The future is a merger

It has started, as it inevitably would: the process of companies trying to reduce their costs as we come out of recession by merging with businesses in their own industries - or what are known as in-market mergers.

Today we've had the announcement that France Telecom and Deutsche Telekom are combining their UK mobile operations, which means that Orange will be glued to T-Mobile.

This is a big deal.

If allowed by the regulators, the enlarged business would have almost £8bn of revenues and 28m customers, which the companies say are 37% of all UK mobile subscribers (these sums only work on the basis that lots of people have more than one phone).

Why are they doing it? Well, the companies say they have 3.5bn reasons - because they estimate that savings in running their networks, in distribution and other areas will over time add up to £3.5bn in today's money (that's the net present value of cumulative synergies).

From the point of view of the businesses, this is rational.

We're coming out of the bleakest period for the global economy since the 1930s but most companies believe recovery will be fairly insipid in the UK.

So to generate incremental profits, the focus has to be on reducing costs. And one of the best ways of doing that is to marry a similar business and remove overlapping activities.

In a way, this process was initiated by Lloyds' controversial decision last autumn to buy HBOS - though this takeover showed that such deals are not risk free, and many of Lloyds' shareholders are sore at the losses they inherited on HBOS's reckless loans to companies.

Also there's an element of looking for efficiencies in Kraft's £10bn offer for Cadbury. That said, Kraft is probably more motivated by the idea that a fairly counter-cyclical business such as Cadbury probably isn't going to get cheaper (and, by the way, the market reaction tells us that for Kraft to stand a chance it will have to raise its offer very significantly).

There will be more of these mergers within particular industries in the coming weeks and months, and not because there are a vast number cooked and ready to go, but because big businesses have a sheep-like quality: the mood in boardrooms will switch from fear of doing anything too bold in uncertain times, to fear that doing nothing will look pusillanimous.

To repeat, eating your rivals probably makes sense for businesses and also for their shareholders, so long as the bidder does not overpay: buying a competitor to generate cost-savings is usually not a licence to destroy wealth for shareholders in the way that other kinds of takeovers (such as those motivated by a desire to become big for the sake of bigness) frequently have been.

But that doesn't mean we should cheer when these deals are announced or that they are necessarily good for the economy.

Cost savings normally equal job losses, which - at a time when unemployment is still rising - can be very painful for those whose careers are sacrificed on the altar of corporate efficiency.

And in some industries, such deals would lead to cuts in research budgets that are valuable to the UK's economic potential and to the transfer of these precious research activities to countries such as India where costs are lower.

Having recently demonstrated that we have become a little too reliant on one industry, finance, we ignore any slimming down of our productive potential in other industries at our peril.

However, it is the impact on competition about which we should be most wary.

We're going to hear lots of sob stories from businesses wanting to merge, about how they'll only be able to invest enough to provide customers with the products and services they deserve if they're allowed to become ginormous.

But today's enhanced cash flows for investment are tomorrow's massive market share and ability to fix prices at levels detrimental to consumers.

As John Fingleton, chief executive of the Office of Fair Trading, says today in a thoughtful speech, the pendulum has been swinging against the notion that competitive markets are good for us, because of the massive costs we've all suffered from the recent market failures in banking.

That said, what happened in banking is not a demonstration that liberal markets are per se bad for us: the madness of banks converting dodgy loans into gilded investments was an example of what can go wrong when markets are dangerously opaque so that prices aren't set in a rational way; it doesn't show that transparent markets filled with lots of suppliers and vast numbers of informed customers are per se bad.

Some of the old rules surely still apply, such as that when a giant institution says that it's in the interests of the nation or of consumers for it to get even bigger, well we should probably presume that's untrue, pending unambiguous proof to the contrary.