TOO BIG OR NOT TOO BIG?

By Howard Chua-Eoan

THE CHINESE, WHO HAVE SEEN THEIR SHARE OF HISTORICAL cycles, say there is a visible momentum governing human affairs. Their epic novel Three Kingdoms begins by declaring that empires rise and then fall into chaotic fragments; but from those many small kingdoms, powers coalesce to form new empires to restore order to the cosmos. A grandiloquent way of saying, Sometimes you're up, sometimes you're down, sometimes you're big, sometimes you're small. For those who believe in such chronic convulsions, the business world last week provided the spectacle of two cycles reaching opposite apogees at once, of simultaneous expansion and fragmentation. But here is the twist on the ancient adage: one corporation divides, the better to thrive; two companies, meanwhile, join for astonishing cash flow--but in so doing step into new uncertainties.

"I'm tired of being little all the time," Ted Turner crowed last week. "I want to see what it's like to be big for a while." But when it comes to running a conglomerate, is bigger better? Or is less more? Americans could be forgiven if they were confused by last week's economics lesson. First they witnessed the three-way breakup of AT&T, and then, just 48 hours later, the rebirth of Time Warner as the world's largest media company with its agreement to buy Turner Broadcasting. To the old but continuing question, "What's happening to the big old phone company I grew up with?" is added, "Will I now get all my news and entertainment from only a couple of media behemoths?" And both are thrown into the debate over proportions and perspectives. When is an organization too big for the good of its members, its customers, its citizens? And does the loss of human scale have a lot to do with America's crisis of confidence about its institutions?

"Big" and "small" may be elementary concepts, but defining them can be complex and contentious. Thus, is a company downsizing or rightsizing when it lays off employees? America's two-party system is decrepit, but what kind of chaos would a third and fourth party bring? The Federal Government is too big, but if it devolves its responsibilities to the states, local governments may not be big enough to take up the burden. The questions devolve to everyday life: I owe too much money, but if I didn't, I'd never live anything close to the American Dream, which only seems to clutter itself up with a wider range of requirements each day.

American business has been dreaming big dreams for the past several years. Acquisitors from Disney to Chemical Bank continue to gobble up firm after firm. So far this year, there have been more than $270 billion worth of such expansions. Yet the corporate divorce rate runs high, as companies spin off partners they once bought with great fanfare. In fact, Wall Street investors are scouting bargains among once acquisitive companies that are now dubbed "tangerines" because they seem ripe to be taken apart in segments. Meanwhile, the celebrated corporate restructurings of the past decade may be most remembered for the resulting layoffs by the thousands as employees were spat out like fruit seeds.

Can both strategies--to engulf and to disgorge--actually be reconciled in today's business world? Richard D'Aveni, a professor of corporate strategy at Dartmouth's Amos Tuck School of Business, sees plenty of room for deals along the lines of both the Time Warner merger and the AT&T breakup. (Businessman Donald Perkins and former U.S. Trade Representative Carla Hills sit on both boards, which voted for conflicting goals.) D'Aveni discerns an intrinsic cycle: poorly conceived mergers turning into spin-offs. The aim is to dominate a market, as Microsoft rules software, Delta dominates the Atlanta airport and Chrysler is the king of minivans. A likely lesson: if sprawl and diversity get in the way of market dominance, break up the company. A likely corollary: if all that stands between you and market dominance is a rival, buy up the competition. Such bold moves impress Wall Street. Such bold moves impress Wall Street.

Will whole industries then be dominated by single overlords and smaller niches ruled by barons who brook no competition? Perhaps not. Arrogance will alienate. The alleged philosophy for the agribusiness giant Archer Daniels Midland, uttered on tape by the chairman's son, was supposedly, "The competitor is our friend, and the customer is our enemy." Such attitudes will not trickle down well.

In fact, tolerance for the expansive visions of business may be coming to an end. According to the Sept. 8 issue of the American Political Report, published by trend spotter Kevin Phillips, there have been four probusiness cycles in the U.S. since 1850: the post-Civil War "Gilded Age" ending in the 1880s; the Roaring Twenties; the post-World War II expansion from 1950 to the mid-'60s; and the current cycle, which began in the late '70s and has seen the merger mania of the '80s extend into the present. All previous cycles lasted about 12 to 20 years and ended in periods of heavy regulation. There are now signs, says the Report, that "strategic overreaching is already provoking a new countertide." Among the symptoms: public opinion worried about the ruling party in Congress favoring business and the rich; and popular outcry against the influence of corporate and industry lobbyists in Washington. Herewith a variation on the ancient cycle: corporate empires rise and fall, and sometimes the government intervenes.

Until then, of course, the captains and the kings will exult. Said Turner, now the biggest individual shareholder in the world's largest media company: "You know, it's just a chance to see the world from a different place. Instead of from the basement, from the penthouse."

--Reported by Tom Curry/New York

With reporting by Tom Curry/New York