By Sandeep Vaheesan*
Attorney General Bill Barr inadvertently showed the fundamental problems with federal policy on corporate mergers. In testimony to Congress last month, a Department of Justice (DOJ) career employee revealed that Barr had directed the Antitrust Division to closely scrutinize mergers in the highly fragmented cannabis industry (operating in states that have legalized the substance) due to Barr’s personal animus toward the industry. Even as the Antitrust Division cleared large mergers in food processing, agriculture, telecom, and other industries, it devoted substantial resources to advancing Barr’s agenda against the cannabis industry, despite no apparent threat to fair competition from mergers among cannabis firms. Barr’s conduct and the Antitrust Division’s record show that the present approach to mergers—open-ended and subjective—is long overdue for root-and-branch overhaul.
What might an alternative system look like? Representative Alexandria Ocasio-Cortez and Senator Elizabeth Warren offered a preview with their Pandemic Anti-Monopoly Act, which would prohibit all mergers and acquisitions by corporations and investment funds worth more than $100 million for the duration of the COVID-19 crisis and its aftermath. A clear, rules-based system tied to firm size and market share would stop potentially problematic mergers and allow tie-ups that fall below both the size and the share thresholds. This merger regime would protect the public from concentrated corporate power and small businesses from officials like Attorney General Barr, while entailing little or no economic loss for society.
Present merger policy is an exercise in prediction. Under their shared merger evaluation framework, the Antitrust Division and its sister agency, the Federal Trade Commission (FTC), generally try to forecast the effects of a merger on prices, product quality, innovation, and other consumer-oriented criteria. Relying on this clairvoyance, they only seek to stop a merger in court when they are confident that the combination would likely harm consumers and that these adverse effects cannot be “remedied” through the sale of business assets or duties of fair conduct.
The open-ended, predictive character of merger analysis grants enforcers substantial discretion. The subjectivity of merger analysis is compounded by a review process that is shrouded in extraordinary secrecy. Under this system, the DOJ and FTC can easily clear harmful mergers: consider Antitrust Division chief Makan Delrahim guiding T-Mobile’s acquisition of Sprint and the Obama Administration’s decision to drop its challenge to the merger between American Airlines and US Airways in 2013 following intense lobbying by the airlines’ political allies. That same latitude also allows the agencies to investigate and bog down innocuous deals, as the Antitrust Division did with the cannabis mergers.
The antitrust agencies closely review fewer than five percent of all reported mergers in a typical year, and usually confines these reviews to mergers involving firms in concentrated markets. At Attorney General Barr’s behest, the DOJ has focused its attention on cannabis mergers: Of the thirty-one combinations it closely scrutinized in 2019, nine were in this industry. Some of these mergers involved firms with miniscule market shares—0.35% in one instance. And yet the Antitrust Division enlisted “staff from other offices [in the Division] . . . including telecommunications, technology, and media” to assist, and the Division compelled the merger parties to produce hundreds of thousands or millions of documents.
A simple rules-based system would reduce the discretion of executive branch officials like Barr. Representative Ocasio-Cortez and Senator Warren proposed banning mergers and acquisitions by medium-sized and large firms and investment funds during the COVID-19 pandemic and recovery period. They highlighted how the crisis-triggered distress of thousands of businesses could lead to another wave of consolidation and produce a post-crisis economy even more concentrated than the present one. Their proposed ban on acquisitions by firms and funds worth more than $100 million should be made a permanent part of merger law, and not be confined to the current and future crises.
In addition to limits tied to acquirer size, merger law should also prohibit mergers that unduly concentrate specific markets or extend firm power into adjacent markets, much like the Antitrust Division did through the early 1980s. For example, mergers that combined firms each with a share of 4% or more in a highly concentrated market were illegal under this system, and a firm with more than 10% share in one market could not acquire a firm with 6% share with whom it had or could have a buyer-seller relationship. Under a system of clear rules on mergers, firms that fell below both the size and the market share thresholds would be free to combine and have greater assurance that enforcers hostile to their business could not use antitrust as a weapon.
Would this broad ban on large and medium-sized mergers hurt consumers? On the contrary, it would help them and the public. Mergers frequently lead to higher prices and other harms to consumers. They also often lead to large-scale layoffs, and corporate concentration generally depresses workers’ wages. Consolidations also eliminate vital social redundancies that, for instance, left the United States without enough spare hospital beds or a sufficient emergency stockpile of ventilators. At the same time, even with a strict anti-merger regime, firms of all sizes would still be free to improve their products, invest in new plants and facilities, and hire more workers. As the Supreme Court wrote in 1963, “one premise of an anti-merger statute . . . is that corporate growth by internal expansion is socially preferable to growth by acquisition.”
While the present tolerance of mergers rests on an assumption that mergers “generate significant efficiencies and . . . may result in lower prices, improved quality, enhanced service, or new products,” this theory lacks factual support. Offering a bleak assessment of the social benefits of mergers, Professor Melissa Schilling, of the NYU Stern School of Business, wrote, “A considerable body of research concludes that most mergers do not create value for anyone, except perhaps the investment bankers that negotiated the deal.”
What about distressed firms? The present crisis has shown that mergers are not necessary to help struggling firms. Congress has appropriated hundreds of billions of dollars to support businesses and their workers during the COVID-19 pandemic. Direct, efficiently administered public support for firms and workers should be the default during crises that depress macroeconomic activity and threaten even the best-managed enterprises.
Outside of recessions, reorganization through bankruptcy (with the replacement of management and the allocation of losses to shareholders and creditors) is the appropriate path for troubled businesses that have suffered due to mismanagement and unsustainable debt burdens. Acquisitions by powerful corporations should be a true last resort, permitted only for an acquiree that faces near-term liquidation and has no other prospective buyer or lifeline.
Through his misuse of anti-merger law against an industry he personally disfavors, Attorney General Bill Barr unintentionally made the case for root-and-branch reform of our merger policy. The present framework is open-ended, subjective, and ripe for abuse. Even as the DOJ permitted mega-mergers across the economy, it targeted the cannabis industry for special scrutiny. A rules-based system governing mergers and acquisitions would protect the public from the harms of corporate power and small businesses from the misuse of executive power.
* Sandeep Vaheesan is legal director at the Open Markets Institute and leads their legal research and advocacy work. He has published articles and essays on a variety of topics in antitrust law, including merger policy and the political content of antitrust.