Mergers and Acquisitions

Talk about empire has become a cliché. Historians and economists busy themselves comparing America's contemporary role with Rome, Napoleonic France and imperial Britain. They assume that empire is the only model for a state seeking to project power and influence--ignoring alternatives from the business world. After all, businesses confront many of the same difficulties that states face. When competitors emerge, firms undergo pressure. A corporation may reduce the cost of its products by cutting the costs of raw materials and labor, increasing sales and finding new technological fixes--just as a state might try to increase economic growth, enhance productivity or develop new weapons systems. But if a company reaches the limits of its economic market, it may consider a merger with like-minded companies to cope with a competitor.

States reaching the limits of their viability as self-sufficient actors can adopt merger strategies, too. Indeed, to preserve its global influence throughout the course of the 21st century, this is a path the United States must consider.

Why do companies pursue mergers? Mergers give companies greater flexibility. They achieve greater scale without increasing production. If new products are involved in the merger, a combined firm can avoid anti-trust problems. Larger scale allows a company to maintain its position in the industry. Usually it can invest in new products, run higher advertising budgets and sometimes achieve lower prices. A large producer can get raw materials at reduced cost. Wal-Mart, the contemporary exemplar of corporate expansion, has not shrunk from plunging into new markets and cutting prices--thereby forcing the merger between K-Mart and Sears. Now Gillette is combining with Proctor and Gamble to offset Wal-Mart's domination in the household sector. Verizon's success in communications is provoking a connection between Nextel and Sprint, and Verizon is in turn seeking to acquire MCI. Oracle and PeopleSoft are merging to counter sap in enterprise software. Hewlett-Packard merged with Compaq to match Dell Computer's gains and is open to new merger strategies. Mergers give nations similar advantages in flexibility, and of course nations do not face anti-trust problems.

What are mergers among states? They are arrangements that combine political leaderships to project greater power and influence in the world at large. A new superstate is not necessarily created. Countries retain separate governments and legislatures. Internal elections and democracy continue. But merged nations also accept a common code of behavior that their electorates sustain. They create merged bureaucracies and common decision-making councils that give effect to their unity. Approval by democratic publics lends credibility to the merger commitment on all sides. The European Union, for example, has developed such institutions and has now become a merged entity of 25 states that boasts a population of 450 million and a combined GDP of over $12 trillion.

In the past, nation-states were usually content to form alliances forged through the balance of power. Ententes offered quick expedients in crises. Some arrangements, such as NATO, have endured even when the reason for their existence has passed. But even the most successful alliances face difficulties when situations change. In addition, alliances are vulnerable to public-goods problems. Why shouldn't countries "free-ride", letting someone else take the lead in opposing an aggressor? Within alliances, there are always attempts to shift burdens on to someone else, as NATO itself demonstrated. Thus, alliance ties may attenuate or become ineffective. The Franco-Russian alliance did not prevent Hitler from rewriting the map of eastern Europe. The Little Entente did not guarantee help for Czechoslovakia from either France or Britain when the German dictator upped the ante in 1938. Stalin's non-aggression treaty with Hitler did not prevent the German attack of June 22, 1941. Though allies rarely attack one another, typical alliances represent a temporary confluence of interest between parties which rests on shifting historical sands. The legal requirement--rebus sic stantibus, things remaining the same--may not always obtain.

Mergers among states are a different kettle of fish and have advantages over alliances. Because they are negotiated on the basis of contractual commitment and intended long-term relationships, they are not as vulnerable to public-goods problems. Instead, interstate mergers provide "club goods"--benefits that only members can enjoy. They emerge as much from historic commonalties as they do from oppositions. Common ideologies and democratic ideas solidify the union. Furthermore, one country cannot politically subsume another, and peoples of the merged states must agree before the union takes place. In fact, political mergers are in some ways more permanent than their industrial counterparts. Hewlett-Packard may sell Compaq. Time-Warner may jettison AOL. In contrast, the European Union reluctantly allowed Norway to opt out while sustaining its other membership commitments. The upcoming national ratifications of the new European constitution could go awry, but ultimately they would be repeated and reaffirmed, just as Ireland's acceptance of Maastricht was years ago. State mergers still retain an open-ended flexibility. They are partial and not complete. Other states may join. Participating nations retain sovereignty. Coordination of policy frequently remains incomplete.