Mr. FLOWERS. We've got the same problem in my office. So, you have one vote, in case you want to start a movement.

Are there any further questions of the Assistant Attorney General? Thank you, Mr. Kauper, for being with us, very much.

Mr. KAUPER. Thank you.

Mr. FLOWERS. Our next witnesses will be Mr. Paul Rand Dixon, Acting Chairman of the Federal Trade Commission, joined by Mr. Owen Johnson, Director, Bureau of Competition, FTC, and Dr. Frederic Scherer, Director, Bureau of Economics of the FTC. Gentleman, we welcome you to the subcommittee. Mr. Dixon, why don't you proceed as you see fit?

[The prepared statement of Paul Rand Dixon follows:]

STATEMENT OF PAUL RAND DIXON, ACTING CHAIRMAN, FEDERAL TRADE

COMMISSION

Mr. Chairman and distinguished members of the Committee, it is always a pleasure and a privilege to appear before you. I understand that you are planning broad oversight hearings into the effectiveness of the antitrust laws, but that your initial focus is on Section 7 of the Clayton Act. Therefore, I will confine my remarks to the merger area of FTC antitrust enforcement.

Your subject is a timely one, both because this year marks the 25th anniversary of the Celler-Kefauver Amendments and because merger activity appears to be picking up from its depressed level of the past few years. As you know, merger activity runs in waves, the last of which crested in the late 1960's and early 1970's. If a new wave is on the horizon it is none too early to prepare for it.

I should make it clear that I am most emphatically not an opponent of mergers in general. Mergers can play an important and efficient role in allocating capital and economic resources. Many mergers are not anti-competitive and are not opposed by the antitrust agencies. However, there are mergers which hinder competition and we must be prepared to stop them.

From the beginning, the United States antitrust laws have tried to grapple with those mergers which hamper competition and tend toward monopoly. The Sherman Act itself was a response to a great wave of corporate consolidations in the late 19th Century. It is generally agreed that the Sherman Act had little impact on the merger movement in succeeding years. Section 7 of the Clayton Act, enacted in 1914, was designed to meet what the public saw as a flaw in the Sherman Act.

Unfortunately, the relentless attacks of corporate respondents opened up loopholes that soon made the Clayton Act totally ineffective. The Federal Trade Commission, the major enforcer of the Clayton Act, brought only 31 complaints in the 1927-1950 period and only four of those resulted in orders. No Commission orders were issued in the 16 years following the 1934 Arrow-Hart and Hegeman case, which ruled that the FTC had no authority to order divestiture of assets.1 One scholar summed up his examination of this dreary period as follows:

It is clear from this review of the formal complaints issued from 1927 through 1950 that the Commission's administration of Section 7 of the Clayton Act in that period did not prevent or dissolve any mergers, though it may have affected the form in which some combinations were organized.*

This sorry record, combined with a change of political climate spurred on by the Temporary National Economic Committee's findings, led to the passage of the Celler-Kefauver Amendments in 1950. The importance of those amendments cannot be overemphasized. For the first time antitrust enforcers had a workable tool. That tool was quickly picked up and utilized, as a 1967 FTC report, published by your Committee shows. From 1950 to 1967, 206 Government Section 7 cases were filed involving a total of 801 acquisitions which, in turn, involved almost $8 billion in commerce. Most of these actions were brought against large companies; 71 percent involved the largest 500 companies. The effect of this government campaign can be demonstrated statistically. In 1951-4, 37 percent of all

1 Arrow-Hart & Hegeman Electric Company v. Federal Trade Commission, 291 U.S. 587 (1934).

2 David Dale Martin, "Mergers and the Clayton Act," University of California Press (Berkeley: 1957), pp. 162–63.

corporate acquisitions of greater than $10 million were horizontal; in 1963-6 the horizontal proportion had dropped to 15 percent. And most dramatically, the per centage of greater than $10 million acquisitions, by large companies, which were horizontal, declined from 62 percent in 1951-4 to 25 percent in 1963-6. As that study concluded:

... the simple fact is that the merger enforcement program since 1950 represents a unique event in American antitrust history. And when measured by its effects, it has had a fundamental and widespread precompetitive impact on the organization and performance of our economy.*

I agreed with that analysis then and my judgment is, if anything, reinforced now, nearly ten years later. In that space of time the Commission has brought and either won or negotiated divestitures in a series of merger cases against many of the nation's leading companies, including Allied Chemical Corp., Eaton, Yale and Towne, ARA Services, Inc., Kennecott, Rockwell Inernational, Pepsico, Anaconda Co., Bendix Corp., Standard Oil Company (Indiana), Amerada Hess Corp., Heublein, Inc., Georgia-Pacific Corp. and Borg-Warner Corp. to name just a few. Currently cases are pending at one stage or another against Warner-Lambert Pharmaceutical Co., Fruehauf Corp., American General Insurance Co., Jim Walter Corp., RSR Corporation, Gifford-Hill & Co., Inc., Coca-Cola Bottling Co. of N.Y., SKF Industries, Nestle Alimentana S.A., and the Brunswick Corp. to give a partial listing. A number of investigations are also currently underway at the Commission. And, of course, the Antitrust Division of the Department of Justice is also extremely active in the merger area.

