Communications Sector Mergers and Wage Outcomes: An Assessment from a Public Interest Standards Perspective
Sumit K. Majumdar University of Texas at Dallas Richardson, TX [email protected]
Rabih Moussawi Villanova University Philadelphia, PA [email protected]
Ulku Yaylacicegi University of North Carolina Wilmington, NC [email protected]
December 21, 2017
1 Communications Sector Mergers and Wage Outcomes: An Assessment from a Public Interest Standards Perspective
Abstract
This article has examined the relationship between mergers and average per-person wages of incumbents over long periods of institutional changes within the United States telecommunications industry from a public interest standards perspective. We evaluate the mergers and wages relationship across two differing periods; one when the sector was completely regulated, and the other when competition was introduced after the Telecommunications Act of 1996. We treat mergers as endogenous and use treatments effects analysis to examine the mergers and wages relationships. Having split the data set into data for regulated and deregulated periods, we find no impact of mergers on wages in the regulated period. In the deregulated period, between 1996 and 2001, we find a significant negative mergers and wages impact. For firms experiencing mergers, real average wages per employee are a third lower than in non-merging firms. This suggests a post- merger cost-cutting approach by firms. Our before-and-after findings of wages declining after mergers, in the 1996 to 2001 period, lead us to conclude that the merger approvals given after the passage of TA 1996 will not have met a public interest standard which postulates that merger outcomes be fair to affected firms’ employees and stakeholders. Additionally, we suggest a resolution to the empirical puzzle, of half negative and half positive mergers and wage outcomes findings that exist in the literature, by incorporating institutional context into our analysis to explain why during some periods of time merger and wage outcomes may be positive and at other times the relationship may be negative.
Key words: congeneric mergers, human capital; institutional logics, public interest standards; retrospective policy assessments; telecommunications industry; wages
JEL Classification: J31; J40; L25; L96
2 Introduction
Mergers are important phenomena, and such transactions account for a large proportion of the gross domestic product. Mergers raise public interest concerns because of the associated human costs (Bruner, 2005). Yet, we know little about how mergers occurring across specific institutional regimes affecting labor market outcomes.1 When evaluating competition policy topics, such as mergers, the United States Department of Justice (DOJ), and bodies around the world, focus on consumer issues. A reason is the impact on consumers’ welfare, since a combined entity can have a large market share and it can dictate prices. Focusing on consumers at the neglect of other stakeholders, such as firms’ employees, in assessing firms’ mergers and their outcomes, is unfortunately common. Evidence on how mergers impact firms’ employees needs to be generated.2
In institutional assessment of mergers, primary questions asked relate to if mergers promote or retard competition, via impacts on prices, competitive behavior and competitive entry (Andrade, et al 2001; Baker, 1997; Kovacic, 2001). Jobs and wages define key parameters by which the livelihood of people are measured. Key questions also relate to merger outcomes with respect to variables such as jobs, wages and technical progress (Katz and Shelanski, 2007; Porter, 2001).
On the mergers and wages relationship there are no clear conclusions. Over a dozen retrospective studies have generated mixed results. Negative mergers and wage outcomes have been established by Brown and Medoff (1988), Lichtenberg and Siegel (1990) and Gokhale, et al (1995),
1 Institutional decisions exacerbate competition, with considerable wage impacts (Dube and Kaplan, 2010; Feenstra and Hanson, 1996; Neumark, et al 2008). An impact of enhanced competition due to institutional decisions is lost jobs and lowered wages in incumbent firms. For incumbent firms, margin reductions lead to cost cutting, job losses, and real wage drops (Abraham, et al 2007; Katics and Petersen, 1994; Revenga, 1992). Pressures for lowered prices and reduced margins lead to demand increases, attracting new firm entry and jobs. Increased competition reduces job security and wages (Amable and Gatti, 2004; Blanchard and Giavazzi, 2003; Gersbach, 2000).
2 In the United States, over 15,000 mergers occurred in the 2000s, and the demand for evidence on merger outcomes is large (Kwoka, 2013). Mergers have wide-ranging impact, and assessment of their impacts is vital (Carlton, 2009).
3 and partially by McGuckin and Nguyen (2001), while Davis and Wilson (2003) have found a small positive effect of mergers on wages. Beckman and Forbes (2004), Conyon, et al (2004), Huttenen
(2007), Kubo and Saito (2012), Peoples (1989) and Siegel, et al (2008) have found a positive impact, while Majumdar, et al (2010) have evaluated merger waves and established a positive impact in respect of first mergers, but a negative impact of second mergers on wages, and Nguyen and
Ollinger (2009) have found both negative and positive impact of mergers in different time periods.
Absence of empirical regularity on such a topic is puzzling. A resolution to this conundrum is to incorporate specifics of the institutional in assessing phenomenon, and anchoring analysis in the institutional literatures.3 Firms’ decisions are influenced by regulatory changes (Aldrich and Ruef,
2006; Nelson, 2007), and institutional incentives influence spending (Parente and Prescott, 2002).
Merger-impact assessments can be made contingent on such specificities. Thus, occurrence of negative versus positive mergers and wages outcomes could be explained as occurring due to variations in institutional climates driven by variations among public interest standards.4 Such contingencies would affect post-merger wage outcomes in differing political and social contexts.5
3 There is shortfall of evidence as to how institutional changes affect the behavior of firms (Short and Tofell, 2010), and the literature has not engaged in comparative analysis to assess the impact of institutional features in determining outcomes of institutional regimes (Sokol, 2010). Behavior outcomes are influenced by incentives, and these vary according to institutional contexts (Aoki, 1996; North, 1990). Institutions comprise of the cognitive, normative and regulative elements that provide social and economic meaning (Scott, 2001).
4 Institutional logics shape behavior via their effects on individuals’ perceptions (Friedland and Alford, 1991). The institutional logics approach incorporates a framework of how institutions, and their underlying logics, shape action (Thornton and Ocasio, 2008). Firm behavior evolves along different time-paths due to institutional variations (North, 1994). Historical contingencies generate contextual variations, influencing normative reactions. Each firm’s social and political context is unique (Dosi and Marengo, 2007; North, 2005), and the behavioral implications of changing institutional regimes are different (Fukuyama, 2011). As institutional contexts change, the logic of rules and regulations that make up institutions will have been affected by forces exogenous contingencies might engender, so that incentives and behavior alter. Hence, differing outcomes will be observed in differing institutional contexts. Institutions are also generative forces defining the context based on political factors (de Figueiredo, 2002), and are political but non-technologically
4 Study Scope
Building on extensive prior research,6 of incumbent local exchange carriers (ILECs) in the
United States, and a dataset for the period between 1988 and 2001 containing information on firms’ average wage levels, this article evaluates the relationship between ILECs’ mergers and the impact of such mergers on wage levels, specifically for mergers occurring across the two unique periods of institutional transformation that have occurred in the United States telecommunications industry.7
Given a variety of contexts, descriptive ideal types of behavior associated with the logics of each epoch can permit analysis in understanding each era and to derive hypotheses (Thornton and
Ocasio, 2008).8 We define two contextually-driven institutional logics at play in the United States telecommunications sectors. Based on details of the environment between 1988 and 2001, and assumptions with respect to mergers, we relate behavior associated with the two logics with hypotheses that map the relationship between mergers and wages across two different institutional regimes; the first from 1988 to 1995, and the second from 1996 to 2001. A ‘regulated public utility’ logic, driven by a universal service ethos, involving the diffusion of the public switched telephone
determined constraints influencing social interactions by providing incentives for behavior regularity (Greif, 1998).
5 Firms scan the environment (Nelson and Winter, 1982) and reconfigure capabilities to meet performance goals (March, 1991). As altered logics lead to changes in interpretations of contingencies, firms relate asset reconfigurations to context changes (Nelson, 2007) and resource reconfigurations occur (Teece, 2007).
6 See Majumdar (2013) and Majumdar, et al (2010; 2012; 2013; 2014).
7 See Brock (2002), Lehman and Weisman (2000), Majumdar (2013), Majumdar, et al (2010; 2012; 2013; 2014) and Woroch (2002) for more extensive details of the institutional environment.
8 Thornton and Ocasio (1999) has described ideal types or archetypes for the higher education publishing sector. Rao, et al (2003) used the archetypes or ideal types in characterizing classical and nouvelle French cuisine.
5 network (PSTN), was in place before the passage of the Telecommunications Act of 1996 (TA
1996). A ‘competitive entity’ logic came into play after TA 1996.
