Antitrust Laws and Megamergers - Essay Example

Megamergers can create an excessive amount of economic concentration and market power, which can threaten competition. While there might be a number of mergers that benefit both competition and consumers by increasing internal efficiency, there are so many mergers that can lead to higher prices, fewer or lower-quality goods or services, and less innovation. Antitrust in general represents a significant competition policy tool that inspires US and many other countries public policies regarding business conducts. Section 7 of the Clayton act adequately addresses the mergers and questions whether the increased concentration will harm the competition. Antitrust policy has undergone incredible change over the twentieth century as the markets have. Nevertheless antitrust laws control how firms reach and sustain their market power, they do not prohibit monopoly. In this paper first I will discuss the main antitrust statutes regarding mergers, then I will illustrate how the interpretation of these statutes have changed over time. Finally I will look at the enforcement of antitrust and will demonstrate the cases in which antitrust laws prohibit the monopoly power. It is important to recognize that the majority of monopolies end up being destructive for the society, it is not always the case, thus we have to consider each event based on its own merits. Antitrust Laws Introduction Antitrust refers to a body of laws that focus on discouraging the concentration of corporate power as exercised by few companies within specific industries. Essentially, these laws are crucial in prohibiting illegal business practices that at times deprive consumers the benefits associated with competition. As a result, consumers at times are charged higher prices for different products and services having inferior qualities. In the United States the federal antitrust laws are enforced by the Department of Justice (DoJ) and the Federal Trade Commission (FTC). In this case, antitrust policies originate from the belief that the size of the company determines its level of competition in relation to other smaller companies within the same market. For instance, there is belief that large companies grow on the platform that they restrain trade of their competitors. Such companies use their sheer sizes to harm the smaller competitors, therefore, the antitrust regulators are more vigilant on Mergers and Acquisitions (Areeda and Herbert 5). There has been increasing attention towards research on various structures, control and cooperation between different firms that leads towards enrichment of business within different markets. From the perspective of International Business research, there is still lack of conceptual integration as well as empirical support concerning daily operations of Mergers and Acquisitions. According to Beamish and Lupton (75) Mergers and Acquisitions are referred to as companies comprising of two or more equity partners. In such cases, the principle company may hold a small share in the equity stake within the partnership even though in most instances it is required to be below the minimum of 20% of total shares. The formation of Mergers and Acquisitions always focus towards satisfying certain conditions that includes attainment on social, economic and technological demands and at the same time, gaining competitive advantages as well as economies of scale within provided the target market. Additionally, there are positive effects of Mergers and Acquisitions that involve elimination of the extent of dependency amongst firms that includes dealing with business imperfections (Beamish and Lupton 75).There is elaborate literature on the nature of operations within mergers and acquisitions that provides adequate information to this study. However, there are always violations of the law in cases where the mergers focus on monopolizing target markets on illegal grounds such as obtaining price advantage over other competitors Kovacic and Shapiro (60). Some of the illegal activities include provision of inferior products to consumers and charging higher prices on such goods and services. For instance, in cases where competitors fix prices, get involved in rigging of bids alongside dividing up customers, the consumers tend to lose benefits that comes alongside competition. The market scenario in such cases is that prices become artificially high, therefore, distorting the various resource allocations since there is no actual reflection on cost. Such exhorbitant activities results into loss to different stakeholders of the economy from consumers, taxpayers and even the overall economy. For the purposes of avoiding further dispute with the law, managerial responsibilities should be based on the level of functional expertise from individual partners rather than superiority complex. At the same time, it is important to note that Mergers and Acquisitions tend to focus on satisfying elements within firm’s individual business strategies that at times lead to dominance especially depending on the level of aggressiveness. The major focus of these M&A’s should be on firm’s resource-base, market-orientation as well as risk-driven objectives that comply with antitrust laws. Despite the aspect on monopoly, other benefits associated