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Economics The merger wave has had a substantial impact on the work of the antitrust enforcement agencies. In fiscal year 1998 there were over 4700 merger filings under the Hart-Scott-Radio Act approximately 28 % greater than fiscal year 1997 (Merger Wave, 1997), and the largest volume of merger filings in history. Nowadays, merger started playing an important part of the economy development. Merger waves are not a new phenomenon, but are there anything new or different about the current merger wave?
Are mergers today different in character from those of a decade ago? The answer to those questions is yes; the merger wave of the 1990 s is significantly different from the wave of the 1980 s. Observers of the previous merger wave will recall that it was fueled largely by junk bond financing and driven by corporate raiders. Some of those mergers involved the acquisition of unrelated businesses that were targeted for their break-up value or designed to generate cash for corporate raiders. Not all 1980 s mergers were financially based, but that is what drew most of the attention.
Today, mergers are rarely generated by junk bond financing and corporate raiders, but are more likely to be motivated by fundamental developments in the rapidly changing economy and to reflect more traditional corporate goals of efficiency and competitiveness. (Caney, 1998). One of the most challenging issues in merger analysis is whether the proposed efficiencies from an acquisition can overcome the potential harm to competition. As a result, the relevant law and administrative agencies' enforcement guidelines have evolved on this issue. In the past, both the courts and the agencies rejected any consideration of efficiencies. More recent decisions, however, have held that, in appropriate circumstances, efficiencies generated by mergers can promote competition. These rigorous standards are appropriate because competition is the driving force behind efficiency.
Without competition there can be no assurance that consumers will receive the benefits that the market can produce. As one court observed: "Experience teaches that without worthy rivals ready to exploit lapses in competitive intensity, incentives to develop better products, to keep prices at a minimum, and to provide efficient service over the long term are all diminished to the detriment of consumers. " (Janet, 1998). Even under the standard established by the courts and section 4 of the Merger Guidelines, it is not enough for defendants to show cost savings resulting from the transaction. Instead, defendants must show that the merger will not adversely affect competition. "A defendant who seeks to overcome a presumption that a proposed acquisition would substantially lessen competition must demonstrate that the intended acquisition would result in significant economies and that these economies would benefit competition and, hence, consumers. " (Merger Wave, 1997). Mergers can have a negative impact on competition as in case of companies merger the new organization becomes more influential and powerful on the market. It means the new company will have more resources and abilities to produce more advantageous products while decreasing prices.
The reason for price decrease is usually the cost cuts accompanied by the merger. The situation, when bigger companies can offer more competitive product at lower price, can kick smaller companies out of the market. Therefore the agencies struggle to restore competition. The enforcement agencies are increasingly recognizing that a settlement, which does not effectively restore competition, is not worth adopting. The FTC's obligation is to ensure that competition is restored to the level that existed before the merger.
Frequently, relief that does not include divestiture of a facility is inadequate. For example, in some cases a licensing arrangement may not fully enable a new firm to become an aggressive rival, because it remains in a dependent relationship with the merged firm. In the past few years the Bureau of Competition has systematically reviewed the results of its divestitures and has learned that they sometimes do not adequately replace the competition eliminated by the transaction. In short, there are some transactions that simply cannot or should not be resolved through any type of remedy short of a total injunction. (Merger Wave, 1997).
On occasion, parties to a transaction propose that a merger be resolved through the sale of a package of assets that purports to create a new rival in the market or to expand a fringe player. Often these proposed divestitures are rejected because an important rival will be eliminated by the transaction and the divestiture of a package of assets will not fully restore the competition that was lost. Restoring the level of competition that existed before the merger requires a set of assets that creates a firm competitively equivalent to the firm eliminated from the market. The purpose of defining a relevant market is to determine whether a merged firm will possess the ability to exercise market power -- that is to raise prices or decrease output -- after the merger. Defining a relevant market is not an end in itself, but rather a tool for determining the existence of market power. The tools for defining a product market "help evaluate the extent [to which] competition constrains market power and are, therefore, indirect measurements of a firm's market power. " (Janet, 1998).