The data provides the means for assessing a natural experiment (Coleman and Lagenfeld,
2008) to illustrate merger impact on wage outcomes across historically-contingent institutional conditions. A view suggests that policies to engender the competitive process and associated performance outcomes have been ineffective (Crandall and Winston, 2003). But, another view postulates that policy has been effective (Baker, 2003; Werden, 2003) and the issue remains unsettled
(Buccirosi, et al 2013). Hence, additional historically-contingent analyses are apposite.
Mergers variable are endogenous. Companies’ choice of mergers are contingent on selection processes.9 Such contingencies vary according to the institutional environment, and hence firms’ merger motivations vary across time. Historically-contingent and temporally-related motivation variances can lead consummated mergers to impact wage outcomes differently. We use the treatment effects approach10 to tackle endogeneity in evaluating merger impact over different institutional contexts.
Mergers and Wage Outcomes
The mergers and wages prediction is complex. Two hypotheses, initially independent of institutional specificities, are possible. First, mergers can change the resources of firms because new capabilities are developed. Given a scale effect, a new brand can be developed, because of advertising possibilities, and from new technology platforms. These activities enhance requirements for more expensive skill sets. On acquiring these skills, the average levels of wages can go up after mergers because the types of employees in the merged firms are qualitatively different.
9 See Egger and Hahn (2010) and Gugler and Siebert (2007).
10 See Abbring and Heckman (2008), Angrist and Krueger (2001), Dehejia and Wahba (1999) and Heckman and Vytlacil (2005).
6 Mergers increase the wage surplus. The post-merger scale effect will generate efficiencies and lead to such an increase. If efficiencies arise, gains from mergers will be split between stakeholders, so that owners, managers and employees all benefit. If mergers are to enhance performance, then the efficiency wages idea suggests that employees be given higher wages as incentive payments for their efforts (Baker, 1992). An aftermath of mergers can be wage growth.
The rent-seeking view of merger outcomes suggests otherwise. Mergers are motivated by a desire to build empires, grow enlarged firm size and expropriate resultant surpluses (Mueller, 1969).
Also, older and senior employees can often appropriate a substantial amount of the surplus of a firm. In such circumstances, mergers are motivated by the opportunity provided for rent-seeking managers to renege on implicit labor contracts and to reduce extra-marginal wage payments so that surplus for expropriation rises (Shleifer and Summers, 1988).
This behavior is consistent with shareholder value enhancing, as managers stand to gain if they enhance value. Mergers change the nature of bargaining. The spirit of sharing being violated, managers could expediently reduce the number of older and senior employees paid more than marginal products. Altered bargaining between firms and employees could permit managers to change employment contracts, while allowing themselves greater amounts to appropriate. Thus, wages could fall after mergers.
The Telecommunications Industry Context
Changes in the Sector:
Major institutional changes have happened in the United States over the last 30 years. After the issue of a Modification of Final Judgment (MFJ) in 1982, pursuant to a consent decree in 1984 the
Bell system divested its local telephone companies, the Bell Operating Companies (BOCs), and retained long distance services. In 1984, 22 BOCs were in existence, and 161 local access and transport areas
(LATAs) were created. The BOCs could carry calls within one LATA.
7 Twelve years after the 1984 divestiture, the Telecommunications Act of 1996 (Public Law 104-
104, 110 Stat. 56, codified at 47 U.S.C. 151, et seq.), hereinafter referred to as TA 1996, recast the industry structure to make it competitive (Cave, et al 2002). This legislation was intended to bring competition into a sector monopolized by ILECs, and induce entry in ILECs’ markets. The legislation required existing firms to interconnect with entrants (Lehman and Weisman, 2000).
The intent of TA 1996 was to promote competition and reduce regulation. The pre-TA 1996 and the post-TA 1996 environments were different. A major impact of the TA 1996 and its implementation by the FCC and state commissions was to eliminate the MFJ’s line-of-business restrictions keeping Regional Holding Companies (RHCs) from entering in-region inter-LATA markets.
Restrictions keeping other types of carriers from entering local exchange markets were eliminated.
Restrictions preventing the RHCs and other ILECs from providing local telephone service outside their franchised territories were eliminated.
Long distance interexchange carriers (IXCs), competitive access providers (CAPs), such as new competitive local exchange carriers (CLECs), and cable system operators (CSOs) were allowed to offer local, intra-LATA, and inter-LATA telephone service. A firm obtaining certification from a state commission could offer local services using its own facilities and unbundled network elements obtained from ILECs, or resell ILEC's local services purchased from the ILECs at wholesale prices.
Features of Sector Mergers:
The unit of analysis for our study is [a] each local exchange carrier, [b] operating in its specific territory, [c] in each year, over the entire 1988-2001 period. Each of these carriers has operated as a territorial regulated local monopoly. The ability to dominate related markets would not motivate local exchange companies to merge, since each carrier’s prices and service quality would be regulated by different state regulatory commissions. At best, a merger, say, between Southwestern Bell
8 Corporation (SBC) and Pacific Telesis would make the combined RHC a strong entrant in territories not adjacent to the territories of the ILECs coming under a combined SBC-Pacific Telesis umbrella.
The ILECs’ mergers were not horizontal mergers or vertical mergers between a RHC, like
SBC, and an IXC, say like AT&T. The local exchange mergers studied were congeneric (Rosenberg,
1997), predicated by efficiency concerns as stated by merger proponents (Goldman, et al 2003).
Given a reasoning that mergers drive firms’ growth and efficiency, the companies articulated a positive role for mergers in reconfigurations, with efficiencies to result from combined networks through leased-line cost reduction and access charges avoidance. By merger-induced expansion, cash could be generated through savings (Goldman, et al 2003).
Specific Details of Mergers Studied:
Table 1, taken form from Majumdar, et al (2014), lists each company in terms of ownership status and merger activity. In 1984, with the break-up of the old AT&T, the sector consisted of 7
RHCs, which between them owned 22 stand-alone BOCs. There were 5 other such main groupings:
Central Telephone, Continental Telephone, GTE, Southern New England Telephone and United Telephone and 2 large independent companies, namely Cincinnati Bell and Rochester Telephone. These groupings owned several ILECs. The local exchange sector consisted of several thousand firms, but the 50 largest companies accounted for 99 percent of the lines; of these, 40 companies accounted for 95 percent of the lines.
Early Mergers:
Between the 1984 divestiture and the introduction of TA 1996 several mergers occurred. In the early 1990s, several RHCs operationally amalgamated their separate stand-alone local exchange companies. In 1991, the operations of Mountain States Telephone and Telegraph Company, Northwestern Bell
Telephone Company and Pacific Northwest Bell Telephone Company were combined to form US West
Communications. In 1992, the amalgamation of South Central Bell Telephone Company and Southern Bell
9 Telephone and Telegraph Company operations, as Bell South, took place. Simultaneously, several non-RHC groupings were acquired by other groupings. Thus, Continental merged its companies, such as Contel of California, Contel of New York, Contel of Vriginia and Contel of Texas with GTE. These events occurred in 1990. The operating companies of United were acquired by Sprint in 1991, and the operating companies of Central Telephone Company were acquired by Sprint in 1992.
Later Mergers:
A number of mergers occurred in the mid-1990s, after the promulgation of TA 1996
(Hazlett, 2000). The key mergers were those of SBC and Pacific Telesis, in April 1996, the merger of
Bell Atlantic and NYNEX, in April 1996, and the merger of SBC and Ameritech, in June 1998, all between RHCs. The landmark TA 1996, having opened the local exchange market to entry by
CLECs, motivated a series of performance-enhancing mergers among unattached RHCs. For example, Pacific Telesis was merged with Southwestern Bell Corporation (SBC). SBC also acquired Southern
New England Telephone (SNET) in 1998. Also, inter-modal cable competition emerged in the sector.
Several RHCs began acquiring other RHCs or other groupings. The RHC Ameritech was acquired by SBC, to acquire the financial scale to be a player with major presence in all local exchange markets in the United States. This merger was thought to be anti-competitive, but cleared
(ITU, 2002). Then, in 2000 GTE was acquired by Bell Atlantic. Bell Atlantic had also earlier acquired
NYNEX, an RHC in its own right. The conglomerate Bell Atlantic re-named itself Verizon.
Several ILECs went through two mergers. The Continental ILECs went through two mergers.
