New Thrust in Antitrust

New Thrust in Antitrust Sheer size becomes a target as tough new bills are pressed on Capitol Hill

"Antitrust is one of the battlegrounds upon which the future of capitalism is being fought out." --Former Solicitor General Robert Bork, at last week's TIME conference.

The 1970s have hardly been a happy time for the American Captain of Industry. Pressed hard by environmentalists, consumer activists and Government regulators, he is now coming under fresh attack from trustbusters in the Justice Department, the Federal Trade Commission and the Congress. All are considering ways to expand and toughen the nation's 90-year-old antitrust laws. The new activism, besides making lawyers rich and executives apprehensive, is raising some of the most fundamental questions about the social and political power and the function of U.S. corporations. The basic themes are as old as the debate between Jeffersonians and Hamiltonians, and as new as today's arguments in Congress over a number of proposed antitrust bills.

Is bigness badness? Is the function of antitrust to enhance economic efficiency or to ensure the dispersal of economic power into many hands? Is antitrust becoming, as its critics charge, a hodgepodge of half-baked economic theories and pop sociology that threatens the future of freedom? Or is it becoming, as its champions insist, an ever more important and effective guarantor of that freedom? Seeking answers, Time Inc. last week brought 59 leading corporate officers and economists to Washington for a conference on antitrust. For two days, they heard from and asked questions of 19 speakers, including Government officials, lawyers, law professors, economists and businessmen.

The meeting occurred just as antitrust was being pushed beyond its old boundaries on Capitol Hill and in the courts. Last week the Senate Judiciary Committee approved the so-called Illinois Brick Bill by a 9-to-8 vote, led by Chairman Edward Kennedy of Massachusetts. Prospects for passage in the full Senate and House are doubtful, but, if enacted, the bill would overturn a 1977 Supreme Court decision. Not only could middlemen and retailers sue and collect treble damages from a company for antitrust violations, but so too could individual consumers who join together in class actions. Businessmen fear that the bill would engulf many companies in harassment suits. Often, such suits amount to little more than blackmail: plaintiffs know that companies would rather agree to an expensive out-of-court settlement than endure years of costly litigation.

Many businessmen are already mired in time-consuming antitrust cases. The Justice Department is pressing monumental cases to break up IBM and AT&T, and the FTC is doing the same in a suit against Exxon and seven other oil companies. It is unlikely that the FTC suit will come to trial much before the 21st century, by which time the Government expects oil to play a diminishing role in the nation's economy.

For now, antitrust largely involves traditional questions, such as whether a company conspired to fix prices, divide up markets or drive a weak competitor out of business. A commission appointed by President Carter to review antitrust laws and procedures earlier this year recommended that the standards of proof be relaxed in favor of the Government.

More significantly, a new bill, sponsored by Senator Kennedy and Ohio Democratic Senator Howard Metzenbaum, goes much further and asserts that the mere size of a corporation can tend to give it undue power over countless markets. In short, bigness is badness.

Kennedy-Metzenbaum would categorically block takeovers or mergers between companies that have either assets or annual sales of more than $2 billion, a group that includes some 150 of the top U.S. industrial firms. The bill would also stop takeovers by these firms of the hundreds of additional companies around the country that have $350 million or more in assets or sales.

The mergers and takeovers would be prevented unless management could prove that joining together would improve competition or operating efficiency. That is something that businessmen say would be exceedingly difficult to show since the hoped-for benefits might not be expected to occur for years. If such proof were not possible, the deal could still go through if the acquiring company agreed to spin off a subsidiary, division or some other large asset so that the parent firm would be no larger than it was before the linkup. The bill is strongly opposed by the business community and is unlikely to be reported out of committee this year.

Still, Robert Bork, now a Yale law professor, contended that Kennedy-Metzenbaum is symptomatic of a new anti-bigness mentality in the highest reaches of Government. Though most conference participants felt that large companies compete as ferociously and fairly as small firms, they were told by Economist Walter Adams of Michigan State University that antitrust has political as well as economic elements. Said he: "The objective of antitrust is not to promote efficiency and consumer welfare. These are only ancillary benefits that are expected to flow from economic freedom. The primary purpose of antitrust is to perpetuate and preserve, in spite of possible cost, a system of governance for a competitive free-enterprise system."

Thus the panelists often found themselves debating a basic political and philosophical issue: Do the economic benefits of large size and efficiency outweigh the political risks of allowing power to be gathered in relatively few hands?

The issue has intensified because of the rise of conglomerate mergers between companies in completely unrelated fields. In defending his bill, Senator Kennedy points out that such linkups accounted for only 38% of all mergers in 1950 but have risen to nearly 90% since then. He calculates that the amounts paid to acquire firms in these deals jumped from $12 billion in 1975 to $34 billion last year.

Like a latter-day Jeffersonian, Federal Trade Chairman Michael Pertschuk argued that large conglomerates should be banned because "they increase their power at the expense of smaller and less organized groups, and of the individual." In Pertschuk's view, the danger is all the greater because of the difficulty in measuring the consequences of the steady concentration of power.

On the other side, speakers argued that the Government's concern ought not to be bigness per se, but whether corporate giants are efficient and whether competition flourishes in their industries. U.C.L.A. Economist Harold Demsetz said that despite the rise of conglomerates, there has not been much change in market concentration in 70 years, "and those increases in concentration that have occurred have been associated with lower prices and increases in efficiency." Yale Economist Paul MacAvoy reported that his own research shows that conglomerate mergers do not produce more concentration in specific markets but do tend to produce gains in efficiency.

