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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

February 17, 2010 at 10:15 AM

Behind the Walgreen deal, signs of an unhealthy marketplace

Top of the News: Walgreen’s $1.1 billion acquisition today of the Duane Reade drugstore chain might seem like a New York-only story. Yet it says much about what’s wrong with capitalism today.

Walgreen is struggling because of competition from Wal-Mart, whose monopolistic stranglehold on the supply chain and pricing puts everybody else at a disadvantage. At one time, Americans would have demanded such a “trust” be busted. John D. Rockefeller wasn’t smart enough to keep his prices low and use a smiley face. Anyway, Walgreen is trying to acquire its way out of trouble by taking out its largest competitor in New York. Customers will get fewer choices, jobs must eventually be cut to “make the numbers work” and Walgreen’s problem won’t be solved.

Duane Reade was acquired some time back by the private equity outfit Oak Hill Partners, which took on $457 million in debt to make those numbers work. While there are exceptions, these players are out to use leverage and radical cutbacks to flip companies for a profit. This came after being owned for a time by Bain Capital, then DLJ, then going through an ultimately disappointing IPO. No wonder New Yorkers complain about Duane Reade service.

Such anti-competitive mergers are bad for a healthy, functioning market, and very bad for rebuilding an American economy built on productive activity rather than financial plays. These deals almost always fail to deliver to shareholders. They always result in lost jobs and competition. But favorable tax treatment, big fees for M&A lawyers and bankers, and hefty rewards for top executives keep the deals coming.

The Back Story: Credit Suisse analyst Spencer Wang predicted this week that Amazon.com’s share of e-book sales will fall from 90 percent to 35 percent over the next five years, due to increased competition from Apple’s iPad and Google. This was first reported in the Wall Street Journal.

None of this is comfort for local book-sellers, nor necessarily for authors (“content producers). Leon Wieseltier in the New Republic has a great piece on this. Nor does it ease the concerns about Amazon’s broader proto-monopolistic goals in its general merchandising, which, like Wal-Mart, most threaten small, local retailers. The report may, however, explain the hit this morning on Amazon shares.

Today’s Econ Haiku:

Are we like the Greeks?

Or are we like the Romans?

Deficit empire

Comments | More in Amazon.com, Retail

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