with Mergers and Acquisitions include market and business entry modes despite exposure to greater risk and resource investment (U.S. Department of Justice 2). Discussion on main Antitrust Statutes Regarding Mergers in the United States Mergers & Acquisitions occur under various categories that include either horizontal or vertical integration and/or either collusion or exclusion as related to practice. The categories give a clear direction to antitrust regulators in the process of examining a merger. The horizontal integration involves an alliance with a competitor that could lead to monopolistic or rather oligopolistic situation. On the other hand vertical integration involves the acquisition of such entities as suppliers. There are cases where the act of relatedness on firms within Mergers and Acquisitions is on the basis of various activities that focus on industry-product relationship. As discussed, the nature of vertical linkage within the value chain provides one of the essential elements of business relatedness. The nature of product relatedness within Mergers and Acquisitions greatly influences the economies of scale as well as the level of productiveness that exists during transaction costs. In such dealings, there are always eminent and extensive influences in the level of productivity within business strategies. The element of relatedness is crucial especially in the determination of the extent to which M&A utilizes existing resources within individual firms such as level of existing expertise, distribution channels and production facilities. Additionally, Transaction cost theory (TCE), is necessary in the process of identifying economic dynamics existing within market segments before making any venture (Beamish and Lupton 80). Therefore, transaction cost theory framework is applicable in M&A’s on the basis of acute controls and management of human factors necessary for successful operations within any joint venture. However, the different performance indicators identified within Mergers and Acquisitions are outlined through implementation of appropriate business processes. At the same time, it is also necessary that the performance of Mergers and Acquisitions be under assessment of appropriate tools that include either process performance or outcome performance. As mentioned the process performance is associated with management issues amongst line operators found within the business. The key antitrust laws in the United States are the Sherman Act and the Clayton Act that focuses on outlaw of monopolies (U.S. Department of Justice 1). Then there is the Hart-Scott-Rodino Antitrust Improvements Act that demands some crucial information about parties in an Acquisition transaction alongside the deal to the Antitrust Division of the DoJ and the FTC. The Sherman Act ratification in 1890 remains the most crucial source of antitrust law to-date (Areeda and Herbert 5). The law contains some important sections in the perspective of M&A that include; Section 1: Prohibits combination of new businesses that may result into monopolies Section 2: This section prohibits a firm with monopoly power ability from maintaining such monopoly power through means that operate beyond competition. Section 18: In this section there is a prohibition of stock purchases that focuses on monopoly (Areeda and Herbert 5). Firstly, Sherman Act focuses on broad conditions that offer remedies for firms capable of violating current antitrust laws. The provision in this act is applicable to all transactions that occurs in interstate commerce as well as all local activities, transactions and business that affects interstate normal businesses. A good illustrative case involves United States Vs Microsoft (2000) where the Federal District Court situated in Washington ruled that Microsoft violated the section 2 of the Sherman Act. This is since there was enough evidence linking Microsoft to activities of exclusionary, anticompetitive as well as predatory for the purposes of maintaining their monopoly power. Moreover, they also purport that Microsoft were trying to monopolize the Web browser market that was also a violation of section 2. The campaign process of the company was also geared towards protecting its monopoly power whereby they were trying to enter into exclusive dealings on the basis of their browser and operating system that was a violation to section 1 of the Sherman Act that prohibits combination of new businesses that eventually results into monopolization (Areeda and Herbert 10). This was a consideration of an anticompetitive arrangement that in real sense was as a result of agreement between competitors that is punishable as criminal felony under the Sherman Act by Department of Justice. Secondly, there is the Clayton Act was passed in the year 1914 for the purposes of strengthening the Sherman Act in the area of stopping monopoly before development. Mergers & Acquisitions is provided for under section 7 of Clayton Act, which shows the illegality for companies to purchase the stocks of other companies in the process that such combination results into reduction in completion within the stipulated industry (Mann and Barry 12). Contrary to the Sherman act, the Clayton Act is considered a civil statute. In this case, the violation of section 7 guarantees a