First, they were acquired by GTE. Then, GTE became part of Bell Atlantic. Similarly, the GTE and
NYNEX local exchange companies went through two mergers; first when they were acquired by
Bell Atlantic; second, when Bell Atlantic acquired Puerto Rico Telephone Company and then re-named the whole group, consisting of Bell Atlantic, Contel, GTE, NYNEX and Puerto Rico Telephone Company, as
10 Verizon. Pacific Telesis was first absorbed into SBC. Then Ameritech was absorbed into SBC and the
SBC structure recast. Such mergers occurred after 1996, after TA 1996 had been promulgated.
*************** INSERT TABLE 1 HERE ***************
Hypotheses
Institutional logics contingencies will have mattered in influencing firms in their post-merger wage-setting behavior in each era. We evaluate the impact of such mergers on firms’ wage outcomes across two historically-contingent context-specific eras of institutional logics; the first era of institutional logic between 1988 and 1995, characterized by a ‘regulated public utility’ mindset, and the second between 1996 and 2001 characterized by a ‘competitive technology entity’ mindset.11
Mergers and Wages Relationship for Regulated Public Utility Logic Era:
A regulated environment between 1988 and 1995 would generate its own institutional logics.
First, a regulated environment would provide protected and the ILECs guaranteed markets and engender a ‘cost plus’ orientation. Government policies in a regulated regime would dictate industry competition (Murtha and Lenway, 1994), create entry barriers (Spencer, et al 2005), dictate operational tasks (Brock, 2002) and define property rights (Campbell and Lindbergh, 1991).
A regulated regime would mean that adequate marketing and other infrastructures would not be required of firms (Patel, 2002), while closed markets would influence rent-seeking (Bhagwati, 1993) and firms’ competencies would be government oriented (Haksar, 1993). Specifically, a regulated public utility culture would lead to inflating the capital base with inappropriate items (Averch and Johnson,
1962; Bailey and Coleman, 1971; Baumol and Klevorick, 1970), such as surplus personnel, and limit
11 The transition from one mind-set to another could be contrapuntal (Said, 1979) in that the counter-voice proposing change within an existing discourse of institutional rules could be situated within the main discourse as a contained interrogation, rather than as a dismantling force (Rajan, 1999), thus unlikely to be leading to radical changes in firm behavior. Alternatively, the transition in institutional logics could be an interruptive force (Spivak, 1988), evolving as a contested interrogation of the received discourse of institutional rules, leading to a confrontation of existing assumptions governing firm behavior such that firm behavior would radically alter.
11 cost reduction (Biglaiser and Riordan, 2001). Given a public utility mind-set, firms would obfuscate costs as risks were transferred to consumers because of ‘cost pass-through’ (Joskow, 1974). In regulated environments, where a‘cost plus’ framework driving the institutional logics would prevail, lack of cost and market pressures would lead to inefficiencies (Majumdar, 2013; Weisman, 1993).
Mergers help firms increase power (Stigler, 1964; Shepherd, 1979; Scherer, 1988), so that managers might enjoy the quiet life (Hicks, 1935), or else be motivated by hubris (Roll, 1986), with such motives leading to x-inefficiencies (Leibenstein, 1976).12 Enhancing scale and volumes via mergers
(Stillman, 1983; Farrell and Shapiro, 1990), to drive costs down, would not be important. Productive human resource use would not be an issue. In such circumstances, employee-cost pressures would be low and post-merger wage levels could increase. Hence, a positive wage impact will be observed after mergers occurring in periods of industry regulation.
Mergers and Wages Relationship for Competitive Entity Logic Era:
The TA 1996 deregulated industry structure to make it competitive (Cave, et al 2002). The objectives of TA 1996 were: ‘To promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies. After 1996 a new industry landscape was created. The impact of the legislation induced competition in incumbents’ markets and make the environment unpredictable
(Hazlett, 2000). The institutional ethos shifted from maximizing universal access to enhancing customer choices. This legislation was intended to let market forces prevail and bring competition into a hitherto monopolized sector. The impact could be felt as a major interruptive force, as it would incorporate a complete contestation of the assumptions underlying extant sector regulation.
12 Research has upheld the market power argument. The acquisition of power is a popular theme and has influenced the passage of the Merger Guidelines by the United States Government (Baker, 1997; US Department of Justice, 1992).
12 The legislation recognized the telecommunications network as a network of interconnected networks. Existing ILECs’ were required to interconnect with new entrants at any point the entrant wished. Also, the legislation required ILECs to lease parts of their network as unbundled network elements to competitors at cost, to provide at wholesale prices any services the firms provided to competitors, and to charge reciprocal rates in termination of calls to their network and to networks of local competitors. The impact would alter institutional logics, from a regulated public utility mindset to a competitive technology entity mindset. This would imply that firms’ critical practices would be to engage in strategic actions to face competitors.13
With competition, higher demand elasticities would lead to customer consumption pattern changes and easier switching between suppliers. Efficient firms could capture market share through price decreases, while high cost levels, and high prices, could lead to market loss, and the presence of organizational slack in firms would be costly (Majumdar, 1995; Scharfstein, 1988). The presence of high costs would act as an inducement to improve internal efficiencies (Schmidt, 1997) and motivate cost-cutting by wage rate reductions. Accordingly, a negative wage impact could be observed after mergers occurring in periods of industry deregulation.
Analysis
Data:
The market-opening TA 1996 reforms permit us to examine data for the 1988 to 2001 period using two data sets: one for mergers occurring in the closed market environment of 1988 to
1995; and the other for mergers occurring in the competitive market environment of 1996 to 2001.
The merger impact analysis, for mergers occurring in two separate institutional periods, is based on a
13 If the logics defined by a regulated utility mindset have transitioned to an era with a competitive entity mindset, perceptions about actions in a new era could alter. Contestability- enhancing competition would make performance bench-marking easier, reducing information asymmetries and intra-firm agency problems (Hart, 1983; Leibenstein, 1976), and permitting managers to display better outcomes, providing incentives to invest in effort (Nalebuff and Stiglitz, 1983; Vickers, 1995).
13 balanced panel of data for local exchange companies, obtained from the Statistics of Communications
Common Carriers (SCCC). These data have been much used before.
Wages:
When retrospectively evaluating merger outcomes, an issue is defining the measured effect
(OECD, 2011). Most retrospective studies have dealt with evaluating price effects. There are other non-price merger effects, such as impact on jobs and wages. The wage dependent variable is the average wages per employee in each firm per year, expressed in real dollar terms adjusted for inflation (Wages). Data have been available for each firm for the period when it was under prior ownership, and for the period when it was under new ownership. The approach has permitted the evaluation before-and-after merger-specific impact on wages in a natural experiment format.
Mergers: 14
The key institutional factor has been the passage of TA 1996. We define two separate independent merger variables for the separate data sets: Pre-1996 Merger for the 1988 to 1995 data and Post-1996 Merger for the 1996 to 2001 data. Many mergers occur in post-deregulatory periods
(Andrade, et al 2001), and our splitting the dataset into two enables us to evaluate post-deregulatory merger activity and their impact. A merger dummy variable denotes the occurrence of either the Pre-
1996 or Post-1996 merger event, following which outcomes are evaluated. The design of dummy variables to control for merger impact is based on existing research (Brown and Medoff, 1988;
Gugler and Yurtoglu, 2004; Majumdar, et al 2010). Dummy variables’ use is consistent with prior
14 The local exchange company mergers have not been traditional horizontal mergers with two competitors merging to enhance market power and raise prices. In addition, the emergence of inter-modal competition has been substantial (Loomis and Swann, 2005). This contingency would create a check on the motivation for local exchange mergers to raise prices. These mergers have been congeneric in nature, to acquire capabilities rather than market share (Rosenberg, 1997), and the merger events correlate with a merger list maintained at www.cybertelecom.org. The way the firms keep records, based on regulatory requirements, each firm retains its accounting identity. Data for merger firms are reported separately. Hence, for every firm after merger, its performance relative to itself in the past, when it was not taken over, or relative to either other independent or merged firms in the same period, can be evaluated given panel data.
14 competition policy literature (Fisher, 1980; Rubinfeld, 1985), and dummy variables have been used in evaluating the estimated price impact of cartels or mergers (White, 2011).
