Merger Cases & Legislation

1. Merger Cases & Legislation Legislation Early Cases Cellar-Kefauver Cases Current Policy Towards Mergers

2. Major Legislation • Clayton Act (1914) • Section 7 "no corporation ... shall acquire ... the stock... of another corporation ... where the effect ... may be to substantially lessen competition" • Thatcher vs. FTC (1926) • S. Ct ruled that physical assets not covered by Sec 7 • Huge loophole -- shut down merger cases

3. Legislation, continued • Cellar Kefauver (1950) • Amendment to Section 7 of Clayton • Closed physical asset loophole • Clear attempt to strengthen hand of trustbusters • Hart-Scott Rodino (1976) • 30 days notice of impending acquisition to DOJ & FTC • Agencies can seek “preliminary injunction to stop the merger within 30 days • Smithfield Case (2002)

4. Early Cases • Northern Securities • Standard Oil • American Tobacco • US Steel

5. Northern Securities vs US (1904) • Facts: 2 RR lines ran from St. Paul-Seattle • JP Morgan merged them into a holding company • Example of firms resorting to merger rather than forming cartels after per se rule was established • Recall Addyston Pipe (1897) – they merged too • 1st “Great Merger Wave” 1880-1905

6. Northern Securities Decision • S. Court ruled the merger violated Sherman. • broad decision; language would preclude all horizontal mergers • Justice Harlan's decision: • "the principal, if not the sole, object" .. of the merger was that "competition between the constituent companies would cease. No scheme or device could more certainly come within the meaning of the act... or could more effectively and certainly suppress free competition between the constituent companies...... that is enough to bring it under the condemnation of the act (e.g. Sherman)."

7. Northern Securities Decision • Harlan, con’t: "every combination or conspiracy which would extinguish competition between otherwise competing railroads ... is made illegal by the act" • Holmes’ dissent: "a partnership between two stage drivers who had been competitors in driving across a state line, or two merchants once engaged in rival commerce, .... whether made after or before the act, if now continued, is a crime."

8. Standard Oil vs US (1911) • Case is Well Known for 2 things: • 1) Breakup of Std Oil into "7 sisters" • 2) "Rule of Reason" treatment of mergers & monopolization charges

9. Std Oil: Facts • Rockefeller formed a historic monopoly through merger & internal growth • Merged 100s of independent refineries • Reputation as a "ruthlessly" efficient company, competitor, & negotiator • Standard controlled 90% of market by 1890

10. Rockefeller’s Tactics • Merger, but not on pernicious terms – there were many “front-runners” buying up firms to resell to Standard • Exclusionary contracts w/ shippers • Perhaps most serious charge: some contracts precluded railroads & pipelines from shipping oil of competitors • Alleged predation: note that Std's efficiency advantages not disputed; led to lower prices.

11. Std Oil: Decision • Case decided by "rule of reason," a three part test: • 1. some practices are illegal per se by their character (i.e. price fixing) • others practices like mergers can't be judged per se illegal & must be judged by their "reasonableness" as defined by • 2. intent: is the practice designed to restrain trade? if so, illegal • 3. inherent effect: regardless of intent, if the effect is sufficiently harmful, the court can rule the firm in violation of Sherman

12. Std Oil: Decision (cont'd) • Found that monopoly was obtained both by superior efficiency & by practices designed to exclude competitors, including merger • Standard was "broken up" • 34 "successor" companies were the units in the original holding company • Shares of Standard -> shares of successors • the "7 sisters" were regional giants, now nominally independent

13. American Tobacco (1911) • J.B. Duke’s tobacco monopoly • Allegedly built through local predation: • Merge or be ruined! • Decision dismembered Amer. Tobacco, as in Std. • But dissolutions did not eliminate market power! • Std: 7 regional firms, all w/ local market power • AT: 7 tobacco firms, cigarette, cigars, pipe, chewing, etc

14. US Steel (1920) • US Steel was an archetype of MFM • "Gary Meetings" – met regularly with competitors to divide markets & set P • Court noted the absence of hostility from competitors relative to Std. Oil & Amer. Tobacco • could actions of US Steel then be “monopolization” of the sort proscribed by Sec. 2? • Not One of the Court’s better days

15. "Cellar-Kefauver Cases" • C-K Tightened Screws on Antitrust • Obvious case of small business protectionism • Three Cases Illustrate Severe Treatment of Mergers post C-K • Bethlehem Steel (1958) • Brown Shoe (1962) • Von's Grocery (1966)

16. U.S. vs. Bethlehem Steel (1958) • Facts: • Merger of Bethlehem (PA firm) with Youngstown (Chicago) • Aim was entry in Chicago market • Mkt. Shares (national) • Youngstown 4.7% • Bethlehem 15% • US Steel 30%

17. B Steel (cont'd) • Bethlehem's Case • Merger would strengthen competition in Chicago; create a more viable competitor • DOJ's Case • Market is national in scope • heavily concentrated already • Merger would reduce competition • Result • DOJ Wins • Precedent of tough anti-merger stance established • Bethlehem enters Chicago de novo

18. Brown Shoe v. U.S. (1962) • Facts: • Brown merged with Kinney in 1958; DOJ sued • The market was not heavily concentrated • Top 2 dozen manufacturers had 35% of sales • These firms were small: • Company Retail Share/Rank Manufact Share/Rank • Brown 2.1% / 4 4.0% / 4 • Kinney 1.6% / 8 0.5% / 12 • Brown was seeking retailing assets

19. Brown Shoe, cont'd • DOJ's Case: • Narrow & selective market definition(s) • a) product: women's, men's, kid's shoes • b) geog locations: various cities • example: combined shares of kid's shoes was 49% in Dodge City, KS • many locations with 20% + combined shares • Foreclosure: Brown would "force" shoes into Kinney stores (vertical aspect of case)

20. Brown Shoe, cont'd • Decision: • Merger disallowed • Court appeared to take C-K arguments to heart • "If a merger achieving 5% control were now approved, we might be required to approve future merger efforts .. seeking similar market shares. The oligopoly Congress sought to avoid would then be furthered and it would be difficult to dissolve the combinations previously approved." • "We cannot fail to recognize Congress' desire to promote competition through the protection of viable, small, locally owned businesses. Congress appreciated that occasional higher costs and prices might result..."

21. Brown Shoe, cont'd • Impact: • 1) DOJ/Court attempting to stop monopoly trend "in its incipiency" • 2) Use of local sub-markets acceptable to address issue of competition (anti-merger) • 3) Forced scale economies to be realized by internal growth & destruction of assets • (probably slowed the growth of shoe chains a bit)

22. U.S. vs. Von's Grocery (1966) • Von's tried to buy Shopping Bag • Owner of S. Bag was old w/ no heirs • Obvious need for transfer of assets • Both were LA grocers; unconcentrated • Company 1958 Mkt Share Rank • Von's 4.7% 3 • Shopping Bag 4.2% 6 • Safeway 8.0% 1

23. Von's (cont'd) • DOJ's Case: • Trend of concentration and growth of chains • 1947 1957 • CR20 47% 57% • 1950 1961 • Chains 96 150 • Owner-ops 5,365 3,818 • Decision: merger disallowed • "The basic purpose of the 1950 Cellar-Kefauver Act was to prevent economic concentration in the American economy by keeping a large number of small competitors in business."

24. Current Policy Towards Mergers • End of the C-K Era: • Pres. Reagan's Overhaul of DOJ/FTC • Merger Guidelines of 1982 • Improved approach to market definition • More permissive view of market concentration • C-K remains as law, but DOJ policy no longer pursues its aims • May explain why contests to injunctions are so rare