if it is successful in solving its own inventory problems, Amazon.com will end up solving those same problems also for retail booksellers, large and small. This could restore life to an industry that hasn’t seen a lot of sunshine lately. And for the economy, that would be a good thing. It couldn’t hurt.
James McCusker is a Bothell economist, educator and consultant. He also writes “Business 101,” which appears monthly in The Snohomish County Business Journal.
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