"Entrenchment

Loyola University Chicago Law Journal Volume 13 Issue 2 Winter 1982 Article 2 1982 "Entrenchment" Under Section 7 of the Clayton Act: An Approach for Analyzing Conglomerate Mergers Lawrence K. Hellman Prof. of Law, Oklahoma City University Follow this and additional works at: http://lawecommons.luc.edu/luclj Part of the Business Organizations Law Commons Recommended Citation Lawrence K. Hellman, "Entrenchment" Under Section 7 of the Clayton Act: An Approach for Analyzing Conglomerate Mergers, 13 Loy. U. Chi. L. J. 225 (1982). Available at: http://lawecommons.luc.edu/luclj/vol13/iss2/2 This Article is brought to you for free and open access by LAW eCommons. It has been accepted for inclusion in Loyola University Chicago Law Journal by an authorized administrator of LAW eCommons. For more information, please contact . "Entrenchment" Under Section 7 of the Clayton Act: An Approach for Analyzing Conglomerate Mergers* Lawrence K. Hellman** INTRODUCTION While economists continue to debate whether the American economy is becoming significantly more concentrated,' there can be little doubt that the pace of corporate mergers and acquisitions is quickening. The number of corporate mergers and large acquisitions has increased each year since 1975, and the number of signifi1982, Lawrence K. Hellman Professor of Law, Oklahoma City University. B.S. 1966, Washington and Lee University; M.B.A. 1967, J.D. 1970, Northwestern University. This article is based on a paper prepared for the May 1981 program on federal merger policy co-sponsored by the Illinois Institute for Continuing Legal Education and Loyola University of Chicago School of Law and Law Journal. The author expresses appreciation for the helpful comments of Professors Arthur LeFrancois, Craig Callen, Harry First, and William Kratzke, and the research assistance of Emmanuel Edem. The author was a staff attorney in the Antitrust Division of the Department of Justice during 1970-1974. * 0 ** 1. See generally OFFICE OF THE ASSISTANT SEC'Y FOR POLICY, U.S. DEP'T OF COMMERCE, 1 MERGERS AND ECONOMIC EFFICIENCY: PROCEEDINGS OF A WORKSHOP AND SUPPLEMENTARY PA- PERS (1980) [hereinafter cited as MERGERS AND ECONOMIC EFFICIENCY]. Although opinion is divided, one highly regarded authority concludes that "[T]he long-run trend has clearly been one of increasing aggregate [asset and value added] concentration." F. SCHERER, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE 49 (2d ed. 1980) [hereinafter cited as SCHERER]. Relying on Federal Trade Commission data, Professor Scherer found that the 100 largest U.S. manufacturing corporations held 47% of domestic manufacturing assets in 1973, compared with 37 % in 1947. Concentration in terms of value added by the 100 largest manufacturing concerns, though at a lower absolute level, rose even more dramatically during the same period, from 23% in 1947 to 33% in 1973. Id. at 48-49. "In 1976, according to FTC statistics, the 451 largest U.S. companies controlled 70% of the nation's manufacturing assets and earned 72% of the profits. In 1960, comparable concerns controlled only about half the manufacturing assets and earned only 59% of the profits.. " Taylor & Schorr, Government May Abandon Fight to Stem Conglomerate Takeovers, Wall St. J., Nov. 24, 1980, at 33, col. 4 [hereinafter cited as Taylor & Schorr]. The significance of these statistics may be mitigated by the substantial turnover over time in the identity of the 100 largest manufacturing concerns and the relatively small percentage of national income (26%) attributable to the manufacturing sector of the economy. See Weston, Industrial Concentration, Mergers, and Growth: A Summary, in MERGERS AND ECONOMIC EFFICIENCY, supra this note, at 38, 42-43 (1980). See also White, The Merger Wave: Is it a Problem?, Wall St. J., Dec. 11, 1981, at 28, col. 3 (Southwest ed.) [hereinafter cited as White]. 225 226 [Vol. 13 Loyola University Law journal cantly large acquisitions has been increasing as well.' Between 1978 and 1980, there were at least 34 corporate acquisitions involving more than one-half billion dollars,3 and it is now almost commonplace to read about multi-billion dollar transactions.4 The curinvolves conglomerate predominantly rent merger wave transactions.5 Between seventy and eighty percent of recent acqui2. BUREAU OF COMPETITION, FTC, STATISTICAL REPORT ON MERGERS AND ACQUISITIONS 1978 25, 119 (1980) [hereinafter cited as FTC 1978 REPORT]. There were 2,395 merger announcements in 1981. The total value of these transactions was a record $82.6 billion, almost double the previous record (set only in 1980) of $44.3 billion. Mergers Climbed 27%, Prices Rose Nearly 20% in 1981, Surveys Find, Wall St. J., Jan. 14, 1982, at 16, col. 3 (southwest ed.). 3. Taylor & Schorr, supra note 1. 4. Recent proposed transactions (some of which have not been consummated) include the following: Acquiring Firm Acquired Firm Purchase Price DuPont Co. Conoco, Inc. $ 7.5 billion" Societe National Elf Aquitaine Texas Gulf Inc. $ 2.7 billionb Fluor Corp. Kennecott Corp. St. Joe Minerals Corp. $1.77. billionc $ 2.5 billiond Nabisco Inc. Standard Brands Inc. $ 1.9 billione Reliance Electric Co. $ 1.2 billion f Exxon Corp. Standard Oil Co. of California Amax, Inc. $ 3.9 billion g Santa Fe Industries Southern Pacific $ 1.2 billionh Shell Oil Co. Belridge Oil Co. $ 3.7 billion U.S. Steel Corp. Marathon Oil Co. $ 6.4 billion j Connecticut General Corp. INA Corp. $ 4.3 billion Standard Oil Co. of Ohio i k ' Wall St. J., July 15, 1981, at 3, col. 1. (A competing bid of $8.19 billion was made for Conoco by Mobil Corp., Wall St. J., July 27, 1981, at 3, col. 1.) b Wall St. J., July 7, 1981, at 2, col. 2. CWall St. J., June 3, 1981, at 2, col. 2. d Wall St. J., May 13, 1981, at 2, col. 1. 'Wall St. J., April 23, 1981, at 3, col. 1. (The dollar figure represents the combined market value of the common stock of the two merging concerns.) f Wall St. J., March 23, 1981, at 14, col. 2. (The transaction was consummated in 1979.) g Wall St. J., March 6, 1981, at 3, col. 1. h Wall St. J., May 16, 1980, at 3, col. 1. i NEWSWEEK, June 27, 1981, at 54. j Wall St. J., Nov. 20, 1981, at 3, col. 1. (southwest ed.). k Wall St. J., Nov. 10, 1981, at 3, col. 1. (southwest ed.). (The dollar figure represents the combined market value of the common stock of the two merging companies.) 5. Conglomerate mergers are those which are neither horizontal (between presently com- 1982] "Entrenchment" Under Section 7 sitions are classifiable as conglomerate, and the majority of these mergers are classifiable as "pure" conglomerate.' The recent acceleration of conglomerate merger activity has generated serious questions regarding the adequacy of existing law to protect the public interests affected by such a trend.7 The thesis of this article is that these interests may be reconciled fruitfully if the enforcement agencies and federal courts giv (...truncated)