court-ordered injunction that compels divestiture of the property as well as other interests. A good example illustration is that of United States Vs Continental Can Company (1956), which was the one of the largest manufacturer of metal containers in the US. The company acquired all assets, business as well as good will of the Hazel-Atlas Glass Company known by then to be the third largest manufacturer of glass containers. This was for the purposes of exchanging 999,140 shares of the Continental common stock under the assumption on all liabilities of Hazel-Atlas. According to the United States government, the acquisition was done in violation of the section 7 of the Clayton Act; therefore, divestiture order sought as appropriate (American Bar Association, Section of Antitrust Law). Illustration on how the interpretation of these statutes has changed over time There were two major economic transitions in the final third of the 19th century that include industrialization characterized by capitalization and the emergence of huge dominating firms within the industry (Hylton). For instance Kovacic and Shapiro (43-50) gives illustration from the oil industry that experienced major acquisitions such as that of Standard Oil Company of New Jersey that eventually made the company control 90% of United States oil refining industry. The other example is of American Tobacco Company that controlled close to 90% of the total market of tobacco products. However, the public concern on such major acquisitions and monopoly power contributed to major shift in U.S. policy where the government assumed their vigorous control of the economic environment especially in the private sector. This led to enforcement of antitrust policy where the federal government challenged the power of monopoly exercised by few firms (American Bar Association, Section of Antitrust Law). There was the creation of Federal Trade Commission (FTC) in 1914 that was meant to control the growth of monopoly along with the antitrust division of the Justice Department. These bodies had the power to investigate all firms within the industry that used illegal business practices. The Clayton law was also enacted in 1914 for the purposes of strengthening the Sherman Act whereby the law clarifies the illegal per se as provided by the Sherman Act. There was a landmark case in 1962 where the proposed merger between United Shoe Machinery and Brown Shoe Company was blocked since the resulting firm would have been more efficient, therefore, overriding all its competitors. The court in this case decided to protect competitors over consumer benefits. These cases especially, the Alcoa and the Brown Shoe alongside other cases between 1950s and 1960s presented some level of uncertainty within the antitrust environment since they revoked the doctrine of per se illegality The Sherman Antitrust Act from its inception outlawed contracts, combinations as well as conspiracies within the confines of restraint trade. One key aspect of the law that required interpretation was whether actions by firms on controlling large market share was illegal per se. This can be illustrated from the landmark Supreme Court cases of 1911 where Sherman Act was based on the rule of reason was used to break-up Standard Oil and American Tobacco on the illegality surrounding business action. Determination of the illegality of their action was based on conduct not the structure or size of the firms (Kovacic and Shapiro 43). However, ten years after, there was a incidence where Court threw out antitrust suits used by government to prosecute Eastman Kodak, International Harvester as well as United States Steel. In these cases, the court claimed that none of the companies used illegal means through their achieving dominant positions in the industry. This is since the companies were considered to have successfully exploited economies of scale for the purposes of reaping the rewards of efficiency through reasonable pricing. In my opinion it is true that every company uses individual effort to penetrate the market, therefore, there should be no charges against such progression. However, the precedent on rule of reason that allows achievement through legitimate business practices was challenged in 1945 by the U.S. Court of Appeals rule against Aluminum Company of America (Alcoa). In this case, the court consented that Alcoa captured 90% of the aluminum industry by acceptable business practices. Conversely, the court on the same case held that in terms if size, Alcoa was in violation of the law that prohibits monopoly (Hylton). The Sherman Act also provided for rules that prevented price-fixing where some firms could coordinate their pricing policies based on agreement. For instance the case in 1950s where General Electric Westinghouse and other manufacturers made an agreement to fix prices within assigned market segments. The agreement was declared illegal in 1961 where the companies were fined and management team jailed. There were other several subsequent cases on price fixing such as that in 2008 where three manufacturers of liquid crystal display panels were charged for price fixing (American Bar Association, Section of Antitrust Law). However, great changes have been experienced in the use of antitrust policy throughout the years and the following