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Conglomerate Merger Syndrome--A Comparison: Congressional Policy with Enforcement Policy James Thomas

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Conglomerate Merger Syndrome--A Comparison: Congressional Policy with Enforcement Policy James Thomas University of Tulsa College of Law TU Law Digital Commons Articles, Chapters in Books and Other Contributions to Scholarly Works 1968 Conglomerate Merger Syndrome--A Comparison: Congressional Policy with Enforcement Policy James Thomas Follow this and additional works at: http://digitalcommons.law.utulsa.edu/fac_pub Part of the Law Commons James Thomas, Conglomerate Merger Syndrome--A Comparison: Congressional Policy with Enforcement Policy, 36 Fordham L. Rev. 461 (1968). Recommended Citation 36 Fordham L. Rev. 461 (1968). This Article is brought to you for free and open access by TU Law Digital Commons. It has been accepted for inclusion in Articles, Chapters in Books and Other Contributions to Scholarly Works by an authorized administrator of TU Law Digital Commons. For more information, please contact [email protected]. CONGLOMERATE MERGER SYNDROME-A COMPARISON: CONGRESSIONAL POLICY WITH EIFORCEMENT POLICY JAMES C. THOMAS* 661T is a sad thought... that the present system of production and of exchange is having that tendency which is sure at some not very dis- tant day to crush out all small men, all small capitalists, all small enter- prises." This statement, descriptive of the present day corporate merger activity, was first rendered by Senator George in 1890 when Congress was considering passage of the Sherman Act." Perhaps an even more de- scriptive statement was made by the late Justice Harlan in the Standard Oii case. 2 Dissenting in this famous Supreme Court decision which cre- ated the so-called "rule of reason," Justice Harlan declared: All who recall the condition of the country in 1890 will remember that there was everywhere, among the people generally, a deep feeling of unrest. The Nation had been rid of human slavery... but the conviction was universal that the country was in real danger from another kind of slavery sought to be fastened on the American people, namely, the slavery that would result from aggregations of capital in the hands of a few individuals and corporations controlling, for their own profit and advantage exclu- sively, the entire business of the country, including the production and sale of the nec- essaries of life. Such a danger was thought to be then imminent, and all felt that it must be met firmly and by such statutory regulations as would adequately protect the people against oppression and wrong.3 Prior to, and for many years after the passage of the Sherman Act, businessmen manifested a desire to be insulated from the risk of competi- tion. The various tactics used to accomplish this included: formation of trusts; predatory pricing practices to force competitors to come into line or drop from the market; acquiring weakened competitors; etc.' Today these blatant methods have been replaced by more subtle and ingenious devices.5 In their expansion drives, designed to reduce the risk of competi- tion, businessmen -have effectively gained control of other corporations through the respectable merger route. * Professor of Law, Tulsa University School of Law. 1. 21 Cong. Rec. 2598 (1890). 2. Standard Oil Co. v. United States, 221 U.S. 1 (1911). 3. Id. at 83-84 (concurring and dissenting opinion). 4. See Standard Oil Co. v. United States, 221 U.S. 1 (1911); United States v. American Tobacco Co., 221 US. 106 (1911). 5. Speaking before the Committee on Banking and Currency, United States Senate, on S. 510, 90th Congress, 1st Session, Manuel F. Cohen, Chairman of the Securities and Exchange Commison, stated: "It is wise not to underrate the ingenuity of thu-, engaged in the complex game of promoting or opposing block acquisitions .... " (Unpublished statement). FORDHAM LAW REVIEW [Vol. 36 Additional respectability has in fact been given to mergers, especially conglomerate mergers, by Donald F. Turner, who presently heads the Antitrust Division of the Justice Department.' Turner, it is said, has taken the aura of a crusade out of trust busting; however, he should not receive the full credit or blame for the failure of section 7 of the Clayton Act to stop or even slow down the merger movement. The number of cor- porate mergers taking place in this country has increased steadily since 1944, with a sharp increase in 1954. In the area of manufacturing and mining, for example, there were 295 mergers or acquisitions in 1953. This number jumped to 387 in 1954 and has been on a rapid incline since, with 854 in 1964, 1,0084n 1965, and 995 in 1966.1 This increase becomes even more startling when one examines the Federal Trade Commission's tabu- lation of all mergers. Taking the last three years, 1964, 1965 and 1966, the Commission recorded a total of 1,797, 1,893, and 1,746 respectively.' Perhaps when one speaks in terms of the number of mergers occurring in this country the conclusion becomes somewhat clouded; however, the staggering consequences of the merger movement are clearly manifested in the valuation of disappearing assets. Taking 912 selected mergers that occurred during the period of 1948-1966, the valuation of acquired assets exceeded thirty-one billion dollars.' During an earlier period, 1940-1947, Congress noted that 2,500 formerly independent manufacturing and min- ing companies disappeared as a result of mergers and acquisitions. The asset value of the acquired companies amounted to 5.2 billion dollars, which represented 5.5 per cent of the total assets of all manufacturing corporations. 