A fresh round of merger and acquisition headlines has brought home a clear point: Many U.S. industries are consolidating. With the prospect of fewer, and more powerful, players in many sectors, shouldn't antitrust alarm bells be going off in Washington?
The "deal flow," as financial pros like to call it, is regaining momentum after a brief credit crunch-induced hiatus. In the beleaguered airline industry, both management and Wall Street see salvation from horrendous cost pressures with mergers. The pending deal between Northwest Airlines (NWA) and Delta Air Lines (DAL) is expected to be the first in a new round of megadeals.
More earthbound industries are also joining in. The profit-starved newspaper business is seeking to slash costs and shore up profits through consolidation, too. The candy business is shrinking, with Mars purchasing rival Wrigley (WWY). And then there are the deals-that-may-be, such as Belgian brewer InBev contemplating a takeover of American icon Anheuser-Busch and Barnes & Noble (BKS) mulling a deal for its troubled adversary Borders (BGP).
Cyberspace is not immune, either. Consider the intriguing dance among Microsoft (MSFT), Yahoo! (YHOO), Google (GOOG), and famed investor Carl Icahn that could end up in a merger between Yahoo and Microsoft, an advertising deal between Yahoo and Google, some other combination, or none of the above. Stay tuned. Meanwhile, the takeover deal book is long and growing.
The Merger Dance
Does the current consolidation wave mean consumers will pay higher prices to fly, read the news, and eat a candy bar? Or to drink beer or hawk their wares on the Web? Perhaps not in each of these examples listed above, but it's a safe bet the answer could be "yes" in many consolidating industries.
So where is the Justice Dept.? Shouldn't antitrust regulators flex their muscles and start blocking deals? In many cases probably not—especially if the welcome mat stays out for international competitors. The risk that mergers will lessen competition and strengthen market power in an industry can be significantly reduced when competitors from Brazil to Shanghai to Frankfurt compete for profits and markets in a business. (Still, carrying a foreign pedigree doesn't automatically ensure adequate competition. The antitrust authorities will—and should—take a close look at the marketplace implications of combining InBev and Busch into a $100 billion revenue brewer powerhouse.)
On the surface, recent U.S. antitrust policy or, more accurately, competition, has been remarkably laissez faire, especially compared with far more interventionist European policy. Before the mid-1970s, merger litigation was commonplace and a surprising number of cases even ended up before the Supreme Court. But since the '70s, deeply influenced by industrial organization economics in general and the Chicago School of Economics in particular, trustbusters have been increasingly reluctant to intervene in the marketplace. Indeed, economists are now the crucial experts in antitrust. For instance, as of early 2008 the Justice Dept. has 60 PhD-level economists and the Federal Trade Commission has 70 PhD-level economists, according to Lawrence White, economist at New York University,
No Clear-Cut Approach
The numbers bear this out. For instance, of the 37,201 mergers or acquisitions filed with the U.S. antitrust authorities from 1991 through 2004, about 97% sailed through without much scrutiny, according to a recent paper by economists Orley Ashenfelter of Princeton University and Daniel Hoskin of the Federal Trade Commission ("The Effect of Mergers on Consumer Prices: Evidence from Five Selected Case Studies" National Bureau of Economic Research, working paper 13859).
Clearly, trustbusters have moved away from a clear-cut yes-or-no; approach. What remains is much back-channel negotiation. For instance, in the remaining 3% of deals between 1991 and 2004 that were looked at closely, some two-thirds were modified, abandoned, or blocked. "Through negotiation, companies get the benefit that they see, and antitrust authorities get rid of the downside from their perspective," says Randal Picker, professor at the University of Chicago Law School and co-author of the scholarly article "Antitrust and Regulation" (NBER working paper 12902).