section gives the current situation of United States Antitrust policy. The current nature of U.S. Antitrust Policy The doctrine that prohibited “bigness” of companies was the dominant antitrust policy until 1970s despite the criticism involved. According to critics, majority of the largest companies that operated in 1950s no longer exist in the United States market. However, there has been emergence of new firms that replaced these old companies. From the critic’s perspective, the emergence of these firms reveals the dynamism as well as competitive nature within modern corporate scene. Globalization through the use of internet as a marketing tool has increased the level of intra-industry competition. Kovacic (231) also assert that the benefits of competition are not necessarily attainable in a perfectly competitive environment. This is since large firms are capable of competing within the same industry in pursuit of the same high profits enjoyed by initial firms in the target market (American Bar Association, Section of Antitrust Law). The current level of partnership arrangements within Mergers and Acquisitions plays an important role in ensuring profitable results in adherence to U.S. antitrust policies. There are several factors that influence general performance of Mergers and Acquisitions apart from antitrust laws that are analyzable within the confines of overall market performance. However, research concerning operations within M&A consider adherence to laws that pertains to structural, operational and environmental aspects. Previous researchers such as Kovacic give information on structural management of business strategies within organizations that leads to cumulative knowledge concerning strategic management procedures within Mergers and Acquisitions. The initial meta-analysis research on Joint Ventures was done by Beamish and Lupton through examination of various independent variables usually considered as crucial components of M&A management. The factors examined included hierarchical control, disagreements in policies of operations, as well as organizational structure of firms. The existing relationship between firm’s operations and antitrust laws helps in revealing different factors that can be used to ensure high performances within Mergers and Acquisitions. There are at times when organizations differ in operation objectives as a result of disjoint within management practices, or in other terms conflicting operation policies. Progress within defined market segments is achievable in the event that firms entering joint ventures consider some major significant factors such as the need for competitive integrity on pricing, bidding and competition within the market (Beamish and Lupton 88). The implications of antitrust laws on operations of mergers and acquisitions usually draw attention on differential performances of various firms within different market segments. However, the level of competitive advantage of any company in M&A’s is considered as likely measure for its aggressiveness on productivity levels. In such processes, the gap existing within company achievements results from lack of consistency as opposed to principles applicable in trade organizations. In some occasions, organizations in possession of abundant resource base are known to gain uncommon exceptional capacities that are difficult to emulate, therefore, capable of staging monopoly within the industry of operation. Therefore, it is important to note that the industry structures alongside Resource Based View are great contributors towards industry stability (American Bar Association, Section of Antitrust Law). Enforcement of Antitrust Laws The enforcement of antitrust policies primarily focuses on regulating company operations, therefore, protecting consumers from exploitation by dominant companies. The government regulations serve the purposes of controlling the choices of private firms. Such regulations constrain the entry and exit of firms within markets through establishment of prices, product design and safety alongside other business decisions. The concerned regulatory agencies attempts to protect consumers through limitation of possible demands by market power firms. At the same time, the agencies influence business decisions that pertain to worker safety of consumers. Over 50 federal agencies undertake all the regulations and the responsibility of interpreting applicable laws within specific in real-world markets (Hylton 23). The antitrust laws seek to ensure healthy competitiveness within manufacturing, product and service industry. This is since the nature of the free market economy demands that competing businesses operate on competitive prices and quality for the purposes of attracting market demand. The cartel violations such as price fixing and bid rigging provide consumers with non-plausible benefits. Such deals are always organized in secrecy making it easy for the participants to defraud customers by posing as competitors despite behind doors agreement not to compete. This is where the antitrust laws focus on protecting consumers from such misleading. The enforcement of antitrust laws follow three main ways that include criminal and civil enforcement actions through the Antitrust Division found in the department of justice, through Federal