I. Statistics: How Trade and Mergers are Changing the Face of the Economy
A. Growth in Exports, Imports and FDI
- In the US, exports have effectively doubled and imports climbed by more than half in the last decade as a percentage of GDP. At the end of the day, trade across our borders amounts to more than a quarter of the value of the US domestic economy.
- Worldwide foreign direct investment outflows, that is, investments in foreign affiliates, are estimated to be growing at three times the rate of world exports and four times the growth in world GDP. Cross-border mergers and acquisitions play a significant role in driving this foreign direct investment.
- We see the consequences of these massive increases in trade flows and cross-border investments in our work every day. Last year, the FTC and DOJ reviewed a record 4,728 Hart-Scott-Rodino premerger filings - over three times the number reviewed just six years earlier. More striking, the total value of reportable transactions in 1998 increased to almost $1.5 trillion - ten times the 1992 level. And the total value of mergers reached $2.5 trillion globally in 1998.
- Another way to think about this is that on just one day in late November last year, the WSJ reported four breathtaking deals: Exxon and Mobil, two of the four largest oil companies in the world, proposed to create the world's largest privately-owned oil company; Hoechst and Rhone Poulenc announced the formation of the world's largest life-sciences company; Deutsche Bank/Bankers Trust announced the creation of the world's highest asset financial services group; and Viag/Alusuisse Lonza proposed to become a multi-field global leader. (11/30/98). Or as the New York Times observed, "not since the wave of industrial takeovers created the great oil, steel and auto companies at the beginning of the century has corporate America been reshaped by a sweep of merger activity as the one taking place today." (1/19/98).
B. What are Global Mergers?
- What some call global merger mania covers a wide spectrum of corporate transactions. What I think we should mean when we talk about global mergers is in fact mergers with cross-border effects. Such a merger could involve two US companies - Exxon and Mobil - with worldwide operations, whose proposed consolidation could affect multiple markets across the globe. It also could involve two foreign companies, such as Hoechst and Rhone Poulenc, or Ciba Geigy/Sandoz, the merger of which could affect US, EC and other markets. It could involve a foreign and a US firm - Deutsche Bank/Bankers Trust, or Daimler/Chrysler - whose merger, again, would impact US and foreign markets.
- Of the mergers reported to us, about 25% involve parties or assets in at least two different countries, and sometimes as many as ten countries. Of the mergers that we review in-depth - that go to what we call full-phase investigation - at least 50% have involved a foreign party or assets or information located abroad.
II. What is Driving this Urge to Merge?
A. Innovation is one powerful force doing so. Improvements in technology have brought down the costs of transportation and communication dramatically, making cross-border trade and investment more feasible.
B. Successive rounds of trade negotiations have opened up markets by removing not only tariff barriers but also non-tariff barriers in both goods and now services.
C. Deregulation and privatization have opened up former monopolies, state-owned enterprises and other limited entry markets, increasing firms' competitive opportunities.
D. The soaring stock market has enabled firms to finance acquisitions with highly-valued shares of stock.
E. Given an increasingly global environment, it is often profitable to expand operations, but in this fast-paced, high-tech world, growth from within or greenfield investment overseas can seem painfully slow. Acquiring someone tends to be much faster and it may be a particularly effective way to penetrate a foreign market, with its different national tastes.
F. A winner take all mentality is prevalent at corporate headquarters. This is in part attributable to perceived economies of scale and scope, as well as to network effects, but it may also be a management fad - Jack Welch, whose mantra is that one should be number one or two in the business or get out, is not a bad model.
G. In good times, businesses are confident and tend to see the upside rather than the downside of growing and merging. (In fact, the statistics on the success of mergers are far from encouraging.)
III. Is Merger Mania a Good Thing and Does Antitrust Review Matter?
A. What antitrust law is designed to accomplish it to prevent anticompetitive conduct. The theory behind it is that open markets and the competitive process will result in optimal benefits for consumers in terms of the price and quality of goods and services. Competition is also good for businesses - it promotes efficiency, dynamic growth and innovation. One of the reasons that US firms have done so well internationally is precisely because they were weaned in a climate of competition and rivalry at home.
B. Most mergers are motivated by goals of efficiency and improved performance, and from an antitrust perspective are at least competitively benign. Of the thousands of premerger filings we reviewed last year, almost 70 % received what is called "early termination," that is, they were cleared by the agency in less than our statutorily allotted 30 day period. Indeed, the average time for review was less than 16 days. Generally, less than 4 % of all transactions receive an in depth investigation and less than 2 % of all transactions are challenged.
C. Simply put, there is nothing inherently bad with firms getting bigger, or with an industry consolidating by eliminating excess capacity and squeezing out inefficiencies, or with firms combining complementary products or services. What we do need to be on the lookout for is the possibility that a merger may substantially lessen competition. This can happen in two ways. First, the merged firm itself may become able to increase prices, regardless of the actions of other firms in the market. For such unilateral effects to occur, the merged firm typically must have a very large market share, around 35 % or greater. Second, the market may become so concentrated that firms are able to engage in tacit or express collusion. This means that firms are able to agree, expressly or implicitly, to raise prices or reduce output. What it requires is that competitors be able to reach an agreement as well as be able to detect and punish firms that breach the agreement.
D. The reason why merger enforcement is important is because it is excellent preventative medicine. Once a market structure becomes unduly concentrated - whether oligopolistic or monopolistic - it is very hard to get in and undo the damage being caused. It is far better, from both a legal and policy perspective, to prevent the creation of market structures in which firms have the power to unilaterally set prices or expressly collude or tacitly coordinate.
E. I will hazard that, thus far, one of the reasons why the mergers we are seeing are not unduly problematic, is that trade liberalization, innovation and deregulation have caused markets to open and expand, entry barriers to fall and enabled more foreign firms to provide meaningful competition. That is, international trade has likely increased competition. An easy example is the auto industry - what was once a domestic oligopoly of The Big Three back in the 1970s is now a more fragmented international market where European, Japanese, US and other players sell and source across borders and vie for market share. My one concern - and I would not be an enforcer if I did not have some concerns - is that the consolidation process we are seeing and the pull of a winner takes all philosophy could lead to global oligopolies or, in high tech markets with network effects, a worldwide monopolist. For consumers and for national competition agencies who may individually be powerless to remedy the situation entirely, this would not be a good result.
1. The views expressed here are those of the author, and not necessarily of the Federal Trade Commission or any Commissioner.
2. The Organization of Women in International Trade