Treatment Effects Estimation:
The merger variables capture an element of firms’ strategic behavior as do wages. Hence, a concern is to deal with endogeneity of the Pre-1996 Merger or the Post-1996 Merger variable, as otherwise the model may be biased. Starting with Stigler (1950) and Gort (1969), the analysis of merger motives has developed a long history.15 Simultaneous analyses of endogenous merger motives and merger impacts on another endogenous variable of interest are rarely carried out in the same model. We do so in our analyses. In keeping with recent literature (White, 2011), we estimate treatment effects models to evaluate merger impact on Wages.
We estimate treatment effects models to account for the selection bias to affect mergers.16 A separate model is estimated for the two separate merger variables, Pre-1996 Merger or the Post-1996
Merger, in respect of the Wages dependent variable. The Pre-1996 Merger or the Post-1996 Merger variable is the treatment for which parameters are estimated. The Pre-1996 Merger or Post-1996 Merger variable is a treatment that a firm has faced, relative to others, or relative to itself in the past.
15 See Andrade, et al (2001), Berkovitch and Narayanan (1993), Bhagat, et al (1990), Gaughan (1996), Goold and Luchs (1993), Jensen (1988), Lambrecht (2004), Matsusaka (1993), Mitchell and Mulherin (1996), Ravenscraft and Scherer (1987), Shleifer and Vishny (1991), Stallworthy and Kharbanda (1985) and Walter and Barney (1990) for reasons as to why firms merge.
16 The use of treatments effects models (Rubin, 1974), with endogenous mergers as treatments firms undergo, is recent in merger analysis; two uses for European data (Egger and Hahn, 2009; Gugler and Siebert, 2007) exist. Treatment effects are useful in evaluating natural experiment outcomes, where some firms adopt a particular strategy such as a merger, or experience a particular policy, while others do not. Natural experiments are identifiable and non-recurring actions occurring over a relatively clearly defined and sustained period of time, but which then end (White, 2011). Treatment contingencies provide the natural experiment functionalities. For those facing the experience, the contingency is a treatment. Full details of the treatment effects modeling approach are contained in Guo and Fraser (2010), elsewhere, and in our other papers.
15 The use of treatment modeling helps evaluate the dynamics of merger outcomes based on panel data. The panel data framework is relevant in evaluating natural experiment outcomes and in retrospective merger analysis. To merge or not is a choice. If there is selection process involved, in this decision, it can be evaluated (Heckman, 1990). A treatment effect is the average causal effect of a variable on a variable of interest, such as a merger. A transition from a non-merged state to a different merged state is a treatment firms receive. A treatment effects model considers the merger variable as a covariate influencing wage outcomes, after it has been modeled as a dummy endogenous variable influenced by covariates.
Treatment effects modeling permits pre- and post-event evaluations. The likelihood of firms engaging in mergers will have been conditioned by several intrinsic factors, because of self-selection into treatment (Heckman, 2001; Heckman, et al 1997). In respect of instrument choice for the endogenous parameter being identified by the instrument (Heckman and Vytlacil, 2005), the instruments may or may not be a subset of the primary explanatory variables used for explanation
(White, 2011). The exclusion criterion, normally applied in instrumental variable analysis, is relaxed in this method (Amemiya, 1985; Maddala, 1983), as many firm level factors influencing mergers will also influence wages.
Firms’ performance plays a role in driving mergers (Blonigen and Taylor, 2000; Fauli-Oller,
2000; Granier, 2008; Qiu and Zhou, 2007), based on a goal of maximizing performance (Scheffman,
1993).17 A financial performance variable is used as an instrument for the treatment parameters. We use the following performance variable: cash flow (Cash flow) calculated as the ratio of total operating revenues to total assets (Cornett and Tehranian, 1992).
17 The failing firm doctrine is an important alternative perspective in the competition policy literature on how performance drives mergers. See Kwoka and Warren-Boulton (1986) and Shughart and Tollison (1985) for discussions.
16 Competition has wage impacts (Dube and Kaplan, 2010; Feenstra and Hanson, 1996;
Neumark, et al 2008), and we include a variable accounting for competitive rivalry (Competition), measured as the number of competitive entrants within a firm’s territory. Since the two primary independent variables, Pre-1996 Merger or the Post-1996 Merger, each relate to different institutional periods, the Competition variable may very well influence merger occurrences differently in each period. In a regulated regime, the presence of competitive rivals would not necessarily pressurize firms to merge. The contingency of emergent rivalry motivating consolidation would, however, be likely in a deregulated milieu. This rivalry variable may influence mergers as well as wages.
An external instrument, appearing in the selection equation, but not in the main equation, to incorporate an exclusion restriction and correct for sampling selectivity, is also included. This variable is the annual level of real interest rates (Interest) experienced by the firms. The variable would influence discretionary merger activity by impacting the cost of capital, but would not affect wages since wage expenses would be a primary obligatory charge on firms’ operating revenues. We estimate two models for each time period: one with all instruments and another with only the external instrument, Interest.
Additional Effects:
Based on prior work on the telecommunications sector (Majumdar, 2008; 2014; 2016;
Majumdar, et al 2010; 2012; 2013; 2014), several variables are included. The ratio of access revenues to total operating revenues (Access) controls for interconnection access charge regime variations. The market position variable (Market Position) is the ratio of a firm’s total number of lines across the states it operates in relative to the total number of lines in all the states it operates in. The urban population ratio (Urban) is the weighted average ratio of urban population relative to the total population in each firm’s territory, weighted by the fraction of lines that the firm operates in the
17 specific state or states. The business lines construct (Business) is the ratio of total business lines to total access lines for each firm.
Based on literature (Greenstein, et al 1995; Hatfield, et al 2005; Sharkey, 2002), a technology variable is the ratio of total fiber kilometer to total cable kilometers (Fiber Cable). To control for regulation effects, a variable (Regulation) is constructed where price caps regulation exists; a weighted average regulatory measure is computed for each company by weighting the regulation observation by the proportion of lines that each state contributes to the total access lines of the company
(Majumdar, 1997). The Competition and Cash flow variables are also added. These variables listed in table 2 have been used often (Majumdar, 2008, 2014, 2016; Majumdar, et al 2010; 2012; 2013; 2014).
*************** INSERT TABLE 2 HERE ***************
Results
Results for the Regulated Period:
The results for the 1988 to 1995 period are given in table 3. Models (A) and (B) display the estimates for the Pre-1996 Merger variable, for the 1988 to 1995 period when the industry had not been deregulated. In model (B), we leave out the Competition and Cash flow variables, letting only the external instrument variable, Interest, remain. The results are consistent in models (A) and (B). The
Pre-1996 Merger variable is positive but not significant in both models. The model fits for the two models are, however, not entirely satisfactory.
*************** INSERT TABLE 3 HERE ***************
In a regulated milieu, while the estimate generated is positive, mergers are found have had no statistically significant impacts on the level of average wages. In such an environment, where union power in regulated sector firms might exist, mergers might have permitted managers to reduce extra- marginal payments for employees, and obviate the implicit labor contracts that existed between management and employees which would have engendered higher average wages. These actions lead
18 to lower costs for the firms and lower average wages for employees after mergers. Conversely, firms may have been motivated to enhance wages under an efficiency wages approach.
Though Pre-1996 Merger estimates are positive, their small size and relative non-significance do not allow an absolutely unequivocal conclusion as to what the impacts of mergers on wages have been in the period when the sector was regulated. Of the explanatory variables in the selection equation, Competition is a mildly significant determinant of the merger variable in model (C), but negative, which is very plausible in a regulated environment when institutional entry barriers would have permitted firms to protect their markets and not resort to mergers. The Interest variable is negative and significant, this result highlighting that as cost of capital rises merger propensity drops.
Results for the Deregulated Period:
Table 4 provides details. We find that that the estimate for the mergers variables, now Post-
1996 Merger, changes its sign, once we decompose the overall data into institutionally-specific time periods, suggesting that considerably different dynamics, likely to be driven by institutional contingencies, may be at play in specific periods that embody different policy conditions.
Models (A) and (B), in table 4, display the estimates for the Post-1996 Merger variable for the
1996 to 2001 period when the industry had been deregulated, with the passage of TA 1996. The likelihood ratio tests indicate the appropriateness of a treatment effects model being used. In this model, the Post-1996 Merger variable is negative and highly significant (p < 0.001). The average real wages for the 1996 to 2001 period have been $39,800. This has represented an average increase of wages of 16 percent across all the firms in the sector between the 1988 to 1995 period and the 1996 to 2001 period. Hence, between the two different regimes, average wages have gone up. Yet, the magnitude of the Post-1996 Merger variable denotes that where mergers have occurred, real wages per person are 34 percent lower, even though real wages have increased by 16 percent across the board.