The analytical framework set forth in the Merger Guidelines and adopted by the courts asks whether a "hypothetical monopolist... would profitably impose at least a 'small but significant and non transitory' [price] increase. " The Merger Guidelines use five percent as the usual approximation of a "small but significant and non-transitory" price increase. The key question is whether, in the face of a price increase, enough customers will continue to buy from the monopolist to offset any sales lost to other sellers. So long as the additional profit from the price increase exceeds the profits lost from those consumers who turn to substitutes, the price increase will be profitable overall and the particular grouping of products constitutes a separate market for antitrust purposes. (Bogue, 1995). Entry is often a very critical issue in merger litigation. Many of the cases the government lost in the early 1990 s were the result of failing to establish that the anticompetitive effects of the merger were not averted by the ease of entry.
If entry is difficult, the merged entity can raise prices without attracting new competition. The ultimate issue is whether entry is so easy that it "would likely avert the anticompetitive effects" resulting from the proposed acquisition. (Mongoren, 1999). Every few years a new merger defense seems to become popular, and a few years ago that defense was the presence of power buyers. In the early 1990 s, a number of courts relied on the size and sophistication of certain consumers to reject the government's request that a merger be enjoined. In Baker Hughes, for example, the D. C.
Circuit affirmed a finding that the "sophistication" of the defendants' customers "was likely to promote competition even in a highly concentrated market. " (Bogue, 1995). The fact that some buyers may be sophisticated does not immunize from challenge a merger, which affects both large, sophisticated buyers and small, less sophisticated ones. As one commentator has observed: "One cannot reason from the premise that the post-merger firms face a highly concentrated group of powerful or sophisticated buyers... that monopoly pricing in the market is impossible. " (Mongoren, 1999).
Perhaps the most important aspect of the court's efficiency analysis was its consideration of the role of excess capacity. Although elimination of excess capacity might result in some cost savings, the critical question, as posed by the revised efficiency section of the Guidelines, is how the proposed efficiencies affect competition in the market. In its examination of competitive effects, the Cardinal Health court recognized that competition, and therefore consumers, would not benefit from the reduction in excess capacity. Since excess capacity was the catalyst for aggressive competition, the court concluded that the "mergers would likely curb downward pricing pressures and adversely affect competition in the market. " This recognition of the effect of efficiency on post-merger competition is an important insight into merger analysis. (Mueller, 1993). A final issue that arose during the Cardinal Health trial was whether there was some form of regulatory relief that could be imposed to ameliorate the anti-competitive effects of the mergers, but still permit the mergers to occur.
For their part, the parties pledged not to increase prices and to pass on fifty percent of any costs savings resulting from the merger. The FTC, on the other hand, argued that involving the court as a regulator of prices would have been a "second best" solution to continued competition among the four firms, would have been unsound antitrust policy, and was contrary to law. (Mueller, 1993). As a policy matter, antitrust enforcers and the courts have been reluctant to permit anticompetitive mergers to occur based on the promise of the parties not to increase prices. This is so for a number of reasons. As the U. S.
Supreme Court has pronounced, the antitrust laws rest "on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress. " Courts have recognized that prices set by agreement are no substitute for competition. As, explained by the Court in United States v. Trenton Potteries Co. : "The reasonable price fixed today may through economic and business changes become the unreasonable price of tomorrow. Once established, it may be maintained unchanged because of the absence of competition secured by the agreement for a price reasonable when fixed. " This understanding has also led the Court to condemn private horizontal maximum price-fixing arrangements as per se illegal. Furthermore, any agreement providing a price cap offers no protection against the elimination of non-price competition. "The assumption that competition is the best method of allocating resources in a free market recognizes that all elements of a bargain -- quality, service, safety, and durability -- and not just the immediate cost, are favorably affected by the free opportunity to select among alternative offers. " Permitting an anti-competitive merger to occur based on a promise not to increase prices would insulate the allocation decisions from the self-governing forces of competition and place them within the sole control of merged firm.
