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Enforcement of the antitrust prohibitions against anticompetitive mergers has, for many years, been an important part of our overall enforcement efforts. As an illustration, since fiscal year 1960, the Antitrust Division has conducted 6,716 investigations, about a third of which, I estimate, involved proposed mergers. During that period, 688 civil suits were filed, of which 238 involved mergers. I have attached as appendix A to my statement a general breakdown of those cases by industry. Thus, the merger area has been an active one for us.

Of course, the amount of the Division's resources devoted to mergers varies with the amount of merger activity at any given time. That activity seems to vary with general economic conditions. Apparently because of depressed economic conditions, merger activity has been reduced in recent years. In 1969, for example, there were approximately 4,500 mergers, compared with approximately 1,750 mergers in 1974. The decline of merger activity in recent years has enabled us to devote substantial additional resources to other very important areas, primarily to criminal prosecution of hardcore price fixing and activities to promote competition in the regulated industries.

The "nuts and bolts" of our merger enforcement process are rather difficult to define since each case varies, not only in substance and complexity, but also in the time we have available to seek meaningful relief. The Division always tries to decide whether to challenge a merger prior to consummation-with its attendant scrambling of assets and perhaps irreversible lessening of competition-if any challenge is to be made.

We become aware of mergers in a wide variety of ways. Obviously, we read the Wall Street Journal and Standard Corporation Records daily. We receive approximately 400 trade journals which generally report merger activity within their respective fields. Attorneys familiar with an industry frequently learn of a proposed transaction before it is reported publicly. Finally, individual citizens who, for various reasons, know of a merger which has not been reported in the press, sometimes notify the Antitrust Division.

Frequently, we become aware of a proposed merger only a short time before consummation is scheduled. This is particularly true where acquisition through a tender offer, friendly or unfriendly, is planned. We do the best we can in the time we have, attempting as thorough an analysis as is possible in the circumstances. We generally utilize the following procedures, although time pressures occasionally demand abbreviation or bypass of some of these steps.

And here, Mr. Chairman, I have in the statement set forth in part in response to your letter where you suggest a runthrough of the procedures used, a hypothetical kind of case. I think rather than reading that in the statement-it is part of what is included and if you have any questions we will be happy to answer them-but I thought in the interest of time I would proceed over to page 7 of the statement.

Chairman RODINO. I think that will be fine.

Mr. KAUPER. Where consummation of a merger has not yet occurred, a decision to file suit will almost always be accompanied by a decision to seek a preliminary injunction blocking consummation. Generally, only when the parties agree to postpone consummation, or when we feel we have had insufficient time or information to adequately present a case for a preliminary injunction, will we decline to attempt

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to block consummation. I believe, quite strongly, that divestiture is a wholly inadequate remedy in a merger case, and we seek to avoid. that problem whenever we can.

This is an important point, and cannot be overemphasized. Our investigatory process is designed to obtain what is necessary to make a litigation decision before consummation. Experience clearly shows that divestiture very often does not, and frequently cannot, result in a return to the competitive status quo ante. There is almost always a change in circumstances caused by a consummated merger that can never be undone. As a practical matter, divestiture is slow and unwieldy, and experience proves what can be expected-a company that loses a section 7 case after consummation has little incentive to assist in rapid divestiture. Horror stories abound, with the approximately 17-year history of the El Paso Natural Gas case one of the most visible. Unfortunately, the interminable problems and delay involved in obtaining divestiture are the rule, not the exception. There is every reason for the parties to delay an ordered divestiture, as both we and the FTC are only too painfully aware.

In addition, our failure to obtain preliminary injunctive relief creates an incentive for defendants to delay, rather than expedite the litigation. Our experience in bank merger cases, where there is an automatic statutory stay, is that those cases move significantly faster than merger cases challenging a consummated transaction. I am convinced that preliminary relief is necessary to expedited litigation and that, with preliminary relief, these matters can be disposed of fairly rapidly, as was the recent Copper Range-Amax case, which was disposed of in 60 days.

At least three important conclusions can be drawn from this overview of our merger enforcement process. First, the more notice we have, the better job we will do. Second, expanded investigatory authority would enable us to do a better job and with greater speed. Third, whether we get a preliminary injunction can have a significant effect on the length of the litigation and the adequacy of available relief.

