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Job Name:2042343 Date:14-10-30 PDF Page:2042343pbc.p1.pdf Color: Cyan Magenta Yellow Black Mergers in Perspective Yale Brozen American Enterprise Institute for Public Policy Research Washington and London Distributed to the Trade by National Book Network, 15200 NBN Way, Blue Ridge Summit, PA 17214. To order call toll free 1-800-462-6420 or 1-717-794-3800. For all other inquiries please contact the AEI Press, 1150 Seventeenth Street, N.W., Washington, D.C. 20036 or call 1-800-862-5801. Yale Brozen is a professor of business economics in the Graduate School of Business at the University of Chicago, director of its applied economics program, and an adjunct scholar of the American Enterprise Institute. I am grateful to Ernest Gellhorn and Donald G. Kempf, Jr., for their critical reading of the manuscript and their many suggestions. I, of course, am responsible for any remaining errors. Y.B. Library of Congress Cataloging in Publication Data Brozen, Yale, 1917 Mergers in perspective. (AEI studies; 353) 1. Industrial concentration-United States-History. 2. Consolidation and merger of corporations-United States-History. 3. Industry and state-United States History. I. Title. II. Series. HD2795.B835 338.8'3'0973 82-3937 ISBN 0--8447-3489-6 ISBN 0--8447-348~7 (pbk.) AACR2 AEI Studies 353 © 1982 by the American Enterprise Institute for Public Policy Research, Washington, D.C., and London. All rights reserved. No part of this publication may be used or reproduced in any manner whatsoever without permission in writing from the American Enterprise Institute except in the case of brief quotations embodied in news articles, critical articles, or reviews. The views expressed in the publications of the American Enterprise Institute are those of the authors and do not necessarily reflect the views of the staff, advisory panels, officers, or trustees of AEI. "American Enterprise Institute" and @)are registered service marks of the American Enterprise Institute for Public Policy Research. Printed in the United States of America The American Enterprise Institute for Public Policy Research, established in 1943, is a publicly supported, nonpartisan, research and educational organization. Its purpose is to assist policy makers, scholars, businessmen, the press, and the public by providing objective analysis of national and international issues. Views expressed in the institute's publications are those of the authors and do not neces sarily reflect the views of the staff, advisory panels, officers, or trustees of AEI. Council of Academic Advisers Paul W. McCracken, Chairman, Edmund Ezra Day University Professor of Busi ness Administration, University of Michigan Robert H. Bork, Alexander M. Bickel Professor of Public Law, Yale Law School Kenneth W. Dam, Harold ]. and Marion F. Green Professor of Law and Provost, University C?f Chicago Donald C. Hellmann, Professor of Political Science and International Studies, University of Washington D. Gale Johnson, Eliakim Hastings Moore Distinguished Service Professor of Economics and Chairman, Department of Economics, University of Chicago Robert A. Nisbet, Adjunct Scholar, American Enterprise Institute Herbert Stein, A. Willis Robertson Professor of Economics, University of Virginia James Q. Wilson, Henry Lee Shattuck Professor of Government, Harvard University Executive Committee Richard B. Madden, Chairman of the Board Richard J. Farrell William J. Baroody, Jr., President Charles T. Fisher III Willard C. Butcher Richard D. Wood Tait Trussell, Edward Styles, Director of Vice President, Administration Publications Joseph J. Brady, Vice President, Development Program Directors Periodicals Russell Chapin, Legislative Analyses AEI Economist, Herbert Stein, Editor Thomas F. Johnson, Economic Policy Studies Marvin Esch, Seminars and Programs AEI Foreign Policy and Defense Review, Robert J. 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Pranger, International Programs Managing Editor Contents 1 INTRODUCTION 1 The Growth in Relative Size of Foreign Competitors 2 The Conclusions of This Study 3 2 A PERSPECTIVE ON MERGERS 6 Merger Waves and Their Size 6 The Changing Character of Mergers 8 Mergers and Industrial Concentration 9 The Legacy of the Turn-of-the-Century Merger Movement 14 Conclusion 21 3 CONGLOMERATE MERGERS AND EFFICIENCY 25 Financial Evidence That Mergers Improve Efficiency 25 Other Evidence of Conglomerate Efficiency 27 Sources of Conglomerate Efficiency 30 The "Consumption" of Capital by Acquirers 32 Conclusion 34 4 MERGERS AND CONGLOMERATE POWER 36 Potential Predatory Pricing 37 Potential Reciprocity 40 Entrenchment and Potential Mutual Forbearance 42 Conclusion 43 5 MERGERS VERSUS ENTRY DE Novo 46 Why Conglomerate Mergers Occur 46 The Effect of .Conglomerate Mergers on Entry 49 The Effect of Foreclosing Acquisitions on Innovation 52 The Effect on Entry De Novo of a Foreclosure of Acquisitions 53 Conclusion 56 AGGREGATE CONCENTRATION: 6 A PHENOMENON IN SEARCH OF SIGNIFICANCE 58 Is Aggregate Concentration Increasing? 