The Diversifying Corporation: Section 7 Darwinism and the Elusive but Essential Tests of the Marketplace

St. John's Law Review Volume 44 Number 4 Volume 44, April 1970, Number 4 Article 5 The Diversifying Corporation: Section 7 Darwinism and the Elusive but Essential Tests of the Marketplace St. John's Law Review Follow this and additional works at: https://scholarship.law.stjohns.edu/lawreview This Note 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 . NOTES & COMMENTS THE DIVERSIFYING CORPORATION: SECTION 7 DARWINISM AND THE ELUSIVE BUT ESSENTIAL TESTS OF THE MARKETPLACEt The attempts of large corporate entities to diversify, that is, to increase the number of different industries in which the corporation operates, has, to a significant degree, spawned the recent wave of conglomerate acquisitions. Analysis of a typical conglomerate corporation will yield a view of varied industrial activity ranging from one end of the business interest spectrum to the other.' It is precisely this aspect of diversification that engenders the difficulty encountered by the Government in its effort to apply traditional antitrust law to conglomerate mergers. 2 Briefly, the existing antitrust statutes were enacted to protect the competitive nature of the nation's industrial structure, while many conglomerate acquisitions do not necessarily exert a negative influence upon the competitive structure of any industry, but merely substitute one competitive firm for another.3 This article will examine the utilization of section 7 of the Clayton Act 4 by the Government in the context of its far-reaching attempt to t The author wishes to thank Harvey R. Blau, Scott E. Bohon and John T. Cusack for their instructive counsel regarding this Note. Despite this indebtedness, however, the author bears sole responsibility for its contents. 1 Northwest Industries, Inc., a corporation fairly representative of the conglomerate species, derives its income from industrial activities in four major areas: railroad operations, industrial products, consumer products and chemical products. A more detailed analysis of Northwest will be presented in a subsequent section of this article, but evexi this cursory breakdown of its business pursuits dearly denotes a wide range of corporate activity and interest. 2 As herein referred to, conglomerate mergers are those mergers between firms which do not exist as direct competitors (horizontal), nor maintain a supplier-customer relationship (vertical). Conglomerate mergers do include market extension mergers, product extension mergers and the so-called "pure" conglomerate mergers involving totally unrelated products, services and facilities. 3 The statutes are primarily applicable to those mergers of the horizontal or vertical genus and the corporate abuses which flow from such combinations. The evolution of the rules relating to such traditional problems has not provided standards which may appropriately be utilized in the judicial examination of conglomerates, yet Congress has not enacted legislation from which new rules may be developed. Instead, the formulators of antitrust policy have vigorously propounded the applicability of section 7 of the Clayton Act to conglomerate mergers. See, e.g., Hearings on Tax Reform Before the House Comm. on Ways and Means, 91st Cong., 1st Sess., pt. 7, at 2389 (1969) (statement by Richard IV. McLaren, Ass't Att'y Gen., Antitrust Division); Hart, Emerging Paradoxes in Antitrust, 30 ABA ANrrrusr SECriON 80 (1966); see also Reilly, Conglomerate Mergers -An Argument for Action, 61 Nw. U.L. REv. 522 (1966); Thomas, Conglomerate Merger Syndrome-A Comparison: Congressional Policy With Enforcement Policy, 56 FoRmDATA L. REv. 461 (1968); Hearings on Economic Concentration Before the Subcomm. on Antitrust and Monopoly of the Senate Comm. on the Judiciary, 88th Cong., 2d Sess., and 89th Cong., 1st &2d Sess., pts. 1-5 at 42-43, 85, 1865, 1960 (1964-1966) [hereinafter Concentration Hearings]. ST. JOHN'S LAW REVIEW [VOL. 44:677 prevent superconcentration of the nation's economic resources and power. DIvERSIFICATION - THE UNDERLYING CAUSE Although numerous motives have been attributed to the diversifying corporation, the economic forces responsible are frequently of such complexity as to preclude their positive identification and quantitative assessment in particular situations. Among those motives often cited as encouraging corporate diversification are the pursuit of economies of scale in production, administration, financing and research and development, and the use of spare resources, such as the presence of by-products needed in the manufacture of other goods produced within the conglomerate structure.6 Predictably, however, the most frequent and, generally, the most readily discernible motive is entry into an industry which affords an above-average rate of return.7 Stabilization of profits also offers an important incentive to the diversifying firm, for the greater range of corporate interest disperses the risk of a serious decline in total earnings (which might otherwise result from the unforeseen alteration of an economically significant factor such as patterns of consumption). Attempts to diminish the impact of business cycles might also be categorized under the general motive of stabilization. Finally, the desire for growth completes the compilation of 4 As used herein, section 7 of the Clayton Act refers to the section as amended in 1950 and presently operative. Section 7 as originally enacted read, in part: That no 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 so 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. Ch. 823, § 7, 38 Stat. 731-32 (1914). As amended by the Celler-Kefauver Act of 1950, this section now reads as follows: 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 competition, or to tend to create a monopoly. 15 U.S.C. § 18 (1964). 5The most plausible area in which diversification would produce economies of scale is research and development. The broader the spectrum of corporate activity, the less tenuous the integration of a new development or product into the existing c (...truncated)