The subcommittee has requested a brief outline of my views on merger enforcement policy generally. Of course, merger policy must be derived from the purposes which led Congress to enact section 7 of the Clayton Act, and to amend it in 1950, as well as from the case law interpreting that statute.

Whatever one believes about the advantages or disadvantages flowing from existing concentration levels in the American economy, there are several persuasive reasons for preventing any further increase. The dominant theme pervading congressional action in 1950 was a fear of what was perceived to be a rising tide of economic concentration. Increased concentration may not only reduce competition, but threaten social or political values as well. Section 7 was designed to prevent such harm by outlawing probably anticompetitive mergers when the trend to a lessening of competition in a line of commerce is in its incipiency.

Our foremost concern is with horizontal mergers. A horizontal merger is simply one between companies that are competitors, such as manufacturers of the same or very similar products, or distributors selling competing products in the same market area. Such mergers eliminate a competitor and concentrate the power of two firms into one.

The law with regard to horizontal mergers is relatively clear and well developed.

And then, on page 11, I discuss two of the leading cases; and if I might thence skip over to page 12.

Hence, two related rules emerge for highly concentrated industries. Mergers between substantial competitors which further increase concentration or mergers which absorb a small but important competitive factor in the market are probably unlawful.

In light of the case law governing horizontal mergers, it is difficult to articulate any meaningful enforcement policy that distinguishes between "big" and "small" mergers. The size of a merger can be judged by a variety of measurements, most importantly for our purposes by market shares. In addition, size is not the only factor to be considered in assessing the legality of a horizontal merger. The aggressiveness of a firm, the trend toward concentration in the relevant product market, and the history of a particular market must also be considered. It is unlikely, however, that any significant horizontal merger will go unchallenged by the Justice Department or the Federal Trade Commission. In determining whether to challenge a horizontal merger, the 1968 merger guidelines, while not controlling, serve as a useful benchmark by which to assess its probable anticompetitive significance.

A vertical merger is one between businesses that have a customersupplier relation to each other, such as a manufacturer acquiring a supplier of raw materials. The law regarding vertical mergers is not as well developed as that concerning horizontal mergers. The principal jurisprudence was established in the Brown Shoe and DuPont cases. The main concern raised by vertical mergers is that barriers to entry or competition by other firms may be raised. For instance, if a manufacturer acquires a supplier of crucial raw materials for its product, other competitors or would-be entrants to the manufacturer's market may be denied access to these key resources.

Conglomerate mergers are generally defined to include all those which are neither horizontal nor vertical, sometimes putting everything in that's left over. The principal analytic framework used to assess the legality of such mergers is the potential competition doctrine. Under the doctrine, conglomerate mergers may be anticompetitive for three basic reasons.

First, the acquiring firm may be eliminated as an actual new entrant into the relevant market under consideration, thereby depriving that market of increased future competition.

Second, the acquiring firm may be eliminated as an existing procompetitive force on the edge of the market; while it is not actually doing business in the market, it spurs competition in the market because of its threat to enter if profits or controllable costs of actual market competitors rise.

Third, the acquisition may operate to entrench the dominance of the acquired firm.

There is significant case law on the potential competition doctrine, from the first Penn-Olin case through the Marine Bancorporation case. Certain criteria for assessing the legality of a potential competition merger are well recognized, such as concentration levels in the relevant market, and the capability and incentive of the acquiring firm to enter the market in other ways. Projections for successful prose

cution, however, are problematical. We have found some courts reluctant to draw what we believe are reasonable inferences of probably anticompetitive effects of these mergers, but we remain convinced of the soundness of our theories.

Our recent challenge to the Inco-ESB merger rests upon the potential competition doctrine. We believe that Inco would have entered ESB's industrial battery market de novo in the absence of the merger. You also inquired, Mr. Chairman, about mergers in regulated industries.

Mergers in regulated industries present special problems. Where clear antitrust immunity exists, we must, of course, confine our activities to appearances before regulatory authorities with jurisdiction to approve such mergers, and to seeking direct judicial review in some cases. However, even where challenges under the Clayton Act are possible, special factors may come into play in evaluating the probable anticompetitive consequences of a merger. For example, concentration. ratios may have special significance in a line of commerce which can be entered only upon receipt of an officially authorized charter or certificate of entry. Regulation may itself limit the opportunities for competition. Where this is so, it is especially important that available opportunities for competition be preserved and encouraged.