Despite this very considerable record of success, I feel that there are further amendments to Section 7 which could make it an even more useful tool in preventing anticompetitive mergers. I will go into these later, but first I will attempt to answer some of the specific questions raised in Chairman Rodino's letter. Because some of the responses are voluminous and highly statistical in nature, I will only give a brief summary and submit the material for the record.

The Commission initiated 661 merger investigations between 1960 and 1975. The yearly totals have ranged from 77 and 68 in Fiscal 1967 and 1968 respectively to only 9 in Fiscal 1975. The sharp differences in these figures illustrate very clearly the tendency of mergers to move in a pattern of waves and troughs.

Between 1970 and 1975, the Commission investigated 80 horizontal, 42 vertical and 72 conglomerate mergers. These investigations occurred in 39 industrial groups. Leading the list were food and dairy products (32), building materials (22), beverages and concentrates (14), automotive parts (12), metals and metal products (8) and service industries (8).

There are five areas in which FTC merger guidelines have been issued. In 1967, enforcement policies were issued concerning vertical mergers in the cement industry and mergers in the food distribution industry. In 1968, enforcement policies were issued regarding the textile mill products industry' and product extension mergers in grocery products manufacturing. The fifth enforcement policy, with respect to mergers in the diary industry, was issued in 1973.

I have submitted to the Committee a copy of each guideline issued and a description of Commission action taken pursuant to each guideline. I should point out that it is not quite accurate to speak of mergers which "violated" the guidelines because the guidelines are not proscriptive; rather, they constitute a type of early warning system. They are useful to both Commission staff and the industry involved as a means of identifying those acquisitions which will be scrutinized most carefully. The Commission never meant to prohibit every acquisition which exceeded the bounds of the guidelines, any more than it meant to validate every acquisition which fell below the limits set forth in the guides. A look at some of the food distribution mergers which exceeded the bounds of the guidelines demonstrates the reason for this policy. For instance, in 1973 there were two acquisitions of failing companies, six market extensions into remote rather than contiguous areas, and six acquisitions of stores which had been closed or were being shut down. A description

Dr. Willard F. Mueller. "The Celler-Kefauver Act: Sixteen Years of Enforcement," staff report to the Antitrust Subcommittee of the House Judiciary Committee (1967), pp. 3-12. Ibid., p. 37.

5

At the time I authorized its publication during my previous tenure as Chairman of this agency, in a letter to Chairman Celler. I called it an "excellent and informative analysis." Of a total of 158. The author adds up to more than 158 because some were of more than one type.

Rescinded by the Commission on May 12, 1975 because special treatment for the textile industry no longer seemed warranted.

of the circumstances surrounding each acquisition in the years following promulgation of the Commission's food distribution enforcement policy is included in the materials which I am submitting.

Mr. Chairman, you also asked me to describe the workings of the Commission's merger screening process. The best way to do so might be by following the course of a hypothetical merger, let us say, between Colossal Industries and Leviathan Corporation, both makers of widgets. Knowledge of this merger would most likely be picked-up either through our Pre-Merger Notification Program, if large in size, or through public sources such as the Wall Street Journal, Journal of Commerce or trade publications within an industry.

Once the Colossal-Leviathan merger became known, it would be considered by the Merger Screening Committee, which meets once a week. The Committee is composed of representatives from both the Bureaus of Competition and Economics. Most mergers are immediately eliminated as potential targets 'for investigation, usually on a basis of small size and an apparent lack of competitive effect. The remaining mergers, such as Colossal-Leviathan's, are more carefully analyzed as to factors such as size, product lines involved, concentration, potential foreclosure, profits, and the state of entry barriers. If a member of the Merger Screening Committee is familiar with Colossal and Leviathan or the widget industry, he may make an oral analysis from which the Committee can make a decision. Or a staff member may be called on to make a quick investigation and report back to the Committee.

A third technique, which would be used if contact with Colossal or Leviathan was necessary, is to open a formal preliminary investigation assigned to an attorney. Before a preliminary is opened, clearance is sought from the Department of Justice's Antitrust Division,

Through one of these techniques the Merger Screening Committee will decide whether to recommend to the Director of the Bureau of Competition that he authorize a formal seven-digit investigation of the Colossal-Leviathan merger.