Disagreeing with Demsetz and MacAvoy, Economist Willard Mueller of the University of Wisconsin claimed that corporations have indeed increased their size and power because "the percentage of all U.S. manufacturing assets held by the nation's 200 largest industrial corporations has risen from about 48% in 1950 to over 60% today." In fact, big companies have not increased their shares of individual markets but, as conglomerates, have grown larger and larger in the economy as a whole. In the past two decades, multinational companies have also grown, and the growth of their overseas activities has helped to make Big Business seem bigger than ever.

Mueller, like Pertschuk, was also concerned because the impact of big mergers is difficult to measure and may not become clear until after competition has been badly damaged. As companies expand by merger, their muscle may scare off smaller competitors. In the words of Walter Adams, the conglomerate giants have the resources to support money-losing operations for long periods; they can simply "outbid, outspend and outlose" small rivals, creating a kind of economic Darwinism.

But there is simply no hard evidence to support this concern. New York Attorney Ira Millstein, co-founder of the Columbia University Center for Law and Economic Studies, observed: "There are feelings about large mergers, there are emotions about large mergers. There is a suspicion about size and its relationship to the power and politics of society. But there is an almost total lack of responsible research in the area."

To most participants, the real question was: If no one can prove that bigness is bad, then why ban it? To Irving Shapiro, chairman of E.I. du Pont de Nemours, the concept amounted to "no fault antitrust." In other words, it penalized companies simply for being more successful than their competitors.

Some mergers enhance competition. Oil would seem an unlikely industry for this to occur in. But Thornton Bradshaw, president of Atlantic Richfield, argued that the acquisition in 1966 by the Atlantic Refining Co. of the Richfield Oil Corp. turned two so-so firms into a company strong enough to compete against the industry giants. Yet Bradshaw noted that his powers, like those of every high corporate executive, are severely limited: "Every decision made at my desk is influenced by some and sometimes most of the following: environmentalists, consumers, tax reformers, antinuclear protesters, the constraints of Government, the DOE [Department of Energy], the EPA [Environmental Protection Agency], ICC [Interstate Commerce Commission], the FTC, the state governments, the municipal governments, the effect on inflation, on labor union attitudes, and on the OPEC cartel."

Since both the extent and the effects of industrial concentration are uncertain, most speakers favored a go-slow policy to sort out the facts before trying to enact new antitrust legislation. Said Du Pont's Shapiro: "In view of our domestic economic needs and our international competitive problems, we would do well not to go off on major, and perhaps irreversible, social experiments until there are convincing reasons to do so."

In foreign trade particularly, the U.S. is already suffering from its restrictive antitrust laws, which hold American companies to tougher standards overseas than competing foreign firms must meet. Kennedy-Metzenbaum would aggravate the problem. Though big U.S. companies would be stopped from buying up others at home, foreign investors would be allowed to come in and continue acquiring almost as much as they want. Said Republican Senator Orrin Hatch of Utah, a Judiciary Committee member who has fought hard against the bill: "We are at a time in our history when we should be doing all in our power to make it easier, not harder, for our corporations to compete on an international basis." Senator Jacob Javits of New York, the ranking Republican on the Senate Foreign Relations Committee, argued that the U.S. should not force American companies doing business abroad to adhere to antitrust standards tougher than those of the countries where they operate. Felix Rohatyn, a partner in the investment banking house of Lazard Freres, noted that governments in Europe and Japan are urging the merging of some of their own big firms to sharpen their ability to compete in world markets.

Many speakers also criticized the Kennedy-Metzenbaum bill for shifting the burden of proof. The U.S. Government would not have to prove that a proposed merger might hurt competition, but the company wanting to expand would have to prove that competition would actually increase. Economist MacAvoy suggested that this approach was little more than a power play to make it easier for the Government to prove its antitrust cases. But, he contended, "the burden of proof should rest with the Michael Pertschuks of this world." The FTC is already empowered to act as both the prosecutor and judge in antitrust cases, and Senator Hatch is drafting legislation to transfer the judge's role back to the courts.

Several panel members also faulted Kennedy-Metzenbaum for setting arbitrary limits on the size of companies that are allowed to merge. So long as inflation continues, the number of companies that have $2 billion in sales or assets will grow fast, and yet each firm will have a smaller share of the nation's markets than at present. Meanwhile, the new activism in antitrust would concentrate more and more power in the Justice Department's and FTC's enforcement bureaus. Assistant Attorney General John Shenefield, the antitrust chief, told the group that the public has concluded, though reluctantly, that Big Government is a necessary counterweight to Big Business. If businesses continue to concentrate and grow larger, warned Ohio Democratic Congressman John F. Seiberling, the public will increasingly demand that they be nationalized. His point: it is in business's own self-interest to support the bill.

Nationalization hardly seems an immediate threat to U.S. business. At a time when the U.S. is struggling to curb inflation, create jobs and sharpen its competitiveness in world markets, the purpose of antitrust policy should be to enhance efficiency. Most conference participants felt that a further tightening of antitrust policy might promote inefficiency by immunizing some big slow-moving companies from takeovers and protecting inept managers from being tossed out. Kennedy-Metzenbaum, remarked Rohatyn, "could be called the Large and Inefficient Business Protection Bill." The way to reduce conglomerate mergers, he added, is to improve economic policy. Bringing down inflation would lead to lower interest rates and higher stock prices. Companies then would no longer have the opportunity to buy out firms at fire-sale prices. Meanwhile, corporations would have more incentive to expand on their own by investing in new plants and machines. The combination of those factors, said Rohatyn, would reduce the number of mergers by 75%.

What most people at the conference agreed upon was that the debate over antitrust will continue and intensify--unsettled, and unsettling to the nation. Yet if so much is uncertain, perhaps the U.S. should be cautious about enacting new laws. In short: If you don't know, go slow.

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