The U.S. Needs Conglomerate Merger Legislation

A federal court recently held that there was no antitrust problem with AT&T purchasing Time Warner for $86 billion. In the judge’s view, this consolidation didn’t offend the merger law as it now is interpreted. Nor could many far-larger transactions be blocked under current antitrust doctrine.  For example, one of the largest U.S. companies in terms of market capitalization is Apple, which at one point hit the $1 trillion mark. Today, Apple could lawfully merge with Amazon (which has  about $800 billion in market capitalization), and also with other incredibly large firms (e.g., Exxon/Mobil and JPMorgan Chase), so long as they spun off any significant overlaps.  In fact, under current antitrust law, it would theoretically be permissible for a series of mergers to leave the U.S. with at most 10 corporations, each owning 10 percent of every industry.

Sandeep Vaheesan, legal director at the Open Markets Institute, and I are drafting and proposing legislation that would block these extremely large mergers. The bill we’re constructing would block all mergers by companies larger than clearly specified—but quite large—limits.  For example, any firm with more than $10 billion in assets could be prohibited from merging with any other company also exceeding this threshold.  We believe that legislation requiring this limitation would have a number of benefits, with virtually no risk of negative consequences for society.

How Did The Current State of Permissiveness Arise?

Why are mergers of firms in unrelated markets—called conglomerate mergers— almost always permitted, regardless of size?

Corporate size and the political consequences thereof have long been core predicates for antitrust law.  However, today the antitrust laws are interpreted solely in economic terms; the absolute sizes of companies are treated as irrelevant.  The merger statute, for example, makes a merger illegal when its effect “may be substantially to lessen competition or to tend to create a monopoly.”  Because mergers in unrelated markets are not likely to produce significant anti-competitive effects—as that term is defined by today’s courts—they are permitted regardless of the merging companies’ size.

This rule has roots stretching back at least to the 1980s. Since then, most of the antitrust community has believed that only microeconomics should count in antitrust decision-making, for two important reasons.  The first is fear that incorporating suspicion of corporate size would lead to subjective enforcement decisions.  Even those who regard the merger of exceptionally large corporations with skepticism must, as a practical matter, find a way to express their concern objectively, predictably, and in a manner consistent with the rule of law.  Put differently, fear of corporate bigness must be enforced without giving undue discretion to enforcers and courts. The second reason why most of the antitrust world has limited its focus to economics is a belief that blocking large mergers would mean the loss of significant efficiencies.

Both of these reasons, however, have increasingly come under scrutiny.  This questioning is the impetus for our proposal.

The Changing Consensus

In recent years, the bipartisan belief that only economics should count in antitrust law has started to erode. The statements of prominent Republicans offer evidence of this shift:

  1. President Trump said that the AT&T/Time Warner merger threatens to “destroy democracy” and that “it’s too much concentration of power in the hands of too few.” He added: “likewise Amazon through its ownership of the Washington Post” and “Comcast purchase of NBC concentrates too much power in one massive entity that is trying to tell the voters what to think …. They should never have been approved.”
  2. President Trump’s former chief strategist, Steve Bannon, called for public utility regulation of tech platforms like Google.
  3. Senator Ted Cruz recommended using Antitrust to curb the “massive power” of Facebook and other tech companies. He said that their ability to “censor speech is a profound threat… they are blocking conservatives.” And “Facebook is larger and more powerful than Standard Oil ever was and the antitrust laws broke it up…”

Leaders of the Democratic party also have emphasized non-economic concerns in their discussions of antitrust law:

  1. The Democrats’ “Better Deal” proposal includes a vow to “crack down on corporate monopolies and the abuse of corporate political power.” This proposal promises to put “economic and political power back in [consumers’…] hands.” As it explains, “over the last thirty years, courts and permissive regulators have allowed large companies to get larger…. And because concentrated market power leads to concentrated political power, these companies deploy armies of lobbyists to increase their stranglehold on Washington.”
  2. Senator Elizabeth Warren has called for the breakup of Amazon. The corporation must “pick one business or the other,” Sen. Warren said in condemning Amazon’s practice of competing against the companies that depend on it to get to market. “You can’t be in both” retailing and manufacturing, she said.  She also warned that some mergers “pervert our democracy into one more rigged game….”
  3. Senator Bernie Sanders thinks Amazon has “gotten too big.” “We’re seeing this incredibly large company getting involved in almost every area of commerce,” he added. “And I think it is important to take a look at the power and influence that Amazon has.”

