Washington Works To Slow Merger Train
A recent spate of corporate 'megadeals' is shaking the dust off US antitrust laws.
The trust-busting fervor of Teddy Roosevelt's day isn't exactly back - but today government regulators are once again swinging the big stick of US antitrust laws.
Lockheed Martin Corp.'s purchase of Northrop Grumman is only the latest corporate megadeal to face Washington opposition. In recent days federal lawyers have blocked two drug-firm mergers, questioned Compaq Computer's acquisition of Digital Equipment, Corp., and subpoenaed MCI for information about its planned marriage to WorldCom Inc.
Then there's the Justice Department challenge to some of Microsoft's bare-knuckle business tactics. That's a fight that could develop into the government's biggest antitrust case since spats were fashionable.
The pace of business agglomeration is one reason for the new enforcement atmosphere. Last year, the US economy saw a record $1 trillion worth of mergers. The nature of these marriages can be an issue, as well. Many now occur within the same industry, lessening the number of domestic competitors.
And the political context of antitrust has changed. Justice and the Federal Trade Commission are full of eager Clinton appointees armed with new enforcement theories.
"There certainly has been a greater interest in the last 5-1/2 years in finding [antitrust] cases to win," says Robert Crandall, an economics fellow at the Brookings Institution here. "But that doesn't seem to be slowing down mergers."
Case in point: the defense industry.
Lockheed Martin and Northrop Grumman officials were surprised last weekend when the Pentagon expressed some displeasure with their merger, currently set for consummation in late April. For years, the Department of Defense had been telling defense contractors that given the downsized military of the late '90s, consolidation was their only option. Thus Lockheed and Northrop thought their action was, in essence, doing the government's bidding, especially in light of the fact that they predicted $1 billion in savings to their Pentagon customer due to increased business efficiencies.
Now defense officials are concerned that concentration in the weapons business may stifle innovation and raise prices in the future. They may insist that the new firm divest itself of significant assets as the price of winning regulatory approval.
But even if Lockheed/Northrop sells off chunks of its military electronics business, for instance, defense will still be dominated by a handful of big firms that are the result of a frenzied five years of merging: Boeing/McDonnell Douglas, Raytheon/Hughes, etc.
"This is a case of moving to close the barn door after the horses are over the hill and into the dale," says James Brock, an antitrust expert at Miami University, Ohio.
Defense isn't the only business where US regulators now feel there may soon be too few competitors. They're concerned about the rapidly consolidating phone industry, among others.
The planned $37 billion MCI/WorldCom merger would be the biggest in business history, after all. The new firm would control at least 50 percent of Internet traffic in the US, and 25 percent of the nation's long-distance business. Justice officials are weighing whether the merger would have negative effects on smaller Internet providers.
And regulators have resorted to the courts to stop concentration in drug wholesaling. The FTC has rejected two $2 billion-plus mergers among drug firms, saying they would leave the industry with three major players which among them would control 80 percent of the prescription drug market.
All this represents a big change from the Reagan and Bush eras. Back then free-market theory reigned.
Now regulators are enamored of so-called "feedback theory" economics. This holds that in today's high-technology age it has become easier to use a monopoly in one aspect of business to gain a similar position in another one. The feedback theory posits that it would be easy to take a commanding advantage in computer operating systems and bend it to lead in Internet commerce.
The government's scrutiny of Microsoft's actions may hinge on such thinking, though some experts say technology markets are more complicated than the picture feedback theory paints.
In any case there is no denying that antitrust enforcement has been more aggressive of late. "The Clinton people are more enforcement-oriented than the Bush people were," notes Michael DeBow, a former antitrust official who is now a professor at the Cumberland School of Law at Samford University in Birmingham, Ala.