Conglomerate Mergers: The Developing Antitrust Guidelines

St. John's Law Review Volume 44, Spring 1970, Special Edition Article 43 Conglomerate Mergers: The Developing Antitrust Guidelines John Vanderstar Follow this and additional works at: https://scholarship.law.stjohns.edu/lawreview Recommended Citation Vanderstar, John (1970) "Conglomerate Mergers: The Developing Antitrust Guidelines," St. John's Law Review: Vol. 44 : No. 5 , Article 43. Available at: https://scholarship.law.stjohns.edu/lawreview/vol44/iss5/43 This Symposium is brought to you for free and open access by the Journals at St. John's Law Scholarship Repository. It has been accepted for inclusion in St. John's Law Review by an authorized editor of St. John's Law Scholarship Repository. For more information, please contact . CONGLOMERATE MERGERS: THE DEVELOPING ANTITRUST GUIDELINES JOHN VANDERSTAR* One need not point out that conglomerate mergers, as well as other varieties, have been occurring at a record pace in recent years. Nor is it any secret that many congressmen and the antitrust enforcement authorities have grown increasingly concerned about these activities, fearing not only adverse economic effects, but adverse social and political effects as well. Conglomerate mergers seem to attract special attention for two reasons. First, this is virtually the only kind of significant merger activity the very largest firms can engage in, and the conduct of these firms is always top news. Second, the conglomerate merger does not "fit" as neatly into antitrust doctrine as other mergers do, and hence, there is a good deal of mystery about what the operating rules are or should be. Exploring the development of those rules or guidelines will be the focus of this paper. There are generally considered to be three kinds of mergers: horizontal, vertical and conglomerate. A horizontal merger is one between firms that compete directly. A vertical merger is one between a firm and one of its suppliers (a "backward" integration) or one of its customers (a "forward" integration). This leaves conglomerate mergers, which are simply mergers that are neither horizontal nor vertical.' Why do conglomerate mergers occur? There are many reasons, and no one would be so bold as to attempt a complete listing. One reason is a desire to diversify, which in itself can have several motivations. A firm that has grown large and profitable in a particular product line may wish to continue its growth but, because of the antitrust laws or other considerations, may be unable to grow horizontally or vertically. Or a firm tied to a single product or class of customer (the Government, for example) may be concerned about its vulnerability if, for reasons unrelated to the firm's competence, the single product should suddenly be made obsolete or the single customer class should cut back its purchases. 2 Viewed from the acquired company's standpoint, a conglomerate merger is often an effective method * Member of the District of Columbia Bar. B.S.E., Princeton University, 1954; LL.B., Harvard University, 1961. 1 One could quibble about classifying "market extension" mergers (between firms that sell the same product but do so in separate, distinct geographic markets and hence do not directly compete) as horizontal or conglomerate, but it seems to make more sense to classify them as conglomerates. 2 A desire to reduce reliance on government purchases was an important factor in the decision of several companies to become conglomerates. An example is Ling-Temco-Vought, Inc., once heavily concentrated in defense production. Its chairman, James J. Ling, has said that he was urged by the Pentagon and other government sources to diversify if he wanted LTV to survive. See J. COMMERCE, Oct. 24, 1969, at I, col. 4. 596 THE DEVELOPING ANTITRUST GUIDELINES for the owners of a closely held company to convert their personal estates into more marketable securities. Conglomerate mergers between firms in related product lines also create opportunities for increased efficiencies through the meshing of production or marketing facilities or methods, and for the introduction of new and aggressive management into a stagnating industry. Access to available capital or tax loss advantages can also stimulate mergers of all types, but principally those of the conglomerate variety. It goes without saying, of course, that not all of these reasons are consistent with furthering the health of the economy in all cases, and further, that there are also distinctly anticompetitive reasons for some conglomerate mergers. A question often asked is whether conglomerate mergers should be stopped. Of course, that is not a relevant inquiry at all, no more so than asking whether mergers of all kinds should be stopped. Instead, there are two questions that seem to be worth asking. The first is whether any conglomerate mergers can be stopped under present law and, if so, which ones. The second is whether the law should be amended to prohibit some mergers that are now beyond legal attack. The leadership of the Department of Justice's Antitrust Division has not been of a single mind on these questions, which is not surprising in view of their complexity. 3 I. BASIC MERGER LAW Let us turn first to the key statute, section 7 of the Clayton Act, 4 the first paragraph of which states: No corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another corporation engaged also in commerce, where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen 5 competition, or to tend to create a monopoly. Whereas this provision is addressed to acquisitions by corporations engaged in interstate or foreign commerce (the word "commerce" being so defined 3 Compare Turner, Conglomerate Mergers and Section 7 of the Clayton Act, 78 HARV. L. REV. 1313 (1965) with McLaren, Statement Before House Committee on Ways and Means, in 5 TRADE REG. REP. 50,233 (March 12, 1969). 4 15 U.S.C. § 18 (1964). 5Before the 1950 amendment (the Celler-Kefauver Act, ch. 1184, 64 Stat. 1125), this part of section 7 dealt only with stock acquisitions and primarily with horizontal ac- quisitions: [N]o corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital of another corporation engaged also in commerce, where the effect of such acquisition may be to substantially lessen competition between the corporation whose stock is acquired and the corporation making the acquisition, or to restrain such commerce in any section or community, or tend to create a monopoly of any line of commerce. Act of Oct. 15, 1914, ch. 323, § 7, 38 Stat. 730, 731-32, as amended, 15 U.S.C. J 18 (1964). ST. JOHN'S LAW REVIEW in section 1 of the Clayton Act), 6 the second parag (...truncated)