In addition, regulatory entry barriers may affect application of the potential competition doctrine. With regard to the banking industry, the Supreme Court has stated that in States which stringently limit the ability of banks to branch or otherwise to expand internally, "in the absence of a likelihood of entrenchment, the potential competition doctrine grounded as it is on relative freedom of entry on the part of the acquiring firm-will seldom bar a geographic market extension merger by a commercial bank." That's the key part in the holding of United States v. Marine Bancorporation.

Finally, in some cases, Congress has provided for specific statutory defenses to a merger between regulated firms which would otherwise violate the antitrust laws.

Thus, the existence of State and Federal regulation may require. the use of special standards in determining the legality of a merger involving regulated firms.

Finally, you have requested my views on legislation which would contribute to a more effective and efficient merger enforcement program. In my judgment, three legislative reforms would provide much needed assistance.

The first would require substantial companies to provide premerger notification to the Department. Such notification would provide us with time to develop the information needed to insure a thorough evalution of whether the proposed merger should be challenged. It would thus provide us with a meaningful opportunity to seek a preliminary injunction before a questionable merger is consummated. This is of great practical importance because divestiture of stock or assets after an illegal merger is consummated is frequently an inadequate remedy for a variety of reasons.

Premerger notification will advance the legitimate interests of the business community in planning and predictability. It will enable firms to make postacquisition changes with much more confidence than they can at present.


Lastly, premerger notification will prevent the consummation of so-called "midnight" mergers designed to subvert the Department's authority to seek preliminary relief.

A second important proposal would extend the coverage of section 7 of the Clayton Act to the limits of congressional power under the commerce clause. Last year in United States v. American Building Maintenance Industries, the court interpreted section 7 more narrowly. It held that the phrase "engaged in commerce" in that section means, "engaged in the flow of interstate commerce, and was not intended to reach all corporations engaged in activities subject to the Federal commerce power. 99

As a consequence of the American Building decision, many economically significant mergers cannot be reached under section 7 if one of the corporations involved conducts a wholly intrastate business: That is, the corporation is not "directly engaged in the production, distribution, or acquisition of goods or services in interstate commerce.'

This decision leaves an undesirable gap in the coverage of section 7 of the Clayton Act, which can be closed by simply conforming its jurisdictional scope to the Federal commerce power. Last year, Congress granted the FTC authority over unfair methods of competition and unfair or deceptive acts or practices extending to constitutional limits. The Sherman Act has that same reach. Section 7 is a remedial statute designed to arrest the lessening of competition in its incipiency before it develops into restraints and monopolies prohibited by the Sherman Act. Its current restrictive application partially defeats that purpose.

A third reform relates generally to more effective antitrust enforcement but has special application to enforcement of the Clayton Act. Enactment of Ĥ.R. 39 would expand the Department's civil investigative demand authority. I testified in support of that bill before this subcommittee last May. This is not the appropriate time to reiterate what I think are the compelling reasons justifying enactment of H.R. 39. It is, however, a very appropriate occasion to emphasize the particular importance of the use of the authority contained in H.R. 39 to merger enforcement efforts generally.

H.R. 39, if approved by the Congress, would eliminate whatever uncertainty exists today about the use of CID's in investigating proposed mergers and acquisitions. In addition, it would allow us to obtain information relevant to the analysis of such transactions, not only from the parties thereto, but from any person having such information. This latter ability is particularly important in this area, since the crucial determination of relevant product and geographical markets can frequently be made only by obtaining market data from competitors, trade associations, suppliers, or customers. These third parties are not subject to our present CID authority, and often refuse to provide information voluntarily. Enactment of H.R. 39 is thus central to any program of reform of merger law to enhance its efficacy in maintaining competition as the Nation's primary economic policy. This concludes my statement, Mr. Chairman. I will be glad to answer any questions you may have.

Chairman RODINO. Well, thank you very much, Mr. Kauper. We are glad to have you back here, and you are looking well again. Mr. KAUPER. Thank you.

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