Merger Cases

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, cont "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
Rockefellers 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 -gt shares of successors
• the "7 sisters" were regional giants, now
  nominally independent

13
American Tobacco (1911)

• J.B. Dukes 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 Courts 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