By Sandeep Vaheesan
In the past few years, mainstream antitrust practitioners and scholars have been rudely awakened from their technocratic slumber and forced to accept that their field is unavoidably political. The objective of antitrust—for too long uncontested and accepted by all serious voices as “consumer welfare”—is up for debate again. Yet, some bipartisan beliefs remain unquestioned. A good example is the shared hostility to the anti-merger policy of the 1960s. The strict limits on corporate consolidation in that era are disparaged for supposedly limiting “efficiency-enhancing” mergers and thereby hurting consumers. For example, even as they disagree on many antitrust issues, Joshua Wright on the reactionary right, Herbert Hovenkamp in the establishment center, and Tim Wu on the neo-Brandeisian left are critical of mid-twentieth century rules on corporate mergers.
Yet, this hostility toward 60s-era merger policy is unwarranted. The merger law of the period deserves applause and should be a model for policymakers concerned about corporate power. First, it was consistent with rule of law in a democratic republic: the executive branch and courts interpreted the Clayton Act (the principal anti-merger statute) in line with the objectives expressed by Congress when it enacted and amended this law. Second, it was good economic policy because it promoted business growth through product improvement and investment in new capacity while protecting consumer interests. Merger policy of that period did have one important deficiency: it did not go far enough in restricting mergers between firms in unrelated markets (called “conglomerate mergers”). Despite this shortcoming, the merger rules of that era are an important model on which to build going forward.
I. Corporations and Their Limited Freedom to Merge in the 1960s
As a basic matter, merger rules are part of the laws and regulations structuring the political economy. Although widely accepted, the state-market dichotomy is false. State action is a prerequisite for economic activity. The government enables and shapes markets through coercive laws and regulations, such as establishing and protecting property, enforcing contracts, and chartering corporations. Accordingly, public rules on mergers are not government “intervention” in some “pristine” marketplace.
Corporations are state-established entities endowed with special privileges including limited liability and (potential) immortality. Historically, states paired these private privileges with public responsibilities and restrictions. Most state charters prohibited one corporation from acquiring another corporation. (As a result, corporations in the nineteenth century had to find alternative methods of buying other corporations, hence the use of the trust form and subsequently the enactment of “anti-trust” law.) Merger policy is one type of public control on publicly chartered entities.
In the 1960s, federal merger law placed tight limits on corporate mergers and acquisitions. The Supreme Court established a strong presumption against horizontal mergers (between rivals) in concentrated markets and restricted vertical mergers (between customers and suppliers) as well. In a 1966 case called United States v. Von’s Grocery Co., the Supreme Court held that a merger between two Los Angeles area grocery store chains with a combined local market share of approximately eight percent violated the Clayton Act. A year later, the Court ruled that Procter & Gamble’s (P&G) acquisition of Clorox was illegal. It reasoned that this acquisition would entrench Clorox’s dominance in household bleach: Clorox, through larger advertising budgets, could engage in even greater product differentiation of a commodity good and would no longer face P&G as a potential entrant and rival in the bleach market.
The Department of Justice’s (DOJ) 1968 Merger Guidelines synthesized (and somewhat relaxed) the Court decisions of the decade and set out strong merger rules tied to market share and concentration figures. These Guidelines offered clarity to the public and businesses and indicated which mergers the DOJ would challenge and which it would permit. For instance, regarding horizontal mergers, the DOJ stated that in a market in which the top four firms had a combined market share of greater than 75% it would challenge a merger that combined two firms each with 4% or more of that market. For vertical mergers, the DOJ indicated it would challenge the combination of a supplier with 10% or more share in one market and an actual or potential customer with 6% or more in a downstream market.
II. Strong Anti-Merger Rules Were Consistent with the Legislative Purpose of the Clayton Act
The strong anti-merger policy of the era was faithful to legislative intent. The drafters of the original and amended Clayton Act feared rising market-specific and aggregate corporate concentration and believed it threatened the interests of Americans as consumers and sellers, business proprietors, and citizens. An animating theme of the 1950 amendments was the role large corporate interests had played in supporting and enthroning fascism in Germany in the 1930s. Accordingly, the framers sought to check consolidation well before it produced highly concentrated market structures across the economy or ran afoul of the Sherman Act.
Given the congressional desire to stop rising corporate concentration, the Supreme Court announced restrictive anti-merger rules. The text of the statute provided only minimal guidance. While more specific than the Sherman Act, the Clayton Act features open-ended language. It prohibits, among other practices, mergers that may “substantially . . . lessen competition, or . . . tend to create a monopoly.” In deciding how to distinguish legal from illegal mergers, the Supreme Court reviewed the debate in Congress preceding the 1950 amendments to the Clayton Act and implemented the legislative judgment against corporate growth through mergers and acquisitions. The Court and the executive branch honored the decision of Congress and announced clear legal tests in accordance with congressional intent, instead of substituting their own ideological or policy preferences.
III. Strong Anti-Merger Rules Were Good for Society
Federal limits on consolidation channeled business strategy away from zero- or negative-sum mergers and acquisitions and toward investment in new plants and technologies. The Clayton Act, as interpreted and applied in the 1960s, was not a mandate for business stagnation or zero growth when a firm controlled more than a certain fraction of a market. Instead, it directed corporations to grow by improving their products and investing in new productive capacity. In a 1963 decision, the Supreme Court declared that a key assumption of the Clayton Act “is that corporate growth by internal expansion is socially preferable to growth by acquisition.” This shows how the Clayton Act was a moderate solution to corporate size. A true “anti-bigness” law would have established a hard cap on corporate size and restricted growth by both merger and internal expansion.
