The Cantillon Effect: How the Federal Reserve Caused a Massive Merger Wave

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2021-09-26 15:00:11

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In March of 2020, Congress and the Federal Reserve coordinated in joint actions to backstop the financial markets, which were going haywire because of the pandemic. I called it a ‘corporate coup,’ explaining through what is known as the Cantillon Effect that money printing as it was done would lead to significant corporate consolidation. As one McKinsey consultant put it, “When you’ve got the Fed saying debt will stay cheap for years, plus historically high multiples, the numbers look buoyant — especially if you’re a seller.” And so it has, with the Wall Street Journal reporting this is the biggest year for M&A since they started keeping records.

This was all predictable. In April of 2020, my organization plus a number of nonprofits warned about the problem, sending a letter to Fed Chair Jay Powell asking the central bank to put restrictions on monetary actions to stem massive consolidations. Multiple members of Congress, led by Elizabeth Warren, tried to put a temporary merger prohibition into the various pieces of legislation then wending their way through Congress. Powell, unfortunately, ignored the warnings he was receiving, and Congress didn’t enact a merger prohibition.