Moreover, without the drive to compete, there is no certainty efficiency benefits would be passed on to consumers. (Malcolm, 1993). In the Cardinal Health case, the FTC argued that any form of price regulation would have been ineffective and ultimately harmful to consumers. Historically one of the most significant consumer benefits from competition was steadily declining prices. A maximum price imposed by a court, on the other hand, would have frozen prices and halted the downward trend that had resulted from competition. The court ultimately rejected the defendants' promise as an antidote to anti-competitive effects, because resorting to a "price cap" would have effectively deprived consumers of the lower prices that would derive from competition. In reaching its holding, the court relied on evidence relating to McKesson Corp. 's first attempt to acquire Ameri Source Health Corp.
in 1988. If that acquisition had been approved based on a "price cap" promise, the court opined, consumers would have been deprived of substantial decreases in prices that occurred over the next decade. (Cowling, 1990). Two final observations about the case are worth noting. First, the court struggled with the fact that prices were decreasing; thus it seemed unlikely that the merger would result in higher prices. Yet the court found that if the merger led to a slower rate of price decreases this would be cognizable competitive harm. This is a very important precedent for markets, especially distribution markets, in which prices are falling.
The court found that the drug wholesale market was very competitive, with firms working aggressively to grow and become more efficient. As the court noted, that market was an "excellent example of how effectively the nation's market system works. " The benefits of competition are indeed substantial; thus the FTC's enforcement action will likely save U. S. consumers millions of dollars annually. (Malcolm, 1993). Second, in the past some have criticized the enforcement agencies' use of consent orders rather than litigation as diminishing the role of the courts in merger enforcement.
One perceived problem of the use of consents is that there is relatively little development of case law on mergers. One benefit of litigating cases such as Staples and Cardinal is that the decisions have helped to develop and clarify the body of case law, serving to reconcile it with the Merger Guidelines on issues such as entry and relevant product market. This may ultimately play an important role not only for future merger enforcement, but also for the development of antitrust law generally. (Cowling, 1990). The defendants in Tenet suggested that the proposed merger would allow them to combine two inefficient, underutilized hospitals. The court rejected these claims for three reasons. First, the hospitals were being operated on an efficient basis.
Second, if there was excess capacity, the hospitals could rationalize capacity and achieve savings even without the merger. Finally, even if the hospitals were able to achieve efficiencies, they would not likely benefit consumers because the merged hospital was unlikely to pass any cost savings on to consumers absent competitive pressure to lower prices. As the Guidelines observe: "Efficiencies almost never justify a merger to monopoly or near-monopoly. " (Mueller, 1993). Words: 2, 193. Bibliography: Bogue, R. "Reorganization After Merger. " Medical Care. 33 (7): 676 - 686, 1995. Caney, J.
Wave of Mergers is Recasting Pace of Business in U. S. , N. Y. TIMES, Jan. 19, 1998. Cowling, K. , et al. Mergers and Economic Performance.
Cambridge, MA: University Press, 1990. Janet L. Yellow, Chair, Council of Economic Advisers, Before the Senate Judiciary Committee, June 16, 1998. Malcolm Code, Economics, the Guidelines and the Evolution of Merger Policy, 1993. Merger Wave Gathers Force as Strategies Demand Buying or Being Bought, WALL ST. J. , Feb. 26, 1997.
Mongoren, J. Antitrust Enforcement in Pharmaceutical Industry Mergers, 54 FOOD & DRUG L. J. 255 (1999). Mueller, D. C. "Mergers and Market Share. " Review of Economics and Statistics. 65 (5): 261 - 166, 1993.
Mueller, D. C. "Mergers and Market Share. " Review of Economics and Statistics. 65 (5): 261 - 166, 1993.
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