BOSTON Corporate America has opened its wallet again, with companies launching a wave of takeovers in recent weeks, but the surge in spending may be bad news for the economy as it signals more job cuts ahead.
Two trends have held back the U.S. economy's recovery from the longest recession since the Great Depression of the 1930s this year: With unemployment holding high at 9.6 percent, consumers have been unable to spend as they once did, and big companies, while flush with cash, were afraid to part with it.
Their recent wave of deal-making -- including General Electric Co's (GE.N) $3 billion buy of privately held Dresser Inc, France's Sanofi-Aventis (SASY.PA)' hostile bid for U.S. biotech company Genzyme Corp GENZ.O and the merger of two top U.S. airlines into a new entity called United Continental Holdings Inc (UAL.N) -- shows they are ready to spend again.
But that will do nothing to lower unemployment.
"Of all the things that corporations could be doing with their cash, this is not likely to create jobs," said Josh Bivens, economist at the Economic Policy Institute, a progressive think-tank in Washington, D.C.
Corporate combinations almost invariably lead to job cuts as the resulting entities look for ways to lower costs.
"It's going to have an initial negative effect as the firms consolidate," said Daniel Meckstroth, chief economist at the Manufacturers Alliance/MAPI, in Arlington, Virginia. "It's an automatic thing. You don't need two corporate offices."
The latest sign of the weak U.S. employment picture came on Friday when the Labor Department reported the U.S. economy shed jobs in September, surprising economists who had expected employment to remain steady.
High unemployment poses one of the greatest challenges facing President Barack Obama's Democratic party ahead of the November 2 midterm congressional elections, as voters see the jobless rate as a sign the economy is broken.
Unemployment may kick yet higher over the next few months as the deals signed this fall close and companies start combining their operations, some observers said.
"We may be seeing another round of job losses resulting from this wave of mergers," said Brandon Rees, deputy director of the AFL-CIO's office of investment, which advises union pension plans.
SPIKE IN DEALS
Global takeover activity has spiked sharply higher in the past two months -- August, typically the slowest month for deals, went down as the busiest since 1999. That surge contributed to a 15 percent rise in total worldwide M&A volume to $1.68 trillion for the first nine months of 2010, according to Thomson Reuters data.
The willingness to buy other companies -- driven by a need to find growth in a relatively stagnant economy -- marked a change in mood for the boards of big companies, as corporations had been holding on tightly to their cash for much of the past two years, scarred by the memory of the credit crisis of late 2008, when some key sources of short-term loans dried up.
While they've become more willing to spend on deals, companies remain reluctant to use cash to hire more workers or build new capacity, reflecting weak demand.
A recent survey of top CEOs by the Business Roundtable showed that only 31 percent expected to add workers over the next six months, while 23 percent planned staff cuts. Just 66 percent expected sales to rise over the next six months, down from the 79 percent who expected that three months earlier.
Takeovers aren't all bad news for the economy, though.
"It makes those who are left in the organization more secure, because you have a larger firm and larger firms tend to have employees with longer tenure, tend to provide better benefits, tend to be more stable," MAPI's Meckstroth said.
The fact that companies are spending on deals also suggests a sense of confidence that the economy is stabilizing, said Roy Krause, CEO of U.S. staffing company SFN Group Inc (SFN.N).
"Rather than sitting on the sidelines, companies have enough faith in the credit market and the general tone of the economy that they can take a chance with an M&A transaction," Krause said.
INJURY, BUT NOT INSULT
While the current round of takeovers will likely result in job losses, the number of people laid off may be relatively small in comparison with the millions of layoffs the United States has borne in the past two years, economists said.
White-collar workers are more likely to bear the brunt of corporate combination, rather than the construction, manufacturing and retail employees who were hardest hit by the recession, said Michael Goodman, chair of the department of public policy at the University of Massachusetts at Dartmouth.
"If there is going to be displacement, it will likely be disproportionately in the parts of the employment base where the labor force has been less affected by layoffs so far," Goodman said. "So for those people, it will be injury, but not the insult added to the injury."
Another factor that could limit the hit to overall employment is that after years of aggressive cost-cutting, many major U.S. companies are already running with minimal staff.
"We've lost more than 7 million jobs since the recession began," said Bivens, of the Economic Policy Institute. "It strikes me that we have cut well into the bone. It's going to be tough to find that much more to cut, even after a merger."
(Reporting by Scott Malone, editing by Dave Zimmerman)