Risk Latte - Berle-Means Hypothesis and the Rise of the Super Corporation

Berle-Means Hypothesis and the Rise of the Super Corporation

Rahul Bhattacharya
June 25, 2007

In 1932 when the entire western world was immersed in the darkness of depression and Lord Keynes was wistfully trying to resuscitate the minds and hearts of countless academics and politicians with his Economic Possibilities of our Grandchildren a Columbia University law professor, Adolf A. Berle and a Columbia statistician Gardiner Means advanced a strange and ominous thesis in their book The Modern Corporation and the Private Property.

As these two gentlemen - by no means Economists, not at least by education or training - surveyed the corporate landscape of America in the 1930s they found an appalling statistic: it is that half of all corporate wealth was in the hands of just two hundred companies. This was the corporate America that was founded by Andrew Carnegie, JP Morgan, John D Rockefeller, William Durant, et al. Messers Berle and Means concluded that the rate at which the 200 odd corporate behemoths were growing as compared to around 3 million other small companies that dotted the American landscape, it was quite likely that in the year 1950 they - these 200 corporate giants - would control three quarters of the nation's incorporated wealth. Their book in fact advocated the strangest of all theses that if the growth of these large 200 odd companies continued unchecked then in another 360 years all the companies would have merged into a super corporation which would have a life expectancy longer than that of the Roman Empire*.

The year 1950 has come and gone. And it will be quite some time, till we - mankind - see the end of another 280 odd years to test whether Professors Berle and Means's prognosis comes true.But we can reflect a bit on our present predicament.

Blackstone corp has just raised $4.13 billion in IPO. It is a giant private equity company that has equity interests in companies in practically every industrial sector. The way it has grown in the last 5 to 10 years it appears - our guess - that Blackstone corp will triple or quadruple in its market value in the next five years. In 2004 in a landmark IPO transaction Google raised around $1.67 billion giving it a market capitalization of $23 billion. Google's current market capitalization is around $149 billion and Microsoft's market cap is at $281 billion. Both these companies are set to gobble up every other software and internet company that comes its way. The mergers mania has been gripping the corporations of Europe and America for the last five to six years and the party seems to continue at a feverish and wild pace for another five years at least. Banks and financial institutions are also not far behind. Royal Bank of Scotland and Barclays are trying to tear apart ABN Amro and eat it up - fair and square. Large banks around the world are swallowing up smaller banks to become even larger. And at this rate in the next ten to fifteen years there would perhaps be only ten banks standing in the world.

Could the Berle-Means hypothesis come true a lot sooner than originally predicted?

*Reference : The Worldly Philosophers by Robert Heilbroner (Penguin books). There are numerous articles and a lot of content on Berle-Means hypothesis on the internet. But we would recommend the readers to this particular book by Heilbronner where a reference is made while discussing the world of the modern day economists. The book is a pure delight.

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