In addition, if there is a difference of opinion within the Merger Screening Committee as to whether a merger merits an investigation, the matter is brought to the Bureau Director's attention for resolution. The final decision as to whether or not to authorize a seven-digit investigation is in the hands of the Director in both instances. Once the Bureau Director assigns a sevendigit number to the Colossal-Leviathan merger, the screening process is over and a full-fledged investigation begins.

Of course, while the Commission has delegated to the Director of the Bureau of Competition authority to open or refuse to open a 7-digit investigation, the Commission retains at all times the authority to review and reverse any decision which the Director makes. To ensure that the Commission's option in this regard is a meaningful one, the Commission has recently instructed the Bureau of Competition to provide the offices of individual Commissioners with all minutes of the Merger Screening Committee and a record of all determinations by the Director to initiate 7-digit investigations. In this fashion, all Commissioners will be informed promptly of those mergers which are being investigated and of those mergers which, after preliminary consideration, staff has determined not to pursue.

Mr. Chairman, you asked for a brief outline of my views in two areas which you plan to take up in more detail in later testimony: enforcement against "small" as opposed to "big" mergers and merger policy in the regulated industries.

Size does not necessarily determine our attitude toward a merger. In analyzing the legality of a merger our focus is on its competitive effects and the consumer benefit from an action to block a merger. A merger's effect on competition is a product of many variables: the market share of the acquiring and acquired companies, concentration in the industry, the state of entry barriers, profitability, and whether the two firms were in actual or potential competition, to name some of the most important. While a large merger in a large industry is likely to create anti-competitive effects more often than a small merger in a small industry, such is not always the case. For instance, recently the Anaconda Company was sued by the Commission for its acquisition for $3 million of Systems Wire and Cable, Inc., a coaxial cable manufacturer. The total sales of the semiflexible coaxible

cable industry involved were, at the time of the acquisition, only $28 million. However, because a rapid growth in cable television is expected, the coaxial cable industry is expected to expand dramatically and the acquisition removed a small but aggressive competitor from the fledging industry. As a result, despite its small size, the acquisition was challenged by the Commission. Post-complaint negotiations resulted in an agreement by Anaconda to divest the assets of Systems Wire and Cable.

There have been a number of cases brought in the regulated industry area, by both the Justice Department and the Federal Trade Commission, which have established the right of the antitrust enforcement agencies to examine mergers in such industries. Our Bureau of Competition does not hesitate to bring such cases. I fully support the Bureau's efforts to extend the enforcement of the Clayton Act as broadly as possible. Of course, specific statutory exemptions do limit our activities to a certain extent.

I would now like to turn to two areas of potential merger legislation which your committee might consider. First, legislation should be passed to deal with the American Building Maintenance decision. As you are aware, that decision held that Section 7 of the Clayton Act applied only to acquisitions "in commerce", not to those "affecting commerce." The court ruled that although it was clear that Congress could have constitutionally reached acquisitions affecting commerce, it had not chosen to do so. By way of contrast, the courts have held that in the Sherman Act, Congress "wanted to go to the utmost extent of its Constitutional power in restraining trust and monopoly agreements," " and that Act has been applied to intrastate activities which substantially affect interstate commerce." It is true that the American Building Maintenance decision left open the possibility that Section 5 of the Federal Trade Commission Act could be used to reach intrastate acquisitions. The argument would run that Section 5 now applies to activities affecting interstate commerce and has previously been held to reach transactions which violate the standards of the Clayton Act; therefore, one could reason, Section 5 forbids intrastate acquisitions affecting, but not "in", interstate commerce. The American Building Maintenance court explicitly noted that it was not deciding that question."

Rather than await a Court clarification of this point it seems preferable to me for Congress to make it clear that Section 7 is similar to the Sherman Act in that it is intended to reach as far as the Constitution permits. Because merger enforcement is our first line of defense against monopoly, it is just as important for Section 7 to have a broad reach as it is for the Sherman Act to do so. Further, even if the courts eventually rule that Section 5 does reach intrastate mergers, that will do little good to my brethren at the Antitrust Division.

The other areas of potential legislation in which I would like to stimulate interest today are (1) pre-merger notification and information gathering, and (2) standards for enjoining mergers. The Commission has previously told the Senate Antitrust Subcommittee that there is a need for a waiting period in regard to large mergers to permit the enforcement agencies to determine whether a particular acquisition should be opposed in advance of its consummation. I would like to reiterate that view.

Such legislation would help cure two banes on the lives of antitrust enforcement officials. First, foot-dragging and resistence to government information requests is, traditionally, the stock in trade of corporate attorneys. A law that specified that requested information must be supplied after notification and before a merger is consummated, would place the shoe on the other foot. The result should be an enormous drop in the time required to investigate and to determine whether to challenge a Section 7 matter.

