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MERGER OVERSIGHT AND H.R. 13131
WEDNESDAY, MARCH 10, 1976
HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON MONOPOLIES AND COMMERCIAL LAW
The subcommittee met, pursuant to notice, at 9:45 a.m., in room 2141, Rayburn House Office Building, the Honorable Peter W. Rodino, Jr. [chairman of the committee] presiding.
Present: Representatives Rodino, Flowers, Seiberling, Mazzoli, Hughes, Hutchinson, and McClory.
Also present: Earl C. Dudley, Jr., general counsel; Alan A. Ransom, William L. Sippel, and James F. Falco, counsel; Franklin G. Polk and Kenneth G. Starling, associate counsel.
Chairman RODINO. The committee will come to order.
Before commencing this morning's hearings I would like to take the opportunity to announce that in this room this morning is my good friend, Prof. James Watson, from Rutgers University, along with a group of students from Rutgers University, which is my alma mater. I would like to welcome them here.
This morning the Subcommittee on Monopolies and Commercial Law begins its antitrust oversight hearings. Specifically, we begin. oversight into the state of our merger law and its enforcement.
It is an appropriate time for this, as this year marks the 25th anniversary of the Celler-Kefauver amendments to the Clayton Act. That✓ statute is an unquestioned milestone in our antitrust jurisprudence. Its purpose, quite simply, is to prevent anticompetitive aggregations of market power.
Today our two antitrust enforcement agencies will tell us how they have been enforcing that statute, and what they perceive their enforcement problems to be.
We have, in some cases in agonizing detail, a fairly good idea of what those problems are. Some of them have been with us since the dawn of merger legislation.
One of those problems is that of premerger notification. Both agencies can, and will, tell us what we have known for years-you can't unscramble an egg.
Premerger notification is an idea whose time has clearly come. Legislation, in one form or another, has come painfully close to passage a number of times.
In fact, in the 85th Congress I managed a premerger notification bill-it got as far as the House Calendar. It will be appropriate, therefore, on the anniversary of the Celler-Kefauver amendments, to give
our antitrust enforcement agencies effective enforcement tools; and so, I shall shortly introduce such legislation again.
Our antitrust enforcers will also, I am sure, urge the expansion of the Clayton Act's "interstate commerce" clause to coincide with its Sherman Act reach, so that anticompetitive mergers now unreachable under the Supreme Court's recent American Building Maintenance decision can be prevented.
The Department of Justice, I know, will tell us of its need for improvements in the Antitrust Civil Process Act so that it may adequately investigate proposed mergers.
None of these ideas are new; but none have come to pass.
This hearing will be the groundwork for future oversight. We plan, now, to hear the basic concepts and problems of merger law. Later, we will examine specific problems and specific mergers in detail.
I am sure there are widely divergent points of view on these issues, and the subcommittee looks forward to hearing them.
With that, I should like to ask the gentleman from Michigan if he wishes to make any comments. Mr. Hutchinson?
Mr. HUTCHINSON. Thank you, Mr. Chairman.
I'm pleased to welcome the officials of the Antitrust Division and the Federal Trade Commission to testify on the effectiveness of their enforcement of the merger law.
Our fundamental economic policy is to encourage and preserve competition.
I'm sure that all of us agree that the Clayton Act and the CellerKefauver Act are valuable tools in preventing the unreasonable aggregation of industrial power and untimely elimination of viable competitors. The Clayton Act recognizes that some mergers are procompetitive. It allows courts to recognize that in some cases smaller firms need to join together in order to compete effectively with firms as large as some of our modern corporations.
While the merger law is probably the best-known antitrust law to most businessmen, it may be more difficult for them to gage their business activities against it than other antitrust laws. This is because the competitive impact of these mergers must be judged separately. The tests for mergers are judge-made tests, and each merger has a different impact on its market. Merger cases turn on the probability that competition will be lessened, or that a monopoly will be created. in each case the court is allowed to determine the reasonableness of the merger in the particular market.
Since the proper application of the legal standard escapes precise definition for particular cases, and yet is so important from an economic standpoint, these hearings are necessary so that we may evaluate how the law we wrote is being applied.
In recessionary times the absence of a great deal of merger litigation may be only a sign that there are few mergers, not that our merger laws are being eroded or circumvented. Likewise, in the period of economic upswing, the economic impact of any merger will have to be carefully considered. Beyond this, however, if the enforcers of the merger law are actually experiencing difficulties in their efforts. to execute the policies of Clayton, section 7, then we should look carefully at ways to eliminate those difficulties. We welcome their recommendations.
Thank you, Mr. Chairman.
Chairman RODINO. Thank you very much, Mr. Hutchinson.
