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The fall of Michael Milken, Drexel Burnham and Lambert, and the junk bond market has a familiar ring. In his book Money, John Kenneth Galbraith introduces us to banking with the following sobering thoughts: “As banking developed from the seventeenth century on, so, with the support of circumstance, did the cycles of euphoria and panic. Their length came to accord roughly with the time it took people to forget the last disaster—for the financial geniuses of one generation to die in disrepute and be replaced by new craftsmen who the gullible and the gulled could believe had, this time but truly, the Midas touch.”

In a Washington Post column, Secretary of Labor Robert Reich wrote that he had found an excellent indicator of companies with good prospects. If the employees said, “we” are introducing a new production system, the innovation was likely to succeed, but if the employees said “they” are introducing a new production system, success was less likely. Secretary Reich's pronoun‐test‐for‐success reflects a fundamental law of nature that is too often ignored by those who run American businesses: Success depends on a cooperative team effort.

Can you make money through acquisitions? Despite thousands of mergers over the past two decades and scores of economic studies, there is remarkably little good information on this topic. The problem is that we have had little information about the performance of companies before they were acquired and even less about their performance after takeover.

Stockholders make money from takeovers—stockholders of the acquired firm, that is. When Kohlberg Kravis Roberts & Co. (KKR) took RJR Nabisco private for over $24 billion, for example, the RJR stockholders received more than twice what their shares had sold for prior to the bidding battle. That profit margin is typical of contested takeovers, although higher than the premium paid for all acquisitions in the past decade, which have averaged around 40 percent.

High‐yield bonds have made giant takeovers possible. The largest takeover recorded so far, Kohlberg, Kravis, Roberts & Co.'s (KKR) $24 billion acquisition of RJR‐Nabisco, was financed in large part by high‐yield bonds. Even though it was almost twice the size of the largest transaction up to that point, KKR had no trouble raising the money. Like many takeover financings, the offer was oversubscribed.

The CBS Evening News reports that foreigners now hold over one trillion, five hundred billion U.S. dollars and assets. In 1988 alone, there were 307 foreign acquisitions of U.S. companies, with a total value in excess of $55 billion. These numbers are the latest in a trend that suggests the United States is now more subject to the direction of other nations and their businesses. The country's standard of living continues to decline relative to that of our trading partners. The continued weakness of U.S. business and drop in the value of the dollar seem to be creating the “fire sale on America” that Senator Lloyd Bentsen warned of during the 1988 presidential campaign. As a nation, we are importing (buying) more than we are exporting (earning). As a consequence, we are selling U.S. business assets to finance our current consumer imports.

For about a decade, the annual number and total value of large mergers have consistently grown, with only occasional pauses or reverses. In contrast, the economy, the stock market, and the types of mergers have fluctuated widely.

It is common to identify cultural differences between the acquired and acquiring firms as the cause of the failure of individual mergers. For example, H. Ross Perot, the head of Electronic Data Systems, found it impossible to function after General Motors acquired his firm. Many blamed the clash in cultures between an old‐line, bureaucratic manufacturing firm and an innovative, flexible computerage firm.

It is not news that tax laws can affect mergers. How they affect them is a matter of some debate. This column looks at two broad components of recent tax law because they may have had significant effects on the acquisition decisions of the large cash‐rich firms that have led the merger wave of the past decade.

History suggests that the advantages of wealth are easily frittered away if the holders of that wealth are not forced to find more efficient rather than more expensive solutions.