60 Some Causes of the Aggregate Manufacturing Concentration Trend 63 7 THE ECONOMIC AND POLITICAL "POWER" OF THE 200 70 The Economic Power of "Dominant" Firms 71 Bigness and Political Power 72 Conclusion 77 8 SUMMING Up 79 Should Horizontal Mergers Be Restrained? 80 Concentration, Conglomeration, and Antitrust 82 Conclusion 84 ApPENDIX: THE MERGER GUIDELINES 86 Tables 1. Relative Size of 100 Leading Foreign Industrial Firms and 100 Leading U.S. Industrial Firms, by Group, 1965, 1977, and 1980 3 2. Distribution of Medium and Large Merger Disappearances, by Type of Acquisition, 1926--1979 10 3. Distribution of Manufacturers' Shipments, by Four-Firm Con- centration, 1935, 1972, and 1977 13 4. Industries with Rising, Stable, or Declining Concentration, by Concentration Level, 1947-1977 15 5. Market Shares of Selected Turn-of-the-Century Combinations 17 6. Consolidations with Large Market Shares Failing within a Few Years after Their Formation, 1890--1905 18 7. Highly Concentrated Industries with Decreases of Ten Points or More in Industry or Product Group Concentration Ratios, 1947-1977 23 8. Value Added and Wages per Employee in Conglomerate Firms and Single-Industry Firms, 1954-1972 29 9. Legal Costs per Million Dollars of Sales, by Firm Size 32 10. Corporation, Business Enterprise, and Entrepreneurial Popula- tions of the United States, 1945-1977 55 11. Shares Held by Leading Nonfinancial Corporations of All Nonfinancial Corporate Assets 59 12. Shares of Manufacturing Value Added and Shipments of the Largest Manufacturing Companies of 1947 and of Each Census Year, 1937-1977 62 13. Assets/Sales Ratio for the Largest and for All Manufacturing Corporations, 1947-1967 65 14. Shares of Manufacturing Employment and Earnings Pro vided by the Largest Manufacturing Companies, 1937- 1977 69 15. Import Quotas of Refineries as Percentage of Daily Input of Petroleum, July 1, 1959-December 31, 1959 73 16. Department of Justice Merger Guidelines, 1968 87 Figures 1. Price Fluctuations in Three Groups of Manufacturing Indus- tries, 1900--1925 19 2. Returns to Stockholders of Acquiring Firms in Relation to the Average New York Stock Exchange Firm 27 3. Earnings of Stockholders of Acquired Firms in Relation to Average Stockholder Earnings in the 480 Business Days Preceding Acquisition Announcement 48 1 Introduction The United States has the world's most stringent merger laws. While policy in most other countries has aimed at encouraging mergers orhas been neutral, that in the United States has been manifestly hostile to this activity.1 The chief difference in the design of domestic and foreign merger policy is the lively sense displayed abroad of the economic gains that size confers. Europe's post-World War II economic policies, for example, deliberately aim at producing an economic structure com parable to that of the United States. In particular, the European Economic Community (EEC) was intended to provide a market large enough to support firms as big as those in the United States. "The EEC's industrial policy is to encourage size," writes The Economist, Britain's prestigious weekly. 2 The policies followed in individual coun tries are consistent with this approach.3 Particularly in France,4 but to varying degrees in other countries as well, mergers are encouraged or tolerated as a way of setting the units of the national economy on a level equal to that of competitor nations. The active concern of policy makers in Europe is not the prevalence of 1. "Recent Supreme Court decisions go so far in prohibiting specific mergers that any potential merger of two substantial, healthy companies is logically subject to challenge under the new precedents." Max Ways, "Antitrust in an Era of Radical Change," Fortune, vol. 73, no. 3 (March 1966), p. 222. 2. "Europe's Trustbusters," The Economist, August 31, 1974, p. 52. 3. The major exception to the generally favorable or neutral policy abroad with respect to mergers is West Germany's 1973 amendment to its Law against Restraints of Com petition. The amendment empowered the Federal Cartel Authority to prohibit mergers that "may create or further strengthen a position of market dominance." In its admin istration, the amendment appears to have had little effect. Jiirgen F. Baur, "The Control of Mergers between Large, Financially Strong Firms in West Germany," Zeitschrift fur die gesamte Staatswissenschaft, vol. 136, no. 3 (September 1980), p. 444. In contrast, American policy has been to preventfurther concentration. In the words of the Supreme Court, our policy is to arrest mergers "ata time when the trend to a lessening of competition in a line of commerce was still in its incipiency." U.S. v. Brown Shoe, 370 U.S. 317 (1962). 4. Frederic Jenny and Andre-Paul Weber, "French Antitrust Legislation: An Exercise in Futility," in Alexis P.