Antitrust Treatment of Mergers

§ 7 of the Clayton Act of 1914 was enacted with the intention of stemming the tide of anti-competitive merger activity. The following companies were formed by means horizontal consolidation in the period between 1890-1910: U.S. Steel, PP&G, du Pont, American Tobacco, GE, Uniroyal, Allis Chalmers, International Paper, and U.S. Gypsum. In fact, mergers are a key factor in explaining the structural transformation of the many manufacturing industries to tight oligopolies during this period.

The loophole in section 7

The original language of § 7 made specific reference to the acquisition of (intangible) shares but made no mention of hard assets. Hence, one could elude the reach of § 7 by purchasing the factories, machinery, etc. of one's rival.

The original version of section 7:

"[N]o corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital of any corporation engaged also in commerce where the effect of such acquisition may be to substantially lessen competition . . . or to restrain such commerce in any section or community or tend to create a monopoly in any line of commerce."

§ 7 was amended by the Celler-Kefauver Act of 1950. Celler-Kefauver "put some teeth" into section 7 by closing off the loophole supplied by the original version. Click here to see the amended version of section 7.

The DOJ Merger Guidelines

The preamble to the Clayton Act states that the intent of the legislation is "[t]o arrest the creation of trusts, conspiracies, and monopolies in their incipiency and before consummation." Pursuant to this objective, the Department of Justice issued Merger Guidelines in 1968. The guidelines were revised in 1982 and again in 1992. The guidelines "describe the analytical framework and specific standards used by the agency in analyzing mergers. By stating its policy as simply and clearly as possible, the Agency hopes to reduce uncertainty associated with enforcement of antitrust laws in this area."

The guidelines set forth

	The analytical framework used by the DOJ to determine if a merger is "horizontal"--i.e., if the merger involves firms that should be grouped into the same product and geographic market.
	The criteria used by the DOJ to ascertain whether a horizontal merger "substantially lessens competition or tends to create a monopoly" within the market delineation specified.
	Market definition is an important, but complicated (tricky) area of antitrust (as you will discover, many an antitrust case has turned on the court's definition of the "relevant market"). Consult the 1992 Merger Guidelines (or pp. 212-214 of the text) to see the DOJ definition of a market.

Having established that a merger is horizontal, the DOJ uses the Herfindahl index (H) to test if the merger is anti-competitive. The DOJ has set forth the following rules of thumb:

	If post-merger H is less than 1000, the merger will likely go unchallenged.
	If the post merger H is greater that 1800, it is likely the merger will be challenged (see Coca Cola--Dr. Pepper proposed merger in 1986).
	If the post merger H is between 1000 and 1800, then the key issue is the change in H as a result of the merger. Click here to view safe harbors under the 1992 Merger Guidelines.

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