19 The observed relationship denotes a large significant drop in real wages per person in merging firms relative to wages in non-merging firms. Of the variables in the selection equation, the
Rivalry variable is significant. In a deregulated regime, entrants’ presence has motivated merger occurrence. Overall, we establish that an impact of enhanced competition due to deregulation is lowered per-person wages in firms as an impact of mergers firms have gone through.
*************** INSERT TABLE 4 HERE ***************
In the selection equation, Competition is a significant determinant of the merger variable in model (C), and positive, which is intuitive and acceptable, since the primary impact of TA 1996 has been to encourage entry which then would motivate mergers by incumbents to retain their market positions. The Interest variable is again negative and significant highlighting that as the cost of capital rises, merger propensity drops. This is an acceptable finding in tune with general expectations.
Public Interest Standards and Merger Assessment in a Regulated Regime
We have been concerned with understanding the mergers and wages relationship as institutional regimes have varied. Generic theory, context-free, has suggested that after mergers per- person wages may rise because of resource base changes, implementation of new platforms requiring different skill sets and increases in surpluses available for wage enhancements. If employees are paid higher wages as post-merger incentive payments average wages rise. This is the efficiency wages idea.18 An alternative hypothesis is that mergers permit cost-cutting (Farrell and Shapiro, 1990), and wage costs are cut. As earlier noted, the evidence on how mergers impact wages is mixed. Both positive and negative findings have been established, in equal numbers, in the literature.
Each part of the data set has reflected institutionally unique conditions. Hence, the issue is reframed as to what impact could mergers in the two institutionally-separate periods have on wages?
18 See Akerlof and Yellen (1986), Baker, et al (1994), Capelli and Chauvin (1991), Krueger and Summers (1993), Levine (1993), Raff and Summers (1987) and Shapiro and Stiglitz (1984).
20 Two broad possibilities are likely. In a regulated industry setting, an empirical regularity has been the presence of above-average wages because of high unionization. Research on wage differences between regulated and unregulated firms had found regulated firms paying higher wages across a variety of industries. Industries evaluated were banking (Black and Strahan, 2001), electric utilities
(Hendricks, 1975), telecommunications (Ehrenberg, 1979; Peoples, 1990) and trucking (Hirsch,
1988; Rose, 1987), where wages were higher when firms were regulated and faced less competition.
In regulated environments, job security had been associated with higher wages (Nickell,
1999). Firms in regulated industries could attract more expensive personnel, because of job stability
(Weiss, 1966). Literature (Card, 1986; Hirsch and Macpherson, 1997; 2000; Peoples, 1998) has shown post-deregulation wage declines due to the compression of union power. Klein, et al (2003) established a generic finding of wage compressions after deregulation for American industry.
Mergers in such a milieu could eliminate rents.19
Often, senior employees might appropriate substantial surpluses (Shleifer and Summers,
1988). Mergers could enable managers to renege on implicit labor contracts, and reduce extra- marginal payments for employees. These actions could lead to lower costs and average wages after mergers. Even if pre-merger implicit bargains had been struck between managers and other employees that the rent would be shared, mergers could change the bargaining relationships between managers and employees. In such changed situations, the spirit of implicit sharing would be violated, and managers could reduce the numbers of highly-paid older and senior employees.
19 Card (1997) had shown a 10 percent decline in the earnings of airline workers after deregulation, with similar declines for pilots, flight attendants, managers and secretaries. Hirsch and Macpherson (1997) found trucking deregulation from the 1970s to the 1990s had led to relative wages of drivers falling by 15 percent for unionized drivers, while non-unionized drivers’ wages had fallen by a smaller percentage. Hirsch and Macpherson (2000) and Peoples (1998) analyzed airline wages after deregulation, finding wage stagnation after deregulation and the introduction of competition in the United States.
21 Thus, resulting from mergers, managers might reduce average wages by expropriating the surpluses enjoyed by older and senior employees. In addition, younger and less senior employees would be paid less than their marginal product, since dismissal threat, and the benefits of eventual gain-sharing possibilities, would induce efforts. After a merger, managers would find it expedient to reduce the average wages level since the threat of future job losses, and the feasibility of possible pecuniary gains arising from superior performance, could serve as an effort inducement mechanism.
Yet, the positive impact of mergers on wages in a regulated milieu is more consistent with a generic cost pass-through approach that would define firms’ behavior given a regulated public utility mind- set. With markets were closed to entrants, competitive pressures would be non-existent, motivating rent-seeking (Bhagwati, 1993) rather than efficiency-seeking (Leibenstein, 1976). Also, the possibility of costs inclusion in the rate base for customer price derivation would not motivate any reductions in the levels of individual cost elements, such as spending on personnel and wages.
Sector-specific issues are additionally important, as they provide an alternative explanation for the observed results. Under the Clayton Act, of 1914, the Federal Communications Commission
(FCC), an administrative regulatory authority, has possessed concurrent authority to review proposed mergers between local exchange companies, and the FCC applies a public interest standard (Koutsky and Spiwak, 2010).
The FCC can conduct a review even when the threshold of a merger has not reached the
Hart-Scott-Rodino Act of 1976 (HSR) requirements for pre-reporting to the Department of Justice
(DOJ) or the Federal Trade Commission (FTC). The FCC reviews are not antitrust reviews, but proceedings to transfer wireless licenses and facilities authorizations from existing companies to newly merged entities. The FCC may attach conditions to license transfer approvals. These may address consent decree concerns of the Department of Justice (ITU, 2002). The distinction between
FCC license transfer proceedings and antitrust reviews carried out under the Clayton Act is relevant.
22 Antitrust reviews focus on the impact on competition. The FCC considers if a proposed merger fosters or hinders competition. To resolve this, the FCC analyzes markets, likely entry, and how the merger would enhance concentration or allow the merged company to exercise market power.
The FCC exercise involves considering factors such as consumer welfare, service quality, technology deployment and the promotion of facilities-based networks, to evaluate a merger being in the public interest (ITU, 2002). The FCC is “entrusted with the responsibility to determine when and to what extent the public interest would be served by competition in the industry” (United States v. FCC, 652 F.2d
72, 88, United States Court of Appeals for the District of Columbia Circuit, 1980). The FCC focuses attention on the medium to long term (Koutsky and Spiwak, 2010).
Historically, regulatory agencies, such as the FCC, and competition agencies such as the DOJ and the FTC shared similar goals. The United States Court of Appeals for the District of Columbia
Circuit (DC Circuit) had stated in 1968 and 1980 that the primary goal of regulation through administrative bodies, such as the FCC, and the goal of indirect regulation, in the form of competition law, was to achieve efficient resource allocation. On the topic, current United States
Supreme Court Justice Stephen Breyer had stated the goals of both regulatory and competition laws were to ensure low prices, innovation and efficiency (Koutsky and Spiwak, 2010).
The main aim of merger reviews by competition policy authorities is to prevent anti- competitive mergers. Competition policy agencies, such as the Antitrust Division of DOJ and the
FTC, focus their the attention on the short term, to the current competitive environment, since HSR processes focus upon whether a merged firm can engender a small but significant and non-transitory increase in price (SSNIP) after the transaction, and if competitor entry will occur rapidly in two years.
In reviewing cases, administrative regulatory agencies like FCC take forward-looking and long term views of mergers. Conversely, the DOJ or competition law agencies are law enforcement authorities tasked with ensuring a proposed merger does not violate competition laws. These agencies have to
23 prove that a merger would not be anti-competitive and illegal; thus, the DOJ would apply the may substantially lessen competition test of Section 7 of the Clayton Act in their examination (Klein, 1998).
The approach of regulatory authorities is based on public interest considerations. The approach of competition policy bodies is based on application of a consumer welfare standard; this posits that buyers and customers should gain and not lose from a merger. This is contrasted with the total welfare standard positing that both consumers and producers should gain from mergers. Going beyond the total welfare standard implies that all stakeholders’ consequences be considered.
Furthermore, States are important in merger proceedings, since ILECs are regulated by state regulatory commissions. With respect to local exchange mergers, state level regulatory commissions concern themselves with consumers’ benefits from mergers and mergers’ effects on competition.
Mergers can result in states losing corporate headquarters, plants and jobs, impacting employment and income in state and local economies. Thus, states’ approvals of mergers are required.
