Conglomerate-Power Mergers

Washington University Law Review Volume 1965 Issue 1 Symposium: New Towns Development January 1965 Conglomerate-Power Mergers Follow this and additional works at: https://openscholarship.wustl.edu/law_lawreview Part of the Antitrust and Trade Regulation Commons, and the Business Organizations Law Commons Recommended Citation Conglomerate-Power Mergers, 1965 Wash. U. L. Q. 126 (1965). Available at: https://openscholarship.wustl.edu/law_lawreview/vol1965/iss1/11 This Note is brought to you for free and open access by the Law School at Washington University Open Scholarship. It has been accepted for inclusion in Washington University Law Review by an authorized administrator of Washington University Open Scholarship. For more information, please contact . CONGLOMERATE-POWER MERGERS I. TYPES OF MERGERS Government's attacks on corporations which upset the ideal of economic competition by controlling price rather than being guided by the "impersonal" laws of supply and demand' are directed to a great extent in the laws forbidding certain mergers. A merger entered into with intent to monopolize or one which is in restraint of trade is subject to attack under the Sherman Act;2 one which may substantially lessen competition or tend to create a monopoly is subject to attack under section 7 of the Clayton Act.' Until the last decade the applicability of section 7 was limited to horizontal mergers:' those in which the merging firms perform similar functions 1. The ideal is premised on a conviction that competition exists primarily when no firm or group of firms can control prices in a given market. GALBRAITIr, AastmuoAN CAPITALISm 7-14 (rev. ed. 1956). In United States v. Philadelphia Nat'l Bank, 374 U.S. 321 (1963), the Court notes with approval the statement in Comment, 68 YALE L.J. 1627, 1638-39 (1959) that "competition is likely to be greatest when there are many sellers, none of which has any significant market share." The Court added that this is "common ground" among economists, and "was undoubtedly a premise of congressional reasoning about the anti-merger statute." 374 U.S. at 636; accord, United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377 (1956); Scott Paper Co., 3 TRADE Ruo. REP. 16706 (FTC 1964); Procter & Gamble Co., 3 TRADE REG. REP. 16673 (FTC 1963). See also Bok, Section 7 of the Clayton Act and the Merging of Laws and Economics, 74 H-RDv. L. Rav. 226, 247 (1960); Walden, Antitrust in the Positive State, 41 Tex. L. REv. 741, 763-64 (1963). In United States v. Philadelphia Nat'l Bank, supra, the Court did not mention that the comment in the Yale Law Journal, in a footnote, indicated the contrary views of those who advocate workable competition, by which the market of a few sellers, although an oligopoly, may be the preferable form of competition in certain industries. Comment, 68 YALE L.J. 1627, 1639 n.56 (1959). 2. Sherman Act, 26 Stat. 209 (1890), as amended, 15 U.S.C. §§ 1, 2 (1958). Section 1 provides that "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade . . . is declared to be illegal." Section 2 provides that "every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce ... shall be deemed guilty of a misdemeanor." 3. Clayton Act § 7, 38 Stat. 731 (1914), as amended, 64 Stat. 1125 (1950), 15 U.S.C. § 18 (1958). The pertinent section, as amended in 1950, forbids acquisition of stock or assets of another corporation where the effect of such acquisition "in any line of commerce in any section of the country ... may be substantially to lessen competition, or to tend to create a monopoly." 4. Federal enforcement agencies originally thought that the statute covered only horizontal mergers. See, e.g., FTC, REPORT ON CORPORATE MERGERS AND AcQUISTIONS 168 (1955). For a discussion of this erroneous position, see Brown Shoe Co. v. United States, 370 U.S. 294, 313 (1962); United States v. E. I. du Pont de Nemours & Co., 353 U.S. 586, 590 (1957). Washington University Open Scholarship CONGLOMERATE MERGERS in the production or sale of comparable goods or services.5 Originally, application of section 7 required (1) that the merging firms operate within the same line of commerce6 and (2) that they compete in the same geographical market.7 The threat to competition in such a merger is clear. Where firms in the same line of commerce in the same geographical market merge, there is an immediate increase in the market share of the acquiring firm.' In determining the validity of such a merger, the test applied is whether the acquisition of new market shares will substantially lessen competition.9 5. Brown Shoe Co. v. United States, supra note 4, at 334. 6. "Line of commerce" is synonymous with "product market." United States v. Bethlehem Steel Corp., 168 F. Supp 576, 588 (S.D.N.Y. 1958). In Brown Shoe Co. v. United States, 370 U.S. 294, 325-26 (1962), the Court said that the outer boundaries of a product market are "determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it." Within this broad market, there may also exist "sub-markets" which constitute product markets for anti-trust purposes. The determination of sub-markets is made by examining "such practical indicia as industry or public recognition of the sub-market as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes and specialized ven- dors." The Court added that "the boundaries of the relevant market must be drawn with sufficient breadth to include the competing products of each of the merging companies and to recognize competition where, in fact, competition exists." See United States v. Continental Can Co., 378 U.S. 441, 452-58 (1964). 7. See United States v. Philadelphia Nat'l Bank, 374 U.S. 321, 357-62 (1963). "Section of the country" in section 7 of the Clayton Act is described as referring to "where, within the area of competitive overlap, the effect of the merger on competition will be direct and immediate." Id. at 357; see United States v. El Paso Natural Gas Co., 376 U.S. 651 (1964). The requirement of the same geographic market means that the horizontal aspects of market-extension mergers (performing similar functions), defined in text accompanying notes 17-18 infra, are not covered by section 7, since the merged firms are not in the same geographical market. 8. Brown Shoe Co. v. United States, 370 U.S. 294, 322 n.38, 335, 342-43 (1962); Crown Zellerbach Corp. v. FTC, 296 F.2d 800, 823-24 (9th Cir. 1961), cert. denied, 370 U.S. 937 (1962); United States v. Bethlehem Steel Corp., 168 F. Supp. 576, 588, 604 (S.D.N.Y. 1958); Procter & Gamble Co., 3 TRADE REG. RnP. 1 16673, at 21565 (FTC 1963). 9. Brown Shoe Co. v. United States, supra note (...truncated)