Second, the legal standards for enjoining mergers should be liberalized. While antitrust enforcers have an impressive record of winning cases, they have not been so successful at winning meaningful divestiture. According to a former FTC Chief Economist: "In very few of the cases where the Government ultimately prevailed has there been completely successful divestiture of the acquired unit." is

United States v. American Building Maintenance Industries, 422 U.S. 271 (175). 10 United States v. South-Eastern Underwriters Assn., 322 U.S. 533, 558 (1944).

See, e.g. Mandeville Island Farms, Inc. v. American Crystal Sugar Co., 334 U.S. 219 (1947) United States v. Employing Plasterers Assn., 347 U.S. 186 (1954).

12 United States v. American Building Maintenance, 422 U.S. 271, 279 (1975).

18 Statement of Professor Willard F. Mueller, before Senate Subcommittee on Antitrust and Monopoly, June 4, 1975.

A landmark study of 39 mergers by Professor Kenneth Elzinga supports this view." Of the 39 cases which the government "won", in only 6 did he find the relief ordered to be successful. In 21, the government was completely unsuccessful, resulting in either no divestiture or an unsatisfactory divestiture, such as of non-viable or de minimis assets, or a divestiture to a significant competitor.

Typical of these 21 cases is the Commission's "victory" in the Farm Journal case. The leading agricultural magazine acquired its chief rival, Country Gentleman, closed it down, and successfully solicited most of the latter's subscribers for subscriptions to the Farm Journal. The Hearing Examiner ordered divestiture, but noted that:

... as a practical matter divestiture of the subscribers' list now will accomplish nothing. Respondent has, by now, extracted all the juice from that fruit as well as from the list of current Country Gentleman advertisers.

Country Gentleman is dead and the "assets" which it turned over to respondent are now without value to any newcomer or, indeed to any farm publication now in the field. When his corn is taken from him and the horse dies, it is the height of vanity to strew the bare corncobs over his grave. All that can be accomplished then, is simple divestiture of the 2 trade names and the 2 lists, although... this at most may only disturb, but will not diffuse the coalescence which has taken place.

Even where a divestiture is more successful than in the Farm Journal case, it still takes inordinately long-so long that it may pay a firm to make an illegal acquisition and profit from its fruits, knowing full well that disgorgement will not occur for many years. Elzinga found that the average time from an acquisition to a divestiture was five and one-half years. Many cases drag on much longer despite continued Commission efforts to streamline trial procedures.

I have noticed that contrary views on the need for premerger notification have recently been expressed by the editors of the Wall Street Journal. On January 30, 1976 the Journal warned that the result of premerger notification legislation would be that "A handful of young Harvard grads and an efficient secretarial pool could prevent them [mergers] with ridiculous ease." The Journal thinks this would be a bad thing because it likes mergers. The main reason the editors advance as to why mergers are desirable is that when a firm with tax liabilities merges with one with tax credits, there is a big tax saving. And for corporations to pay less taxes is good because otherwise the money would go to Uncle Sam who would waste it.

Now, I'm not anxious to be known as the defender of young Harvard grads or government waste, but this editorial strikes me as plainly silly. If the best argument the Wall Street Journal can think up against a premerger notification bill is that such a bill prevents firms from avoiding taxes, I think such a bill should be passed today. This is particularly so because there are many reasons why such a bill is needed, as I discussed above: (1) To enable antitrust enforcers to quickly gain information they can only obtain from the merging companies, (2) to stop the plague of interminable delay by corporate counsel in merger cases, and (3) to avoid the problems of obtaining meaningful divestiture, which can result even when the government ultimately wins its case.

Mr. Chairman, this ends my prepared statement. I will be glad to answer any questions which the Committee may have.

TESTIMONY OF PAUL RAND DIXON, ACTING CHAIRMAN, FEDERAL TRADE COMMISSION

Mr. DIXON. Thank you, Mr. Chairman, and distinguished members to the committee. It is always a pleasure to appear before you.

I understand that you are planning broad oversight hearings into the effectiveness of the antitrust laws, but that your initial focus is on section 7 of the Clayton Act. Therefore, I will confine my remarks to the merger area of FTC antitrust enforcement.

In my opinion your subject is a timely one, both because this year marks the 25th anniversary of the Celler-Kefauver amendments and

14 Kenneth Elzinga, "The Antimerger Law: Pyrrhic Victories," Journal of Law and Economics, Vol. XII (1). April 1969. See. too. Comment, "Preliminary Preliminary' ReHef Against Anticompetitive Mergers" (1972), 82 Yale Law Journal 1557.

15 In the Matter of Farm Journal, Inc., 53 F.T.C. 26, 50–51 (1956).