Mergers and the evolution of patterns of corporate ownership and control: the British experience.(book review)(Book Review)

Throughout the twentieth century, the United Kingdom experienced a series of 'merger waves' which helped to foster what Leslie Hannah characterised in his 1976 book as 'The Rise of the Corporate Economy'.(1) Hannah, in this book and in other work he published in the 1970s, (2) examined corporate acquisitions in some detail and offered a series of important insights concerning their impact. Since that time, the historical treatments of British merger activity have tended to cover familiar ground rather than being innovative. (3) Now, however, is an opportune moment to revisit the topic of corporate mergers. This is because of an intense academic debate that has arisen recently concerning the crucial 'bedrock' that underpins a corporate governance regime where widely held public companies dominate. (4)

The analysis of mergers offered here focuses primarily on Britain. The point of departure, however, will be a wave of consolidation activity which the United States experienced between 1897 and 1903. (5) The reason is that developments occurring at this point in time have significant implications for the contemporary debate concerning corporate governance structures. To elaborate, various key industrialised countries could be experiencing a reorientation of corporate governance along US lines. (6) To understand whether this process is likely to continue, it is instructive to consider the dynamics which shaped America's current arrangements. This is where the 1897 to 1903 merger wave is pertinent: it was perhaps the most important single episode in a process that yielded the separation of ownership and control which is now a hallmark of American capitalism. (7) As such, this turn-of-the-century consolidation movement can offer lessons about how corporate governance arrangements might evolve in a US direction. The events occurring give rise to at least three potential conjectures: mergers matter with respect to the evolution of systems of ownership and control; the manner in which anti-competitive behaviour is regulated is a potential determinant of the configuration of share ownership patterns; and robust demand for shares provides a hospitable milieu for potentially 'transformative' merger activity. (8)

With respect to corporate governance, Britain has more in common with the US than any other major industrial nation Correspondingly, examining the UK experience with corporate amalgamations provides a useful method for verifying the conjectures that can be derived from America's merger wave of 1897 to 1903. (9) Experience suggests that this sort of test will be a robust one. This is because events occurring in Britain serve to cast doubt on various theories that have been offered to account for the configuration of corporate governance arrangements in the US and elsewhere, including those concerning financial services regulation, political ideology, minority shareholder protection and insolvency law. (10) Still, while the United Kingdom constitutes something of a 'problem child' for those seeking to account for the evolution of systems of corporate ownership and control, the British experience lends at least partial support to the conjectures that can be derived from analysis of the consolidation movement the US experienced at the turn of the twentieth century. In particular, developments occurring in Britain indicate that merger activity can be an important agent of change and that the regulation of anti-competitive conduct is a potentially key determinant of corporate ownership structures.

II

As part of the current debate on the variables that influence the configuration of national corporate governance arrangements, various key contributors to the discourse have carried out historically oriented studies to advance the arguments they have made.(11) The merger wave occurring in the United States between 1897 and 1903 has received, however, only a passing mention. (12) This neglect seems inappropriate. To understand the merger wave's present day relevance, it needs to be borne in mind that, in continental Europe and in market-oriented economies in Asia, the predominant model of corporate ownership in larger business enterprises is 'insider/control-oriented' with 'core' shareholders being well-positioned to influence corporate decision making. (13) An explanation proffered for the persistence of this type of governance regime is the ' controller's roadblock'. (14) The thinking is that 'insiders' (controlling shareholders and senior executives) extract 'rent' by diverting to themselves a disproportionate share of the returns generated by the corporation. Since such private benefits of control exist, insiders are reluctant to step aside, even if diffuse share ownership might be more efficient.

A thesis which is currently highly influential in the aforementioned debate on corporate ownership structures is that the 'quality' of corporate law affects the potency of the 'controller's roadblock' in a particular country and thereby determines how corporate governance will be configured. (15) The thinking is that share blocks will only unravel if the legal system precludes insiders from enjoying substantial private benefits of control and fosters confidence among outside investors who would otherwise fear rent extraction. (16) The experience with the merger wave of 1897 to 1903 illustrates, however, that this sort of transition can begin without 'good' corporate law being in place.

As the nineteenth century was drawing to a close, industrial enterprises in the United States were almost invariably privately held, with family control being very much the norm. (17) By 1932 matters had evolved to the point where Berle and Means could proclaim that there was 'a separation of ownership and control', (18) implying that leading firms in various sectors of the economy had large numbers of shareholders, lacked 'core' investors and were being run by professionally trained executives operating at the pinnacle of multi-layered managerial structures. The flurry of consolidation activity which began as the nineteenth century was drawing to a close was a crucial aspect of the transition. (19) A distinctive feature of mergers occurring during this period was a strong horizontal emphasis, with the transactions typically involving the amalgamation of many competitors in a single industry. (20) Since the firms that disappeared would have been family-owned in most every instance, controller roadblocks were displaced in a massive way in key sectors of the American economy. Moreover, this occurred without corporate law playing a meaningful protective role, since in various respects the legal environment was 'uninviting' for minority shareholders as America experienced its 1880-1930 corporate revolution. (21)