Note: This article refers to both a “free market” and “free enterprise.” We at AMIBA believe we have neither as long as rules, practices and policies exist that favor transnational corporations over local business--a prime reason AMIBA exists. Please refer to our article, The Benefits of Doing Business Locally, and the many excellent resources we’ve referenced and made available on our website for further information.

Tuesday, October 28, 2003

Merger highlights growing trends of consolidation and globalization

BY G. WAYNE MILLER
Journal Staff Writer

PROVIDENCE -- The $47 billion that North Carolina-based Bank of America paid for FleetBoston Financial may have been an eye-popping figure, but the fact that an out-of-towner bought the bank is merely part of a global trend, economists said in interviews yesterday.

"It's a process that's endemic to the entire economy, increasingly so," said Mark M. Zandi, chief economist with economy.com, a leading research firm.

"It's happening fast and furious," said URI economics professor Richard P. McIntyre.

And Rhode Island and nearby Massachusetts are hardly new to the game. For the past several years, the area has experienced the effects of the economic forces that are prompting companies to consolidate as they seek to lower costs and expand sales in increasingly competitive markets -- here and abroad.

Chances are, if you live in Rhode Island or Southeastern New England, some of the money you've spent recently for food, clothes, electricity -- even your daily newspaper -- went to companies that are headquartered hundreds or thousands of miles away. The sale of Fleet, once a Rhode Island institution, is noteworthy for its size. But it is only the latest in a growing number of local or regional companies to be sold to out-of-towners.

In the last several years:

Royal Bank of Scotland bought Citizens Financial Group.

National Grid Group PLC of Britian purchased New England Electric System, the parent of Narragansett Electric.

The Dutch firm Royal Ahold bought the Stop & Shop supermarket chain.

The United Kingdom's J. Sainsbury PLC bought the Shaw's chain.

The Belo Corp. of Dallas bought The Providence Journal.

New England Gas, comprised of the former Providence Gas and other companies, became a subsidiary of Wilkes-Barre, Penn.-based, Southern Union Co.

Many smaller sales were made, including part of Brown & Sharpe to a Swedish company.

In all, 87 companies from 19 countries have offices or facilities in Rhode Island. Hasbro, CVS, Textron and GTECH are the four largest publicly traded firms that continue to maintain headquarters in the state.

ACCORDING TO Zandi, several forces are at work.

In a period of low inflation, he said, companies cannot easily raise prices to maintain profit margins that please executives and shareholders. That prompts a quest for lower costs, which leads companies to seek overseas labor, among other measures.

Just last week, A.T. Cross Co., the Lincoln-based pen maker, announced it would move all of its manufacturing to China by 2006. And Pawtucket-based toymaker Hasbro used to make all of its toys in the United States; now, most come from China. It also used to sell most of them domestically. Now Hasbro products can be purchased around the world.

"Globalization has come to the fore," said Zandi.

And not only is labor cheaper in China, Zandi said -- with rapid advances in technology and global communications, it is now possible to efficiently operate a factory halfway around the world from the home office, wherever it is. The same is true in the financial world, Zandi said, where a bank can easily manage its branches from across an ocean -- or from Charlotte, N.C., where Bank of America is headquartered.

Zandi cited several other industries where globalization and consolidation are the buzzwords of the day -- where large, well-managed companies by their sheer size can offer lower prices, and thus gain market share and put themselves in position to buy or force out smaller competitors.

One industry he cited was retailing, where Arkansas-based Wal-Mart, the globe's largest retailer, rules the roost with $157 billion in sales in 10 countries (including China) last year. With that kind of economic clout, Zandi said, "they're imposing significant competitive forces on all the other retailers." In such an environment, it's difficult for a mom-and-pop store -- or even a regional chain -- to survive, said Zandi. It's eat or be eaten.

Insurance companies are also consolidating and going global, Zandi said. And the huge size of FedEx and UPS, means they "are increasingly taking market share from small trucking companies and small shippers."

McINTYRE AGREED that in banking especially, the trend toward consolidation is accelerating. Banking has been slower than other industries to join in, he said, because of legal barriers that have only recently fallen.

But he noted that while business is subject to waves and cycles, the compulsion to grow is nothing new. "The drive to get bigger, the drive to cover more territory is as old as capitalism itself," he said. "It's competition. It's get big before the other guy gets big."

And given a free-market system, there's little the average person could do to stop any of this.

"The economics of this are very compelling and will continue," said Zandi. "We can't fight it -- we should embrace it and figure out how to succeed in this environment." Some of the keys to success, Zandi said, are "the best skilled work force," and efficient communications networks and transportation systems.

Local officials yesterday agreed that working with change, not fighting it, should be public policy.

Rhode Island Economic Development Corporation executive director Michael McMahon said yesterday that on behalf of the governor, he called Kenneth D. Lewis, chairman and chief executive officer of Bank of America, to welcome him to the region.

"I don't think this is a Rhode Island issue -- it's absolutely a globalization trend," McMahon said. "It's a fact. Then you have to say how do you take that fact and turn it into a good thing?" One suggestion he offered to new owners? "Don't look at Rhode Island as a small market -- look at Rhode Island as a place to try new things."

Said Greater Providence Chamber of Commerce president James Hagen: "Everything being equal, you like to see local control. But I'm not sure there's much we can do about it. That's the free-enterprise system we live under."

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