0 Generalizations such as the above will admittedly vary, depending on their particular source," but they are sufficient to support the points to be raised in this paper. A more complete and accurate tabulation of the num- ber and valuation of mergers occurring in this country would only support the already clear conclusion that section 7 of the Clayton Act has failed 6. Business Week, May 20, 1967, at 59. 7. See Appendix table 1, p. 566 infra. S. See Appendix table 2, p. 567 infra. 9. See Appendix table 3, p. 568 infra. 10. H.R. Rep. No. 1191, 81st Cong., 1st Sess. 2-3 (1949). 11. Note the discrepancy in the number of reported mergers and acquisitions in manu- facturing and mining shown by comparing Appendix i and Appendix 2. It will be noted that the source material in compiling Appendix 2 included the Wall Street Yournal, Journal of Commerce, and New York Times. One might still change these figures by adding other source material in which mergers are reported. In Forbes, it was reported that the brisk merger rate was causing 2,400 companies to disappear into other companies every year. Forbes, Feb. 15, 1967, at 38, col. 1. There were 1,416 mergers during the first six months of 1967, according to the Associated Press. Tulsa Daily World, Sept. 3, 1967, § 3, at 3, col. 3. 19681 CONGLOMERATE MERGERS to thwart the ever-increasing expansion and creation of gigantic corpora- tions which hold extreme economic power over this society. It is enough to demonstrate that the merger business in the financial world has become big business. For example, it was recently reported that Lehman Bros., in- vestment bankers, were paid a fee of $916,000 for services in connection with the study and negotiations leading to the merger of American Home Products with Ekco Products Company.12 While business brokers and CPA firms have increased their role in the "merger business," the key role in most major mergers is played by Wall Street investment bankers. These bankers, who handle the underwriting of new acquisitions, participate in one of the most vital phases of a successful merger."3 Then, of course, there are the business executives who play a not insignificant role in pro- ducing major mergers, many of which go unchallenged."4 The merger and acquisition fever has risen to such a level that many businessmen feel that they can act with impunity as far as the federal anti- trust laws are concerned. And perhaps this attitude is not unwarranted, especially in light of the current administrative enforcement philosophy which has been created by a combination of factors. This philosophy, by giving businessmen a false sense of security, has led to several rags-to- riches success stories. One of the most interesting and successful involves the rapid growth of Gulf and Western Industries, Inc. Charles Bluhdorn, born in Vienna, has entered into many apparently crazy (but successful) business deals and has become known on Wall Street as "the mad Austrian."' 5 In 1958, Bluhdorn purchased Michigan 12. Forbes, Feb. 15, 1967, at 38, cal. 3. In this same article, it was reported that CPA firms are taking an active role (and generating a profitable business) in advising corpora- tions on the acquisition of other firms. "Some big CPA firms generate their own 'companies for sale' list, which is circulated internally. Many big CPA firms are starting to set up trouble-shooting departments for merger and acquisition work." Id. at 39, cal. 1. The merger business is so big that D.H. Blair & Co. conducts special seminars on the subject. See full page advertisement, Forbes, Sept. 15, 1967, at 335. William Colvin, who started Corporate Seminars Inc., observed that: "More and more you find company chairmen and presidents spending half their time searching out acquisitions." Tulsa Daily World, Sept. 3, 1967, § 3, at 3, col. 3. Even educational institutions, especially law schools, have entered the busi- ness of training company officials and lawyers in how to accomplish a corporate merger. 13. Forbes, Feb. 15, 1967, at 41-48. 14. A number of these executives are examined in Forbes, Feb. 15, 1967, at 49-59. See also Business Week, May 20, 1967, at 61, reporting several unchallenged mergers: Con- tinental Oil Co. combined with Consolidation Coal Co., forming a company with aggregate assets of 2.1 billion dollars; Atlantic Refining Co.
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