This morning we are pleased to welcome, once again, Mr. Kauper, the Assistant Attorney General in charge of the Antitrust Division of the Department of Justice as our first witness, and following him will be the Acting Chairman of the Federal Trade Commission, Mr. Paul Rand Dixon.
We are pleased to have you here once again, Mr. Kauper. I know that in the past we have been calling upon you for the benefit of your information, and we await it eagerly.
[The prepared statement of Mr. Kauper follows:]
STATEMENT OF THOMAS E. KAUPER, ASSISTANT ATTORNEY GENERAL,
DEPARTMENT OF JUSTICE
Mr. Chairman and Members of the Subcommittee:
I welcome the opportunity to testify on the Department's experience and enforcement policy under Section 7 of the Clayton Act. In addition, I would like to discuss three areas in which legislation could significantly improve antitrust enforcement efforts in the merger area.
At the outset, I wish to commend the Subcommittee for its plan to conduct extensive antitrust oversight hearings. As the Supreme Court has noted, "[s]ubject to narrow qualifications, it is surely the case that competition is our fundamental national economic policy, offering as it does the only alternative to the cartelization of governmental regimentation of large portions of the economy." Since the antitrust laws are designed to insure that competition is allowed to serve this crucial purpose, the task of determining whether the antitrust laws are working properly is enormously important. I am confident that your hearings will serve as a foundation for improving both the antitrust laws and antitrust enforcement and thereby substantially benefit the interests of consumers throughout the country.
Enforcement of the antitrust prohibitions against anti-competitive 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
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 prosecutions of hard-core price fixing and activity 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 its 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 variety of ways. 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
United States v. Philadelphia National Bank, 374 U.S. 321 (1963).
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 by-pass of some of its steps.
After a brief initial examination by staff attorneys, a decision is made as to whether a more extensive inquiry is warranted. If so, a recommendation to open a preliminary inquiry is prepared by the staff, outlining the known facts and the reasons why a further investigation should be conducted. The matter is then forwarded to the Office of Operations for decision as to whether to authorize the necessary expenditure of resources. This decision is based on the size of the companies and markets involved, market data generally (including the structure of the market and the positions of the firms involved in the proposed merger), the probable validity of potentially applicable legal theories, and resource allocation factors, including the present availability of appropriate staff. Frequently, our Economic Policy Office is asked for its views and the matter may also be considered by others in the Division, including our Evaluation Section, one or more Deputy Assistant Attorneys General, and, on occasion the Assistant Attorney General. The basic responsibility for deciding whether or not to initiate a preliminary investigation, however, rests with the Operations Office. I should note, however, that doubts as to the wisdom of any proposed investigation are generally resolved in favor of proceeding further.
The FTC is, of course, contacted to determine whether any investigation would conflict with any of its activities. If such a conflict appears, further consultation occurs until an agreement is reached as to the appropriate agency to undertake the investigation.
If an investigation is authorized, the staff proceeds to gather and analyze the necessary information as rapidly as possible. Unfortunately, our ability to do a sound, professional analysis is influenced by factors over which we have little direct control. Most importantly, the scheduled date of consummation sometimes establishes, for all practical purposes, an outer time limit for a litigation decision if meaningful preliminary relief is to be sought. The parties will sometimes delay consummation at our request. Sometimes, however, they will not. Scheduled expirations of tender offers present particularly difficult problems in this respect. Thus, while we occasionally have several weeks (and sometimes longer) before a decision must be made, we sometimes have only a matter of days. In fact, there have been situations where we have had only a few hours notice, and the transaction, by necessity, must be dealt with after consummation.
Another important variable is the cooperation of persons and companies with relevant information. We currently can compel only documentary information, and then only from corporations under investigation. There is one reported decision denying the Division even this limited authority prior to the consummation of a merger. As a practical matter, this often means that parties to a pending merger transaction have a considerable amount of control over our ability to rapidly and effectively analyze the transaction, and the history of the willingness of such interested parties to cooperate with the Justice Department is mixed at best.
Sound analysis of a pending merger requires assembly of reliable market data. We must formulate relevant product markets, taking into consideration cross elasticity of demand among functionally related products. We must define a section or sections of the country in which the measurement of competitive effects is appropriate. We need data not only from the parties to the pending merger but also from other competitors in order to construct a realistic universe in which effects on concentration may be measured. Published data is often unavailable or insufficient. Thus, we must depend on the cooperation of third parties to obtain this data, and here too, the record is mixed. Many times we get very good cooperation; many times we get none. In any event, we have no direct control over the process, since we currently have no authority to compel the production of any information by third parties.
Upon completion of an investigation, the staff forwards a memorandum setting forth in detail whatever pertinent facts it has compiled regarding the effects of
2 United States v. Union Oil of California, 343 F. 2d 29 (CA9 1965).