Effect of restructuring on R&D still at issue Despite a growing number of studies, the verdict is not yet in on whether the recent wave of corporate restructuring has caused a decline in U.S. industrial R&D activity. There are a number of conflicting reports, but not enough data are available yet to provide strong support for any particular one, as the House Subcommittee on Science, Research & Technology, chaired by Rep. Doug Walgren (D.-Pa.), found out earlier this month. The hearing was held in response to Congressional concerns about potential harm to U.S. competitiveness from industrial R&D cuts. "Private industry is responsible for half the R&D spending in the country," says subcommittee member Sherwood L. Boehlert (R.-N.Y.). "Cutbacks in that spending have a detrimental impact at a time when our global competitors are maintaining or enhancing their R&D." Congress, federal agencies, and policymakers began focusing on the issue when a wave of corporate restructuring began to hit Wall Street around 1984. Concerns that the restructured companies would cut back on "nonessential" operations such as R&D to improve their balance sheets led a number of organizations to undertake studies on the effects of restructuring on R&D. One such study resulted from a
Boehlert: cutbacks are detrimental
survey by the Office of Technology Assessment of 19 companies, most of which had been involved in restructurings. "In some of these companies," says OTA senior analyst Julie Fox Gorte, "mergers and acquisitions have resulted in curtailed R&D for a time, leading to reduced R&D spending, fewer R&D staff, and a shorter term focus to what remains." However, she says, "Other restructurings have had little or no apparent effect on R&D, and, in still other cases, R&D has increased." According to Gorte, "The distinction between these outcomes is often debt. Mergers or acquisitions that leave the company with high debt had negative effects on R&D spending in the cases OTA examined and have changed the R&D program qualitatively as well." For example, in all six companies in the survey that had resisted a hostile takeover, debt increased and R&D declined, either in dollar terms or in R&D intensity (R&D spending as a percent of sales). Friendly mergers, on the other hand, were more likely to result in increased R&D spending than in cuts. The National Science Foundation has also been studying the issue, using data from its annual survey of industrial R&D. According to William L. Stewart, director of NSF's division of science resources studies, the data tend to support the hypothesis "that the recent increase in corporate mergers and restructurings . . . has reduced real support for R&D in the affected companies— at least temporarily, until the effects of the mergers and restructurings have run their full course." NSF examined data for the 200 largest R&D-performing companies. Of these firms, 24 had been involved in mergers, leveraged buyouts, or other forms of restructuring. "The result of this analysis is disturbing," says Stewart. "These 24 companies had a combined 5.3% reduction in R&D spending, even in current dollars, between 1986 and 1987. The decline in real terms amounted to 8.3%. In contrast, the remaining top 200 R&D-performing companies reported a 5.4% increase in R&D expenditures during that period."
Conclusions at variance from NSF's were reached in a number of other studies. For example, an analysis of NSF data by Frank R. Lichtenberg, associate professor of business at Columbia University, found that R&D intensity of 43 companies involved in leveraged buyouts from 1978 to 1986 increased at least as much as that of all firms surveyed by NSF. A study by Bronwyn H. Hall, assistant professor of economics at the University of California, Berkeley, also found that "by and large, the firms involved in acquisitions experienced much the same kinds of changes in their R&D as firms that were not involved." William F. Long, a guest scholar at Brookings Institution who has studied a number of the reports on the effects of restructuring on R&D, says that differences in the methodologies used to conduct the studies and analyze the data may account for the disparities between one study and another. For example, some of the studies involved small, and not necessarily representative, samples of all leveraged buyouts, according to Long. Concerns about decreased R&D at restructured companies have been tempered by the fact, mentioned at the hearing, that high-technology companies—firms that tend to do a lot of R&D—are not frequently bought out. Leveraged buyout targets are frequently companies with underutilized assets and a strong cash flow that can be used to service the debt incurred in the acquisition. High-tech firms usually have neither of these characteristics. Perhaps the hearing's most conclusive finding was that studies on the topic remain inconclusive. "There was general agreement that it is still far too early to tell what the long-term impact of all the restructuring has been," says NSF science resources analyst Melissa Pollak. "It was brought up repeatedly that the major drawback of all the work done so far is that we don't have the data we need to measure the impact of all the restructuring that occurred in the mid-eighties. That is the reason, in my opinion, that it is too early to think about any legislation." St u Borman July 31, 1989 C&EN
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