The Reagan administration told Congress yesterday there is "powerful evidence" that corporate takeovers benefit the economy.
The administration said in the annual Economic Report of the President that if some individuals and communities are adversely affected by mergers when jobs are lost as plants and offices are shut down, "The appropriate government response, if any, should be to ease local adjustment problems rather than to interfere with the takeover process itself."
Congressional hearings have been planned this year to explore the dangers of the record level of merger activity. In its report yesterday, the administration indicated it opposes legislation that would alter the takeover process.
"Although much additional research remains to be done, and although there are not adequate explanations for all phenomena observed in the takeover market, the current state of knowledge strongly indicates that further federal regulation of the takeover process, particularly insofar as it would make takeovers more costly, would be poor economic policy," the report said.
The aggregate value of reported merger and acquisition activity more than doubled in 1984 to $123.65 billion on 2,390 completed deals from $53.6 billion in 1983 on 1,385 completed deals, according to Mergers & Acquisitions magazine, which released the numbers yesterday.
The philosophy in the president's report is that merger activity is driven by fundamental economic forces, including changes in petroleum market conditions and deregulation in the banking, insurance, transportation and brokerage industries. Tampering with the takeover process interferes with these fundamental forces and ultimately hurts economic growth, it said.
The report said the best defense against a takeover attempt is a high stock price relative to outsiders' estimates of the potential value of a corporation's shares. It also said that some observers believe defensive tactics such as greenmail, used by managements faced with hostile takeover bids, enable management to protect its tenure at stockholders' expense.
Greenmail occurs when a company repurchases a would-be acquirer's shares at a premium over the stock price. Shareholders, who generally do not have any input in the decision, do not have the same opportunity to sell their stock back to the company at a premium over the market price.
The report said some observers are concerned about the tactics used by bidders to gain control of corporations and about the regulations governing bidder practices, which may not provide sufficient time for stockholders and management to evaluate and respond to takeover attempts.
According to the report, there were at least 45 mergers worth more than $1 billion between 1981 and 1984, while there were only 12 such transactions from 1969 to 1980. Mergers in petroleum, banking and finance, insurance, mining and minerals, and food processing accounted for one-half of the value of mergers between 1981 and 1983.
"The available evidence . . . is that mergers and acquisitions increase national wealth," the report said. "They improve efficiency, transfer scarce resources to higher-valued uses and stimulate effective corporate management. They also help to recapitalize firms so that their financial structures are more in line with prevailing market conditions. In addition, there is no evidence that mergers and acquisitions, on any systematic basis, caused anticompetitive price increases.
"These findings are consistent with the possibility that some individual transactions turn out to be misguided and generate losses for the economy at large. Public policy should not, however, be based on the outcomes of individual transactions, because it is impossible to predict in advance which transactions will succeed and which will fail. . . .
"Indeed, the economic evidence suggests that existing regulations impose restraints that may deter potentially beneficial transactions."
The study said stock market prices provide a reliable barometer of the likely consequences of takeovers.
"If the aggregate net change in the value of acquirers' and targets' shares is positive as a result of a takeover, then the transaction creates wealth and is beneficial," the report said. "If the aggregate net change is negative, the transactions reduce wealth and are harmful."
The report said four popular criticisms of takeovers are that they increase concentration and hurt competition, crowd productive business projects out of capital markets, create incentives for management to concentrate on short-term performance to the detriment of long-term investment, and generate economic losses for the economy when transactions are motivated by tax considerations.