Trade Commission and Lawsuit claims by private entities. The department of justice works alongside Federal Bureau of Investigations (FBI) for the purposes of obtaining evidence. Prosecutions are guaranteed to those found guilty of bid rigging or price fixing on the presentation of timely and reliable information. This shows that the antitrust laws are basically enforced through the State attorneys general’s offices. However, there is a provision in Clayton Act that permits private individuals to sue in Federal court concerning damages caused by antitrust violation (Posner 15-17).This sounds fair since private individuals are guaranteed a voice that ensures their protection against the law. Cases in which antitrust laws prohibit monopoly power There are cases where some businesses employ forms of illegal conducts that distort normal competition for the purposes of gaining market share. In some instances, such conducts are justifiable on innovative grounds that focus on benefitting consumers (U.S. Department of Justice 1). However, in the event that there is no valid justification the antitrust laws are applicable for the reasons of prohibiting such conducts. Antitrust rules requires the plaintiff to give convincing information linking defendant to likelihood of obtaining “market power” or rather “monopoly power”. The act of illegal attempt to monopolize occurs in the event that the defendant undertakes a dangerous probability to obtain success through monopoly. The initial process of determining antitrust legality of joint ventures in the field of research and development or production sectors involves verification on whether companies partnering in a joint venture would achieve market power. However, there are certain antitrust violations that do not require any proof of monopoly power, which are conventionally under categorization as ‘per se’ offenses. The Supreme Court has consistently defined ‘monopoly power’ in accordance to definition stipulated in the United States Vs E.I. du Pont de Nemours & Co as the act of a company having power to control prices within a target marker or exclude competition (Lim 2). In this case, supremacy within the market is determined by the quality delivery of products and services, therefore, can lead to monopoly due to consumer demanding for the same quality product from the same company. This case provided relevance in the accurate definition of monopoly power that helps in providing a new dimension to this study. A company having exclusive supply contracts prevents a supplier from transacting business with the buyers. In case where one buyer has a monopoly position where it is guaranteed exclusive supply contracts barring the newcomer from gaining inputs required for the competition with the monopolist, the contract is termed as exclusionary tactic that violates section 2 of the Sherman Act. A good example is the where FTC prevented one of the drug makers from enforcing ten year exclusive supply agreement for one of the essential ingredients required for making its medicines (Orbach 1). This could have benefitted the supplier with a percentage of profits from the drug. However, the FTC discovered that the manufacturer of the drug obtained exclusive supply agreements, therefore, keeping other drug manufacturers out of the market through control of access to essential ingredient. The effect made the manufacturer to raise their prices by a greater percentage. On the same note, exclusive purchase agreements that require a dealer to sell products from only one manufacturer have similar effects on new manufacturer. Another example is when DoJ challenged the exclusive dealing contract of a manufacturer of artificial teeth with a 75% market share. The dealing effectively blocked other smaller firms from selling their teeth to dental labs, therefore, ultimately limiting access by dental patients (American Bar Association, Section of Antitrust Law). In such industries the newcomers face additional costs and require more time for them to convince dealers on giving up the exclusive agreements of the leading firm within the industry. The consumers receive the damage since the monopolist prevents any competitive action within the market that could otherwise lead to low prices, better products and services (Kovacic 238). On the basis of Multi-domestic strategy, companies enter into partnership with other related firms within same industry for purposes offering integrated services within target markets. For the company to gain a competitive advantage, it is necessary to focus on effectiveness with which decentralization process is executed (U.S. Department of Justice 2). For instance, decentralization done on decision making process allows for easier modification of products that depends on local demand as well as the existing competition. At the same time, such strategies enable complete utilization of local knowledge and capabilities, for the purposes of fulfilling consumer requirements. However, in cases where multi-domestic strategy is utilized, there is loss on product’s distinctiveness since local adaptation keeps changing over a period of time. At the same time, there is increased spending owing to complexity experienced in coordinating a range of strategies across boundaries (Kovacic 245). Then there is the