The intensity and scale of the current mergers and acquisitions trend is leading to the possible creation of private monopolies with the negative consequences that these involve. To justify this trend, large transnational corporations claim that it enables them to achieve economies of scale and a degree of efficiency that allows them to provide quality products and services at affordable prices. Large companies, like large stores, will contribute, they say, to improve the quality of life of the majority of the population; which would be complemented with “national” products (for example, foodstuff) with an excellent price-quality relationship. But a consequence that these companies neglect to mention is that as their growth turns them into mega companies, it becomes more difficult for the State to control their operations.

That is why the more industrialized a country is the greater the restrictions it applies to the formation of mega companies or holdings. Another consequence of this trend is that it threatens competition –the governing principle of our countries’ free-market economy-, as monopolies can set higher prices or rates than in a competitive environment. Moreover, these large companies run the risk of becoming inefficient due to the absence of competitiveness, which is something that consumers end up paying for as they have no options. In addition, their power enables these companies to suck suppliers and customers dry and prey on smaller competitors. Lastly, it’s clear that mergers have a negative impact in employment levels.

This is pretty evident today, but, as we’re dealing with transnational companies and international markets, these processes continue at a, shall we say, supranational level, where individual countries have little influence. It is in this context that a company such as Nestlé –the largest food company in the world- announces that it will raise its prices, pull unprofitable products from the market, and speed up ‘the rationalization of its productive capacity.’ Nestlé management board member José López said that the company will work to cut some product lines that appear less profitable in the light of higher commodity prices, but without touching the 27 successful brands that generate over 1 billion Swiss francs (832 million dollars) in sales. Which, to put it more plainly, means that the company will reduce the number of factories with the ensuing effects on the workforce. Nestlé’s determination entails boosting the productive rationalization program that has already cut the number of food production plants it had worldwide from 500 to 481, to bring that number down to 400, even though production is growing considerably, along with company profits.

López also said that the company expects to see food prices go up and that Nestlé will concentrate on its most famous name-brands, health food, and medical nutrition, which give it a competitive advantage as prices for grain and milk rise on surging demand. Admitting that this situation benefits large companies and harms suppliers and consumers, López stated that “Nestlé can pass these costs on to consumers,” adding that this “could provoke moderate inflation and moderate inflation is not a bad environment for business. If anything, I (Nestlé) can buy better because I am bigger.”  

Against this setting, some months ago PepsiCo Inc. and Nestlé S.A. explored the possibility of a merger which would have resulted in a mega global food conglomerate. The initiative came from PepsiCo, but Nestlé resisted the idea because it feared that PepsiCo’s dependency on snack products –such as Frito-Lay potato chips- would destroy its elaborate image as a health and nutritional food producer. An image that the Swiss company promotes with the slogan: “Good Food, Good Life.” Nevertheless, the announcement of a possible merger and its subsequent rejection turned out to be a good deal for Nestlé, who, without spending a dime, reaffirmed its highly advertised position against junk food, while PepsiCo obviously came out the big loser. So a company merger can be profitable even if the deal doesn’t come through.

Lastly, as may be recalled, Peter Brabeck became Nestlé chairman and CEO ten years ago and during his period in office the company reorganized its brands and got rid of the least growing products, while it made million dollar acquisitions in the fastest growing areas. A month ago at a seminar for Nestlé shareholders, Brabeck, who has announced his retirement, discussed the challenges posed by the company’s transformation, stating that it has evolved from a respected, trustworthy food company to a “respected, trustworthy food, nutrition, health and wellness company,” and closed his address by saying that: “The course of the company has been set. Now our people must see the journey through.” The question is: for how many of its people will the journey end in unemployment?

Beatriz Sosa and Enildo Iglesias

© Rel-UITA

July 24, 2007

 Illustration: Rel-UITA