This political economic regime stimulated broad-based growth—a record unmatched before or since that period. Notably, high tax rates discouraged corporations from paying out profits to shareholders in the form of dividends. And workers, particularly in heavy industry, wielded significant power within firms through their unions. This combination of strong anti-merger rules, progressive taxation, and relatively high union density fostered growth through product improvements and investment in new facilities and technologies and the sharing of firms’ surplus with workers.
Two examples, one from the past and one from this decade, show the value of stimulating growth through internal expansion. The strong anti-merger policy of the 1960s compelled supermarkets to seek alternatives to growing through acquisitions. With the easy option of buying rivals no longer an option, grocery stores, especially medium-sized and large chains, had to grow by attracting more customers through larger stores with greater selection and improved distribution operations. Anti-merger policy drove beneficial innovation in food retailing.
The wireless industry offers a more current example of beneficial internal expansion. In 2011, the Obama administration blocked AT&T’s acquisition of T-Mobile. Anti-monopoly officials at the DOJ and Federal Communications Commission subsequently made clear that they would oppose further consolidation in the wireless market, meaning the four national carriers (AT&T, Sprint, T-Mobile, and Verizon) would have to grow through non-merger means. (The Trump administration has since repudiated this policy and welcomed T-Mobile’s acquisition of Sprint following an aggressive and unsubtle effort by T-Mobile to curry favor with the president.) Despite industry consultants asserting that T-Mobile would collapse as an independent carrier, T-Mobile, once forced to survive on its own, slashed prices, ended long-term commitments, and introduced new service plans. Previously an ailing carrier, it injected long-missing rivalry into the industry and drove reductions in wireless rates.
In contrast, lax merger policy encourages pursuing growth through consolidation. The economists Walter Adams and James Brock identified the important channeling effects of merger policy, for better or for worse. They wrote that permissive merger policy means that “managerial energies [are] devoted to sterile paper entrepreneurialism and the quick growth-through-merger game” and “diverted from the critical task of investing in new plants, new products, and state of the art manufacturing techniques.” In practice, tolerance of mergers means fewer new products, depressed investment in productive capacity, and diminished job creation.
From the perspective of short-term consumer interests, research in recent years has vindicated 1960s merger policy. Mergers and market concentration are associated with higher prices and higher profit margins. Corporate consolidation in even relatively unconcentrated markets has hurt consumers. Furthermore, the efficiencies promised by lobbyists and consultants retained by the merging parties rarely materialize. Business scholar Melissa Schilling reviewed the empirical research on merger outcomes and concluded, “[M]ost mergers do not create value for anyone, except perhaps the investment bankers that negotiated the deal.” Given these findings, 1960s policy likely stopped consolidation that would have harmed consumers and yielded little or no improvement in productive efficiency for the merging firms themselves.
IV. The Major Gap in 1960s Merger Policy
Merger policy of the era did have one important shortcoming: it did not go far enough and allowed one form of wasteful consolidation. Even as it restricted horizontal and vertical mergers among medium-sized and large firms, it preserved, in significant measure, corporations’ freedom to purchase firms in unrelated industries. With the traditional forms of mergers off the table, firms could and did grow through conglomerate acquisitions (mergers that involved neither direct rivals nor firms in a customer-supplier relationship). Conglomerators were safe from antitrust law so long as they did not acquire dominant firms in a market adjacent to one of their existing firms or a firm likely to imminently enter their market. Given this gap in merger law, a conglomerate consolidation wave defined the mid- and late 1960s.
Corporate executives and financiers engineered complicated deals that created large firms operating in a hodgepodge of unrelated industries. These conglomerates were profitable for the individuals at the top and the darlings of Wall Street for a period. They, however, were unmanageable entities and, in large measure, later dissolved. Experience showed that most conglomerates were illogical. For instance, conglomerate LTV, which “in 1968 produced golf balls, rental cars, missiles, electronics, and packaged meat,” boosted the fortunes and profile of empire-builder James Ling but was an unsustainable mess. Even established firms such as Mobil Oil got into the conglomeration game (Mobil acquired now-defunct department store Montgomery Ward) for a period.
While generally having an unsuccessful record, conglomerates of the era were a precursor to the financialized corporation of the modern era. They anticipated the more shareholder-driven corporation in which short-term returns to stockholders trump the interests of workers, customers, suppliers, and communities. Conglomerates bear an especially close resemblance to the private equity funds that have bought, restructured, and sold countless corporations in our time. Like conglomerators, private equity partners have a poor and indeed often destructive record as managers but generated extraordinary financial gains for themselves.
After decades of popular neglect, antitrust is once again topics of public debate. The Nobel Prize-winning economist Joseph Stiglitz declared in 2017, “America has a monopoly problem—and it’s huge.” The question is now how to tackle the corporate concentration crisis. Reviving anti-merger law is a key element of the anti-monopoly agenda. For citizens and lawmakers concerned about monopoly and oligopoly, 1960s merger policy, as embodied in the 1968 Guidelines, should be treated as a template. Strong rules, tied to market share and firm size, against all types of mergers are critical for controlling corporate power.
Sandeep Vaheesan is the legal director at the Open Markets Institute.