Hart-Scott-Rodino (HSR) Antitrust Improvements Act (1976) that focuses on the sizes of firms within acquisitions. According to this act, some acquisitions cannot be completed in the event that the federal government is not provided with the required information within the required time. This allows the FTC and DoJ to scrutinize the presence of any anticompetitive effects that requires curing prior to transaction’s closing (U.S. Department of Justice 1). Most of the cases under this act highlight the criticalities of the time taken by regulatory authorities before approving any M&A. A good illustration under this act is the case involving merger between JDS Uniphase and SDL that gives the criticalities involving time taken before approval by concerned authorities. JDSU was a company dealing with optical networking components, therefore, required an approval from DoJ for Merger with SDL that was as optical networking components maker. The merger could as well result in a supplier capable of exercising pricing power over products. In this case, the regulators involved took close to over six months before giving final decision on the case. The concern was that such joint entity could control larger market for Pump lasers provided by SDL (American Bar Association, Section of Antitrust law. Conclusion The antitrust laws have to an extent succeeded in protecting consumers from exploitation by megamergers. This is since all pricing techniques and bidding processes are under the check of the antitrust laws, therefore, preventing consumers from being exploited with low quality products and services including exploitation on pricing. However there are instances where the firms have been wrongfully persecuted in violation of antitrust laws. These are situations where a firm achieves its competitive advantage through personal aggressiveness using modern and available tools such as internet. For instance, the section 2 of the Sherman Act prohibits companies from monopolizing or conspiring to monopolize commerce. This act prohibits companies from activities that are competitively unreasonable and would grant the business control over prices and restricting outputs in particular markets. A company is considered to have market power in the event that it has a high market share and at the same time exhibits price leadership that does not tally with changes in market share. However, the antitrust law as discussed prohibits firms from maintaining monopoly unless the status is legally obtained. Good illustrations are given in this study for instance a case where two competing firms in the market came together as one investment entity. In this case, one firm invests a portion of their profit in research and development which is used for innovation therefore, granting a superior product while the other partner firm does not. The superiority of such products attracts consumer demand and may force firms with inferior products to quit the market as a result of legal business competition. The remaining business in this case considers itself to have exclusive monopoly achievable through offering superior products. Such instances call for the enforcement of antitrust laws. The operation within Mergers and Acquisitions depends on partner’s level of contribution, experience and organized working relationship. This leads towards improvement of individual business operations. The view of Kovacic and Shapiro (60) provides information on different reasons that links with changes of leadership within Mergers and Acquisitions and the possible influence on organizational performance. From the perspective of Beamish and Lupton, the formation and operations within Mergers and Acquisitions helps firms to access different market opportunities. In real sense, M&A results into diverse knowledge, capabilities and new resources that assist firms in penetrating target market segments. In M&A’s there are some key elements crucial for legal operations that would not be deemed as violation of antitrust laws. Works Cited American Bar Association, Section of Antitrust Law. Antitrust Law Developments, 4th Edition. Chicago: American Bar Association, 1997 Areeda, Phillip & Herbert,Hovenkamp. Antitrust Law: An Analysis of Antitrust Principles and Their Application. New York: WoltersKluwer Law & Business, 2013 Beamish, Paul & Nathaniel,Lupton. Managing joint ventures. Academy of Management, 5 (2009), 75-94 Hylton, Keith. Antitrust Law: Economic Theory and Common Law Evolution. New York: Cambridge Univ. Press, 2003. Kovacic, William. Creating Competition Policy: Betty Bock and the Development of Antitrust Institutions. Antitrust Law Journal. Fall, 66 (1997), pp. 231–45. Kovacic, William & Shapiro, Carl. Antitrust Policy: A Century of Economic and Legal Thinking. Journal of Economics Perspectives, 14 (2000), 43-60 Lim, Daryl. Patent Misuse and Antitrust Law: Empirical, Doctrinal and Policy Perspectives. New York, 2013. Print Mann, Richard & Barry, Roberts. Essentials of Business Law. 8th ed. Mason, Ohio: Thomson/South-Western West, 2004. Orbach, Barak.The Antitrust Consumer Welfare Paradox. 7 Journal of Competition Law & Economics (2011), 133 Posner, Richard. Antitrust Law. 2d ed. Chicago: Univ. of Chicago Press, 2002. U.S. Department of Justice. 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