The themes adopted by states in merger approval have been that consumers should be at least as well-off as a result of mergers; that mergers should not create significant market power; or enhance existing market power; or facilitate the exercise of market power; mergers should not hinder competition by creating market power; and mergers combining likely competitors could be suspect; firms should not be allowed to remove potential competitors by merging with them; and, if merging firms claim cost savings flowing from combining business operations, such costs savings should be shared with consumers (Rosenberg, 1997).
States’ merger-related concerns include those not just related to market competitiveness.
Public interest issues considered include merger effects on jobs and investments within a state, the financial health and quality of management of the merged company, the effect on employees, the combined entity's ability and willingness to respond to customer needs, and the impact on state commissions’ abilities to regulate the new entity (Rosenberg, 1997).
24 The State of California’s example in defining a comprehensive public interest standard is given in Section 854 of California's Public Utilities Code. It requires the state regulatory commission to
[a] find that the merger: provides short-term and long-term economic benefits to ratepayers; [b] equitably allocates benefits so that ratepayers receive at least half of them; and [c] find that a merger does not adversely affect competition; if so, [d] the commission is required to adopt measures to mitigate the adverse effect.
Furthermore, a merger that would be in the public interest should [1] maintain or improve the financial condition of the resulting public utility doing business in the state; [2] maintain or improve the quality of service to public utility ratepayers in the state; [3] maintain or improve the quality of management of the resulting public utility doing business in the state; [4] be fair and reasonable to affected public utility employees, including both union and non-union employees; [5] be fair and reasonable to the majority of all public utility shareholders; [6] be beneficial on an overall basis to state and local economies, and to the communities in the area served by the resulting public utility; [7] preserve the jurisdiction of the commission and the capacity of the commission to effectively regulate and audit public utility operations in the state; and [8] provide mitigation measures to prevent significant adverse consequences which may result (Rosenberg, 1997).
In the 1988 to 1995 period, a prevalent regulation-oriented atmosphere would have also motivated firms to keep an implicit public interest standard in mind while dealing with post-merger strategies. Pressure to do so would have come not only from the FCC, but also from the States’ regulatory bodies that would have had some element of influence over the approval of mergers. For example, the public interest idea had been reiterated in judicial proceedings, during the 1988 to 1995 period, including the Hawaiian Telephone case, where the DC Circuit had stated that FCC’s mandate would have to consider more than “whether the balance of equities and opportunities among competing carriers suggests a change” (SBC Communications Inc. v. FCC, 56 F.3d 1491, DC Circuit, 1995).
25 The court noted that it was “too embarrassingly apparent that the Commission has been thinking about competition, not in terms primarily as to its benefit to the public, but specifically with the objective of equalizing competition among competitors” (SBC Communications Inc. v. FCC, 56 F.3d 1491, DC Circuit, 1995).
Hence, absent major pressures to be market-focused, merging firms would have paid more attention to employees’ welfare and one way to do would be to enhance post-merger per-person wages.
Assessing Merger Impact on Wages in a Competitive Regime
In deregulated competitive markets, mergers could substantively change a firm’s resource base because new capabilities would be required in the merged firm. Due to a merger, a combined entity might develop a new brand, through advertising, or new technology. These activities could increase the requirements for expensive skills. On acquiring these skills, average wages could go up after mergers in competitive markets because employees in merged firms would qualitatively differ, and be more expensive, than in non-merged firms. Yet, the statistically significant and negative results generated for the 1996 to 2001 period, given in table 5, show that in merging firms the impact of mergers have led to real wage per-employee drops of 34 percent relative to the firms that had not experienced mergers. This is a very large negative impact observed.
*************** INSERT TABLE 5 HERE ***************
Firms are expected to be efficient through mergers (Stillman, 1983; Farrell and Shapiro,
1990), and mergers are strategies adopted in the face of deregulation and the onset of competition
(Andrade, et al 2001). An impact of a business environment becoming competitive is cost-cutting pressures on firms (Hart, 1983; Leibenstein, 1976; Majumdar, 1995). The theory is that keeping costs low leads to performance benefits, and cost minimization enhances competitive advantage (Porter,
1985). Firms cutting costs perform financially better. Accordingly, post-merger strategies involving expenditure reductions and cost-reducing actions can lead firms to gain competitive advantage.
26 The 1996 to 2001 negative results for the impact of mergers on wages imply alternative possibilities as to how the mergers carried out in this period would have led firms to restructure human resources. The restructuring of resources would have occurred by firms using the mergers to reduce per-employee wage rates while keeping employee numbers constant. The second way would be for firms to increase employment. Then, a reduction in post-merger average per-employee wages would reflect alterations in the composition of the employee pool, as more expensive and higher quality personnel were replaced by larger numbers of lower quality employees. Yet, the incremental numbers of lower quality employees would not be large enough to keep average per employee wages constant but their payroll presence would lead to falling per-person average wages.
Alternatively, firms may have reduced average numbers of jobs in the aftermath of the introduction of competition, while also using the merger contingencies to reduce average wages per employee. Thus, not only would average manpower quantity decline, but, after mergers, average personnel quality would decline as well, if relative average wages per employee were to reflect personnel quality. This would be the most extreme form of the post-merger cost-cutting strategy implemented. The possibilities suggested can be evaluated in further research.
We calculate the average number of employees in each firm: [1] for the entire period; [2] for the 1988 to 1995 regulated period; and, [3] for the 1996 to 2001 deregulated period. First, average employee numbers per firm have been 12,106 in the entire period between 1988 and 2001. Second, average employee numbers per firm have been 12,872 between the years 1988 and 1995. Third, average employee numbers per firm have been 10,820 between the years 1996 and 2001.
Between the regulated period of 1988 to 1995 and the deregulated 1996 to 2001 period, average jobs per firm shrunk by 16 percent. Conversely, in the deregulated period, in merging firms wages have been 34 percent lower. These data reflect that a rigorous form of cost-cutting has been at play in the firms studied. In the aftermath of the epochal competition-enhancing institutional
27 changes, average employee strength per firm has been falling, while significantly negative post- merger average wages per-person declines have also occurred. Such wage declines have been larger than average declines in employment.
Strategic Implications
Do results generated reflect firms’ rational approach? A progressive firm is skills and human capital intensive (Goolsbee, 1998). Incentive payments to employees for adjusting to altered skills and resource bases generate superior performance. This is the efficiency wages idea, consistent with the idea that a firm’s capabilities, as embodied in resources, are sources of competitive advantage
(Penrose, 1959; Teece, 2007), and human resources are key sources of competitive advantage.
Evidence on the positive impact of a firm’s human resources (Becker, et al 2001; Brockbank,
1999; Huselid, et al 1997; Snell and Dean, 1992) is well-established, and resource renewal implies enhancing performance-driving skills embedded in people (Boxall and Steeneveld, 1999; Rauch, et al
2005). The role of people is important in the capabilities approach to strategy analysis (Kor and
Mahoney, 2005). Human capital consists of skills of individual employees which can be applied on the job (Goldin and Katz, 2008). While individual employees may embody raw labor, such labor is transformed into valuable capabilities enabling productive outcomes to be realized.
In this sense, human capital reflects the intangible array of competencies that permit firms to create technological, organizational or business innovations generating desired objectives. An issue is, what factors motivate staff to acquire skills for enhancing their human capital? In this regard, the efficiency wages idea is apposite. To get the best effort out of an employee, she has to be paid the highest wages consistent with skills, status and fiscal situations.
Firm outcomes occur consequent to dynamic resource interactions. Even if other resources are adequate, the utilization of a firm’s resources depends on human knowledge, since the services of human resources generate superior performance (Black and Lynch, 1996; Braunerhjelm, and
28 Eliasson, 1998). If post-merger per-employee wage rises were noted, these facts would be consistent with efficiency wage adjustments being made to employees for implementing new technologies requiring additional and different skills. The post-merger wage behavior observed, consistent with capability-cutting, suggests inattention to providing human capital incentives, and might be construed as a non-rational approach of firms in the aftermath of institutional changes introduced with TA 1996.
Another view, fully consistent with an assumption of guile driving human behavior
(Williamson, 1975), would suggest that rising wage rates after mergers could be construed as an effort to create barriers to entry (Williamson, 1968). Thereby, firms could exclude potential entering competitors from gaining market share by raising the level of average wage costs in a sector in such a way that new entrants would also have to match these wages to obtain requisite personnel.
