Biden Trustbusters Display Timidity in Proposed Merger Crackdown

The Department of Justice and Federal Trade Commission recently announced a major shift in thinking on corporate mergers. The permissive approach that has prevailed since the early 1980s will be replaced with a much more vigorous anti-merger program going forward.

The agencies stated that a merger between two rivals in which the firms have a combined market share of greater than 30% would likely invite a legal challenge. Corporations will find mergers harder to complete under the draft merger guidelines. This is a welcome change.

Yet, the agencies’ proposed revisions don’t go far enough. In their final guidelines, the DOJ and the FTC should announce stricter market-share tests—think 15% instead of 30%—and put the largest corporations on notice that their mergers and acquisitions won’t be tolerated.

Although Congress enacted a strong anti-merger law and feared the concentration of economic and political power through consolidation, the federal government, for decades, has broadly tolerated mergers on the theoretical promise of efficiencies. Firms could join forces, attain economies of scale and scope, and potentially lower prices for consumers.

In the current Horizontal Merger Guidelines published in 2010, the DOJ and the FTC asserted that a “primary benefit of mergers to the economy is their potential to generate significant efficiencies and thus enhance the merged firm’s ability and incentive to compete, which may result in lower prices, improved quality, enhanced service, or new products.”

The story of efficiency-enhancing mergers is largely a myth and has little empirical support. Scholars Nancy L. Rose and Jonathan Sallet, who previously served in the DOJ, reviewed the research on mergers between competitors and concluded it provides “little support for a belief in the prevalence of substantial efficiencies.”

Mergers between firms in a buyer-seller relationship appear to have more mixed effects but aren’t as generally beneficial as some claim. Notably, mergers sometimes actually impair efficiency and create a new corporate sum that is less than its independent parts.

More than anything, mergers appear to be a financial extraction game. NYU Stern professor Melissa Schilling examined the record and offered this assessment: “A considerable body of research concludes that most mergers do not create value for anyone, except perhaps the investment bankers who negotiated the deal.”

Even if mergers commonly generated operational efficiencies as some theories suggest, that wouldn’t justify continued tolerance for corporate consolidation. The general alternative to mergers isn’t business stagnation, but instead hiring, investment, and innovation. History shows that such organic growth is better for the economy.

From the 1950s through the early 1980s, the US all but prohibited large corporations from acquiring their competitors, suppliers, and distributors. The DOJ’s 1968 merger guidelines stated that “where substantial economies [of scale] are potentially available to a firm, they can normally be realized through internal expansion.”

This policy helped foster the high-growth economy of that time: By discouraging executives from acquiring existing assets, capabilities, and firms, the federal government forced them to devote resources to new investments, research, and product and process innovations.

While this tough line limited the easy route to profits from buying other companies, it forced managers to discover new capabilities that they didn’t even know they had. For example, when Bethlehem Steel was blocked from acquiring Youngstown Sheet & Tube in 1958, it reluctantly did what it had previously said was impossible and built a new, state-of-the-art steel mill in Indiana—the first of its kind in the US.

Together with high marginal tax rates on incomes, which deterred corporate boards from handing out exorbitant pay packages, and an effective ban on share buybacks, which prevented shareholding looting of corporate treasuries, tough anti-merger policy was part of the institutional underpinnings of an innovative, high-pressure, and high-performing US economy.

The record of the past 40 years of lax merger policy is clear. While the hundreds of thousands of mergers and acquisitions since the 1980s enriched bankers, shareholders, and law firms, they failed to improve US economic performance. Permitting executives to treat corporations on which communities, workers, suppliers, and consumers are reliant as mere tradable financial assets rather than productive business organizations has impaired, rather than promoted, efficiency and innovation.

The DOJ and the FTC should go further in their final merger guidelines. They should announce stronger market-share tests—the 30% test noted above should be cut in half, if not more, for the largest corporations—and put big businesses on notice that their mergers and acquisitions won’t be tolerated.

When firms like AT&T, Google, Pfizer, and regional supermarket chains seek to grow, they should build, not buy.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Brian Callaci is the chief economist at the Open Markets Institute. He researches and writes about market structure, antitrust law, and their relationship to worker and employer power.

Sandeep Vaheesan is the legal director at the Open Markets Institute. He leads Open Markets’ legal advocacy and research work, including its amicus program.

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