There is, moreover, a growing body of academic literature showing that these concerns are well founded.  Here are five conclusions from that literature:

  1. The very largest corporations contribute disproportionately more to political campaigns and PACs. They have more lobbyists and employees who can be deployed for political purposes.
  2. Members of Congress have been shown to be most responsive to two groups: donors who are either wealthy individuals or very large corporations.
  3. Large firms are more likely to sponsor academics to help shape the debate in areas that interest them. They also advertise more, frequently using media that they own.
  4. The very largest corporations often take over industry trade associations and direct the lobbying of the association toward their favored positions.
  5. A merger can combine voices that otherwise might offset one another. Consider an issue on which large high-tech companies or large media companies are divided (there are many). After a merger the combined entity will speak with only one voice. A more powerful voice.

A Landmark Proposal                  

Recently Senator Amy Klobuchar and other senators took a step in the direction of incorporating, for the first time, absolute size into antitrust analysis.  She introduced legislation that would tighten the merger laws in a number of ways. In particular, her bill would mandate a more skeptical review of any acquisition of $5 billion or more by a firm with assets exceeding $100 billion. For these transactions, the legislation would switch the burden of proof and require the merging firms to prove that the acquisition would not reasonably be likely to lessen competition or tend to create a monopoly.

The first objection to incorporating absolute size or political factors into merger policy is easy to deal with. Instead of the amorphous idea that large size is suspect, our legislation would clearly specify dollar limits defining which mergers would be too large. Indeed, by doing this our proposal would enhance the clarity and predictability of merger law. In contrast to the open-ended rule of reason approach used today to evaluate mergers, such as the AT&T/Time Warner merger, our legislation would have clear lines—thus enhancing the rule of law and aiding business planning.

Second, the economics and business literature shows that the claimed efficiencies from large mergers are rarely achieved.  On average, large mergers do not produce lower costs or increased innovation. Efficiencies from large mergers in the same industry are generally unpredictable, and are not at all common. Efficiencies from the merger of firms in unrelated industries are truly rare. Nevertheless, if Congress wanted to avoid the tiny risk of blocking merger-related efficiencies, it could give merging parties the defense of demonstrating their merger is highly likely to lead to significant efficiencies that will be passed to consumers.

Possible Conglomerate Merger Legislation

Almost regardless of which specific dollar thresholds Congress might choose, our proposal would block only a tiny number of large transactions each year. For example, suppose an ultra- cautious Congress decided to presumptively ban only those mergers in which both corporations had assets exceeding $100 billion. If such a law had been in effect in recent years, it would at most have prevented two mergers each year.

A still-very-cautious approach would employ a $50 billion threshold for both companies. This would have meant that two to seven mergers would have been presumptively banned in each recent year.

Alternatively, suppose Congress instead chose a relatively “low” $10 billion threshold for both merging firms.  This law would have presumptively prevented only 11 to 23 mergers each year.

Even five years ago, very few people would have advocated that Congress pass an antitrust law to block a hypothetical merger between Apple and Amazon, Exxon/Mobil, etc.  But today, given heightened and bipartisan concern about the political power of the largest corporations, we hope to start a discussion of conglomerate merger legislation.

This post comes to us from Robert H. Lande, the Venable Professor of Law at the University of Baltimore. A version of the post first ran in the Take Care blog, here.