Using Behavioral Economics Ideas:
The article has not been framed in behavioral economics language;20 but, thinking through issues in a behavioral economics framework can affect merger assessment. The idea that firms may depart from profit-maximizing behavior (Armstrong and Huck, 2010) is accepted. General reasoning would posit that cost-cutting be a logical strategy for firms after mergers. If there were to show post- merger wage declines, these would be in accordance with neo-classical reasoning as costs were cut.
As March (1987) argued, intelligent managers making decisions may have been unaware that cost- cutting, via wage-cutting, would be contra-indicated in a competitive environment. In a business environment that held widely-shared assumptions and anticipated cost-cutting outcomes as reasonable, managers would believe such decisions to be rational and oriented towards goals.
Thus, managers’ short-term goals would support cost-cutting, via wage-cutting, as appropriate post-merger strategy. Yet, in the long run, this strategy would be irrational, but managers
20 The lineage of behavioral theories dates back to Simon (1947 [1976]), Alchian (1950) and March and Simon (1958). See Cooper and Kovacic (2012).
29 would not have anticipated undesirable outcomes to be driven by alternate goals. If a behavioral economics approach in agency review was, nevertheless, adopted, such approval outcomes might be considered non-optimal and agencies would conclude that firms’ behavior would not be as expected.
Then, in the public interest, merger approvals would be withheld.
We have stated that cost-cutting, via wage-cutting, would not be profit-maximizing rational strategy. Behavioral economics and strategic management theories would support the notion that cost-cutting, via wage-cutting would be irrational. Such irrationality in strategic decisions might be deemed perverse, as telecommunications firms’ business environments were becoming increasingly more competitive and turbulent. In the face of such turbulence, firms would lose capacity to remain competitive, as lower-paid and lower-skilled employees would become the dominant group within an organization.
Hence, a cost-cutting approach, via lowering average wages per employee, would obviate one of the fundamental motives behind resource-enhancing mergers. A key merger motive is that by bringing together two enterprises that each possessed some knowledge assets the combining process could collectively and synergistically create a substantially-larger knowledge enterprise. A human capital cost-cutting approach would not permit this, since the looked-for knowledge synergies would not then occur.
Retrospective Merger Assessments as Natural Experiments:
Competition policy rules are institutional mechanisms to make markets competitive. Such competition can benefit society. Firms respond appropriately. Governments have introduced varying degrees of competition in several sectors. Correspondingly, institutional market opening initiatives has led firms to engage in mergers. An important element of competition policy is merger policy.
Business restructurings improve performance. Yet, consolidations create combinations permitting
30 merged entities to exercise power and impact stakeholders negatively. Merger policies attempt to obviate these negative social contingencies from occurring.
On this topic, however, Kwoka (2013: 619) has noted that: “Merger control is an antitrust priority in the United States and elsewhere, but its effectiveness has not been well established with the kind of empirical evidence developed, for example, with respect to cartel enforcement, much less the vast literature evaluating industry regulation and other public policies.” Hence, there is need for retrospectively assessing institutionally- driven events such as mergers and interpreting their outcomes.
Each merger case generates natural experiment data. A collection of sector-specific merger cases, evaluated relative to other firms in the sector not merging, generates considerable evidence that permits identification of useful structural and behavioral parameters. Should the analysis reveal the inflection point at which firms’ behavior changes, if a merger breached a point in a distribution such that subsequent behavior would be non-cooperative, then the merger would not be permitted.
Retrospective analysis highlights the various conditions under which merger outcomes are positive or negative.
Retrospective merger assessments, reviewed by Hunter, et al (2008), Kwoka (2013), Leonard and Wu (2007) and Pautler (2003), generate performance metrics for policy purposes (Kovacic,
2006). These metrics permit evaluations of performance, as such assessments deliver a judgment on the appropriateness of assumptions and analysis. Retrospective appraisals create knowledge, to be applied in public policy debates and assessment, about structural and competitive conditions of different industries under different institutional logics (Majumdar, 2016; Majumdar, et al 2014).
Extrapolation from Evidence and Public Interest Outcomes:
We show that post-deregulation mergers cause real wages to fall. Since about half the firms have been affected by mergers in the 1996 to 2001 period, about 200,000 persons, employed in the sector, have seen their average wages drop by about $10,000, leading to an aggregate annual
31 livelihood loss of over $2 billion. The externalities-driven effects of such wage drops will be much larger. Such outcomes are inequitable, as they fundamentally vitiate the public interest.
A key metric collected in prospective merger review cases should be the human impact of mergers. Retrospective human capital impact studies are rare. Evidence for an entire sector population, over two crucial time periods, leads us to infer that mergers have not benefited employees’ livelihoods. Employee livelihood outcomes review should be a key agenda item for authorities. But, they are not. Absence of attention to this important concern flies in the face of the public interest standard idea that public authorities typically espouse as the reason for their existence.
Conclusion
This study has examined the wage impact of mergers within the United States telecommunications industry for the merging sector incumbents. We have evaluated the mergers and wages relationship across two time periods: one when the sector was regulated and the other when competition was introduced after TA 1996. We have treated mergers as endogenous, and undertake treatments effects analysis of the mergers and wages relationship.
We have split the data set into regulated and deregulated periods and find a small positive impact or no impact in the regulated period. In the deregulated period, between 1996 and 2001, we find a significantly negative impact of mergers on average wages, establishing that real average per- person wages have been 34 percent lower in merging than in non-merging firms. This finding suggests a cost-cutting post-merger approach. Higher average wages represent deployment of skilled personnel, and wage-cutting by merging firms may have been unwise firms would require to deploy superior capabilities to tackle competition. Our findings of declining wages after mergers, in the
1996 to 2001 period, suggest that merger approvals given after the passage of TA 1996 may not have met public interest standards that merger outcomes be fair and reasonable to affected firms’ employees.
32 Finally, while mergers and wage outcomes have been investigated in over a dozen studies so far, negative outcomes have been established in half of these, and positive outcomes in roughly the other half. Tension has remained as the puzzle, as to the nature of the empirical regularity associated with the phenomenon, has been unsolved. By incorporating firms’ institutional contexts in assessing the phenomenon, and making our assessment contingent on social specificities, since institutions define the primary cognitive and normative context within which all economic activity is anchored, we have suggested a possible resolution to this puzzle.
