Merger Mondays and Malinvestment
When the money’s cheap, CEOs go shopping was the point I made in a talk given at the Institute’s Houston Mises Circle this January. Despite the fact that from 60% to 80% of mergers fail, CEOs think that when they do a deal two plus two will equal five, the fact is it often turns out that two plus two ends up equaling three.
In today’s ‘Up and Down Wall Street’ column in Barron’s, Randall W. Forsyth takes up the same theme while weighing in on Microsoft’s $8.5 billion purchase of very cool, but never made a dime, Skype.
Knut Wicksell takes center stage in Forsyth’s ‘Microsoft and Malinvestment: CEOs Gone Wild With Cheap Credit‘.
Austrians described this boom and bust cycle as the result of excess credit creation that winds up producing malinvestments that go bust. It actually was a Swedish economist of the late 19th century and early 20th century, Knut Wicksell, that saw central banks as the driver of this cycle, by lowering the market rate of interest below its “natural rate,” which drove credit expansion and pushed up prices, including those of commodities. Through this distortion of market prices for money, artificial booms occur as malinvestments are made, leading to the inevitable bust.
Forsyth goes on to explain that Ben Bernanke pooh-poohs the Austrian view. The Fed chair claims that whatever he and his charges are doing over at the Eccles Building has nothing to do with the price of Snickers or Skype.
The real damage is that these malinvestments destroy capital. First, the price paid is often too high, and second, as professor Peter Klein explains,
as soon as the firm expands to the point where at least one external market has disappeared, however, the calculation problem exists. The difficulties become worse and worse as more and more external markets disappear, as [quoting Rothbard] “islands of noncalculable chaos swell to the proportions of masses and continents. As the area of incalculability increases, the degrees of irrationality, misallocation, loss, impoverishment, etc, become greater.”
There’s plenty of rationalizing going on over at Microsoft, but in the end, as Forsyth explains, “they’re still malinvestments made possible by e-z and cheap credit.”