The Merger Enforcement Program
Section 7 of the Clayton Act (15 U.S.C. Sec. 18) prohibits mergers that may substantially lessen competition. The Antitrust Division's goal in enforcing Section 7 is to preserve for consumersindividuals, businesses and governmentthe price-reducing and quality-enhancing effects of competition.
The Antitrust Division's merger enforcement program has been tested during the past two years by record numbers of transactions filed under the Hart-Scott-Rodino Act's premerger review provisions. In FY 1998 and 1999, approximately 4,500 transactions were filed each yearmore than double the number filed just a few years earlier. During the past two years, 97 transactions have been abandoned or restructured in response to the competitive concerns expressed by the Antitrust Division, the highest level of merger enforcement activity in its history. These transactions encompassed many products and services that affect everyday life, including telephone, Internet, health insurance, airline, and banking services, local radio advertising, movie theaters, aluminum cans, trash hauling and disposal, voting machines, electronic benefits transfer, and our military's most sophisticated weapons. Many of these transactions have involved firms with billions of dollars in revenues, operating in numerous product and service markets.
The analysis of proposed mergers has become increasingly difficult as the products and services of our economy become more complex and the pace of the development of new products increases. In technologically complex or rapidly changing markets, the Antitrust Division must determine not only the extent to which the merging firms compete today but also the manner in which such rivalry is likely to be affected by foreseeable innovation from these firms and others in the same or related markets. This type of complex, fact-based analysis led to the Division's suit to block the $11.9 billion proposed merger of Lockheed Martin and Northrop Grumman, the largest merger ever challenged by the government, as well as to the divestitures ordered in connection with Raytheon's acquisitions of the defense electronics businesses of Texas Instruments and Hughes Electronics. The Division's goal in each of these transactions was to preserve for our armed services the competition necessary for development of innovative, cutting-edge weapons systems.
In United States v. Primestar, the Division challenged an acquisition that raised the risk that the cable industry would be able to impede competition from a new technology. Cable television companies, which for many years have dominated markets for the distribution of multichannel video programming, are beginning to face competition from firms using new technology to distribute programming through high-powered satellites. The Division sued to block an effort by five of the nation's largest cable companies, acting through their joint venture Primestar, to acquire one of only three orbital slots available to provide such high-power direct broadcast satellite service. The parties abandoned the transaction before trial.
Much of the Antitrust Division's merger enforcement work over the last few years has been concentrated in recently deregulated or rapidly consolidating industries. For example, the relaxation of radio station ownership restrictions in the Telecommunications Act of 1996 has led to rapid consolidation in the radio industry. The Division has investigated dozens of radio mergers and has challenged transactions that would have led to competitive concerns; all of those transactions were either restructured to resolve the Division's objections or abandoned. During FY 1999 alone, the Division analyzed numerous bank merger transactions, including some of the largest in history, and required divestitures of local branches and assets in seven transactions, including the largest divestiture in bank merger history. The Division also challenged a merger between a gas and an electric company, as well as Northwest Airlines' acquisition of voting control of Continental Airlines.
In two cases last year, United States v. Aetna and United States v. Cargill, the Division demonstrated that its concerns about market power extend to circumstances involving "monopsony power," in which a transaction may create or enhance the power of buyers. In Aetna, the Division's complaint alleged that, in certain geographic markets, the merged firm would obtain the ability to depress artificially physicians' reimbursement rates, leading to a reduction in quantity or degradation in quality of physicians' services. In Cargill, the Division's complaint alleged that, in certain geographic markets, the acquisition of Continental's grain business by Cargill would allow Cargill to depress artificially the prices paid to farmers for grain and soybeans. Both cases were successfully resolved by consent decree.
The majority of the Division's merger cases are resolved by consent decrees requiring divestitures that are designed to protect competition. Full compliance with consent decrees is therefore essential to merger enforcement. During the year, the Division filed criminal and civil contempt charges against Smith International and Schlumberger, Ltd. for violation of a consent decree. In December, the companies agreed to pay $13.1 million in civil fines; both were found in criminal contempt and fined $750,000 each. The Division takes its consent decrees seriously and expects defendants to do so as well.
Nevertheless, there will be circumstances in which the Division concludes that the anticompetitive effects of a particular transaction cannot be cured by a consent decree and that the transaction should be prohibited in its entirety. The Antitrust Division's willingness to engage in litigation on merger issues provides important benefits to the public over and above the protection of competition in the particular markets affected by the merger in question. It signals that the Division is unwilling to accept an inadequate divestiture or other remedy, and it helps ensure that merger law reflects current learning. In the past two years, the Antitrust Division has filed or threatened to file 13 lawsuits to prohibit proposed transactions in their entirety, and the Division will continue to litigate merger challenges whenever necessary to achieve appropriate relief or advance merger analysis in the courts.
Table: Hart-Scott-Rodino Premerger Filings*
*Chargeable filings. Data does not include transactions for which notice must be given but no filing fees are required, such as those subject to approval by federal regulatory agencies.
Table: Value of U.S. Merger Activity
Source: Securities Data Company