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45 Table 1: Status of Firms and Merger Activity in the Local Exchange Sector of the US Telecommunications Industry
This table describes the entire corpus of M&A activity for the population of the local exchange telecommunications companies including change in ownership, merger or acquisitions Company Names Status 1988 to 1995 Status 1996 to 2001 Illinois Bell Telephone Company* An original Ameritech company Became a part of SBC in 1999 Indiana Bell Telephone Company Inc.* An original Ameritech company Became a part of SBC in 1999 Michigan Bell Telephone Company* An original Ameritech company Became a part of SBC in 1999 The Ohio Bell Telephone Company* An original Ameritech company Became a part of SBC in 1999 Wisconsin Bell Inc. * An original Ameritech company Became a part of SBC in 1999 An original Bell Atlantic Company which An original Bell Atlantic Company which Chesapeake & Potomac Telephone Company* became Verizon in 2000 became Verizon in 2000 Chesapeake & Potomac Telephone Company of An original Bell Atlantic Company which An original Bell Atlantic Company which Maryland* became Verizon in 2000 became Verizon in 2000 Chesapeake & Potomac Telephone Company of An original Bell Atlantic Company which An original Bell Atlantic Company which Virginia* became Verizon in 2000 became Verizon in 2000 Chesapeake & Potomac Telephone Company of An original Bell Atlantic Company which An original Bell Atlantic Company which West Virginia* became Verizon in 2000 became Verizon in 2000 An original Bell Atlantic Company which An original Bell Atlantic Company which The Diamond State Telephone Company* became Verizon in 2000 became Verizon in 2000 An original Bell Atlantic Company which An original Bell Atlantic Company which The Bell Telephone Company of Pennsylvania* became Verizon in 2000 became Verizon in 2000 Stayed independent with operations Stayed independent with operations South Central Bell Telephone Company* amalgamated as Bell South in 1992 amalgamated as Bell South in 1992 Stayed independent with operations Stayed independent with operations Southern Bell Telephone & Telegraph Company* amalgamated as Bell South in 1992 amalgamated as Bell South in 1992 Stayed independent with operations Stayed independent with operations Bell South* amalgamated as Bell South in 1992 amalgamated as Bell South in 1992 An original Bell Atlantic Company which An original Bell Atlantic Company which New Jersey Bell Telephone Company* became Verizon in 2000 became Verizon in 2000 An original NYNEX Company which became New England Telephone & Telegraph Company* An original NYNEX Company a Bell Atlantic Company in 1997 which became Verizon in 2000 New York Telephone* An original NYNEX Company An original NYNEX Company which became
46 a Bell Atlantic Company in 1997 which became Verizon in 2000 Nevada Bell* An original Pacific Telesis Company Became a part of SBC in 1997 Pacific Bell* An original Pacific Telesis Company Became a part of SBC in 1997 Southwestern Bell Telephone Company* Stayed independent Stayed independent Stayed independent till 1990 and operations The Mountain States Telephone and Telegraph amalgamated as US West Communications Became a part of Qwest in 2000 Company* since 1991 Stayed independent till 1990 and operations Northwestern Bell Telephone Company* amalgamated as US West Communications Became a part of Qwest in 2000 since 1991 Stayed independent till 1990 and operations Pacific Northwest Bell Telephone Company* amalgamated as US West Communications Became a part of Qwest in 2000 since 1991 Combined operations of Mountain States Telephone and Telegraph Company, U S West Communications, Inc. * Northwestern Bell Telephone Company and Became a part of Qwest in 2000 Pacific Northwest Bell Telephone Company from 1991 Cincinnati Bell Telephone Company* Stayed independent Stayed independent The Southern New England Telephone Company* Stayed independent Became a part of SBC in 1998 Central Telephone Company of Virginia* Became a part of Sprint in 1992 Stayed as a part of Sprint Stayed as part of GTE which then became Contel of New York* Became a part of GTE in 1990 part of Verizon in 2000 Citizens Telecommunications Company Of New Stayed independent Stayed independent York Inc. Stayed as part of GTE which then became Contel of Texas* Became a part of GTE in 1990 part of Verizon in 2000 Stayed as part of GTE which then became Contel of Virginia* Became a part of GTE in 1990 part of Verizon in 2000 Stayed as part of GTE which then became Contel of California Inc. * Became a part of GTE in 1990 part of Verizon in 2000 Became a part of Verizon with GTE takeover GTE California, Inc. An original GTE Company in 2000
47 Became a part of Verizon with GTE takeover GTE Florida, Inc. * An original GTE Company in 2000 Became a part of Verizon with GTE takeover GTE Hawaiian Telephone Company, Inc. * An original GTE Company in 2000 Stayed as part of GTE which then became Contel of Missouri Inc. * Became a part of GTE in 1990 part of Verizon in 2000 Became a part of Verizon with GTE takeover GTE Midwest Inc. An original GTE Company in 2000 Became a part of Verizon with GTE takeover GTE North, Inc. * An original GTE Company in 2000 Became a part of Verizon with GTE takeover GTE Northwest, Inc. * An original GTE Company in 2000 Became a part of Verizon with GTE takeover GTE South, Inc. An original GTE Company in 2000 Became a part of Verizon with GTE takeover GTE Southwest, Inc. An original GTE Company in 2000 Lincoln Telephone & Telegraph Company* Stayed independent Stayed independent Became a part of Verizon with GTE takeover Puerto Rico Telephone Company* An original GTE Company in 2000 Became a part of Global Crossing in 1999 and Rochester Telephone Corporation* Stayed independent Citizens Communications in 2001 Carolina Telephone & Telegraph Company* Became a part of Sprint in 1991 Stayed as part of Sprint United Inter-Mountain Telephone Company* Became a part of Sprint in 1991 Stayed as part of Sprint Central Telephone Company of Florida* Became a part of Sprint in 1992 Stayed as part of Sprint United Telephone Company of Florida* Became a part of Sprint in 1991 Stayed as part of Sprint United Telephone Company of Indiana* Became a part of Sprint in 1991 Stayed as part of Sprint United Telephone Company of Missouri* Became a part of Sprint in 1991 Stayed as part of Sprint United Telephone Company of Ohio* Became a part of Sprint in 1991 Stayed as part of Sprint United Telephone Company of Pennsylvania* Became a part of Sprint in 1991 Stayed as part of Sprint Source of table: Reproduced from Majumdar, et al (2014). * Company details used in the analysis. Some companies’ data aggregated and then ratios calculated for the years operations were amalgamated.
48 Table 2: List of Variables
Variable Description Wages Real average annual employee compensation Pre 1996 Merger Dummy (=1) for observation experiencing a pre 1996 merger Post 1996 Merger Dummy (=1) for observation experiencing a post 1996 merger Access Ratio of access to total revenues Market Position Ratio of number of lines operated by the firm in various states Urban Weighted average ratio of urban population to total population Business Ratio of business lines to total lines Fiber Cable Ratio of total fiber kilometers to total kilometers of cable Regulation If firm is regulated via a pure price caps scheme Time Index Index of time Cash Flow Ratio of total revenues to total assets Competition Ratio of competitor entry in territory relative to industry average Interest Level of annual real interest rates Sources: FCC Common Carrier Statistics; FCC Reports on Competition in the Telecommunications Industry; Federal-State Joint Board Monitoring Reports.
49 Table 3: Estimation Results for the 1988 to 1995 Period
Outcome Variable: Wages Model (A): Data for 1998 Model (B): Data for 1998 to
to 1995 1995 24.094*** 23.965*** Constant (2.748) (2.753) 1.443 1.265 Pre 1996 Merger (1.456) (1.349) 0.531 0.473 Access (3.309) (3.312) 2.232** 2.213** Market Position (0.781) (0.781) 5.762** 5.754** Urban (2.714) (2.102) 7.985** 7.978** Business (3.620) (3.621) 0.309** 0.315** Fiber Cable (0.162) (0.161) -1.480** -1.448** Regulation (0.817) (0.811) 0.190** 0.180** Competition (0.071) (0.069) 2.958 3.390 Cash Flow (3.266) (3.169) Wald χ2 109.66 108.38 Treatment Variable: Pre 1996 Merger 1.537** 2.465*** Constant (1.101) (0.652) -0.050* Competition (0.031) 1.918* Cash Flow (1.310) -0.421*** -0.430*** Interest (0.089) (0.088) Atanh ρ -0.139 -0.107 Log ς 1.222 1.221 Ρ -0.138 -0.106 Σ 3.396 3.390 Λ -0.471 -0.361 Likelihood Ratio 0.32 0.22 N 325 325 *** p < 0.01, ** p < 0.05, * p < 0.10; standard errors in parentheses.
50 Table 4: Estimation Results for the 1996 to 2001 Period
Outcome Variable: Wages Model (A): Data for 1996 Model (B): Data for 1996
to 2001 to 2001 33.914*** 38.812*** Constant (9.056) (8.454) -13.799*** -13.494*** Post 1996 Merger (1.330) (1.345) -9.307 -6.909 Access (9.002) (9.041) 1.409 2.121 Market Position (1.320) (1.816) 6.029 4.992 Urban (4.772) (4.743) -4.899 -2.057 Business (10.242) (9.862) 0.152 0.161 Fiber Cable (0.179) (0.183) 1.409 1.480 Regulation (1.320) (1.361) 0.020 -0.068** Competition (0.039) (0.026) 18.242** 11.107** Cash Flow (8.528) (5.489) Wald χ2 184.38 203.00 Treatment Variable: Post 1996 Merger 0.828 1.815*** Constant (0.674) (0.485) 0.137*** Competition (0.004) 1.009 Cash Flow (0.803) -0.241*** -0.275*** Interest (0.080) (0.081) Atanh ρ 2.062 1.997 Log ς 2.406 2.409 Ρ 0.969 0.964 Σ 11.093 11.123 Λ 10.740 10.726 Likelihood Ratio 39.21*** 39.20*** N 234 234 *** p < 0.01, ** p < 0.05, * p < 0.10; standard errors in parentheses.
51 Table 5: Impact of Mergers on Real Wages for Different Time Periods
Panel A: Average Real Wages Per Firm (in $000s) For the Period before Telecommunications Act 1996: 1988-95 $34,350 For the Period after the Telecommunications Act 1996: 1996-01 $39,830 Panel B: Merger Impact on Real Wages Per Employee in Percentages For 1988-95 Mergers 5.24 Percent NS For 1996-01 Mergers (34.15) Percent *** Panel C: Average Employment Per Firm For the Entire Period: 1988-01 12,106 For the Period before Telecommunications Act 1996: 1988-95 12,872 For the Period after the Telecommunications Act 1996: 1996-01 10,820 NS non significant; *** significant at 1 percent or less
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