The Pulte-Centex Merger

The big news a few days ago, before the ephemeral runup in the major equity indices due to Wells Fargo's one-quarter earnings announcement, was the combination of homebuilders Pulte and Centex.

Notionally a purchase of weaker Centex by Pulte, the Wall Street Journal article assessing the move claimed that this means Pulte thinks the bottom of the housing market has been reached.

Personally, I don't believe this is true. If anything, I think it signals that Pulte's management- and that of Centex, for that matter- are girding for a longer dry spell.

Typical of industries undergoing a decline in sales and uncertain long term prospects is consolidation. It's a Schumpeterian thing. As well as basic industrial dynamics. When heavily-leveraged balance sheets and slow sales combine, so do companies. Cost savings become paramount for survival.

As I noted in yesterday's post about the life insurers, what is happening in the homebuilding sector is normal. The life insurance bailouts are not, and actually confound and delay the reckoning of markets on poor performers.

By the way, the homebuilders' combination will most certainly result in job loss. Oh my God!

Somebody shovel some TARP money or a special program in there to preserve the two companies!

Sounds silly, doesn't it? And it is. For both the homebuilders and life insurers. And any other company, the management of which has run it up on the rocks.

Stepping back from the details, it's easy to see the sensibility in the Pulte-Centex merger. Homes were vastly overbought and overbuilt for at least the last two years. Therefore, there's less need for resources in the homebuilding sector. It's logical that it should shrink, with firms combining, employees being shed, as well as assets and expenses, where possible.

Perhaps if the national scale of homebuilding had proceeded somewhat less frenetically, both companies could have survived. But it didn't. So they didn't, either.

The same should be true of any sector. Government meddling only delays the point at which incompetent management and an oversupply of resources are finally removed by market forces.

In the meantime, we all pay, with tax dollars, for our government's wrongheaded subsidization of some companies, but not others.

All must be left to weather Schumpeter's storm of creative destruction without taxpayer "help."