Guidelines For the Merger Thicket

The Justice Department issues new antitrust regulations

Will this merger tend to create a monopoly or will it further competition? That simple question can often lead to a bewilderingly complex discussion among economists and antitrust lawyers about what exactly constitutes a market. Whether the product in question is shoes or steel, it is first necessary to size up the market before deciding whether or not a merger or acquisition endangers competition.

Last week the Justice Department took an important step toward clearing up the confusion. In the first major revision of antitrust guidelines since 1968, Attorney General William French Smith released a 44-page document designed to help businessmen determine whether a merger or takeover effort is likely to be challenged by the Government.

If nothing else, the new rules should prevent some wasted effort in takeover battles. Since 1979, American businesses have spent $182 billion to merge with or acquire other firms. Companies, though, often complete a deal only to have Washington veto it as anticompetitive. Last year Mobil Corp. announced plans to spend an estimated $6.5 billion in what eventually turned out to be a futile struggle to acquire Marathon Oil Co. The takeover was blocked in federal court because it was decided that such a merger would have an adverse effect on competition in gasoline retailing in the Midwest.

The biggest single change in the new guidelines deals with the way markets are to be measured and how the concentration of a market is judged. Says Lawrence J. White, director of the economic policy office of the Justice Department: "Our concern here is with mergers that would tend to have an anticompetitive effect. If the effect is not significant, the merger would not fall within the boundaries of our interest."

To judge what is "significant," the guidelines use the so-called Herfindahl index, a mathematical formula developed by the late Orris C. Herfindahl, a Washington economist. Traditionally, antitrust lawyers have relied on a rule-of-thumb approach. It was believed that the Justice Department would permit any mergers that did not concentrate 75% or more of a particular market in the hands of four or fewer companies. The Herfindahl index sets up a clearer, although more complex, set of guidelines.

Calculating the index sounds difficult, but is really quite easy. The formula is applied by adding together the sum of the mathematical squares of every company's market share in a particular industry or business. For example, if five companies each have 20% of a market, the Herfindahl index for that market would be 2,000. A merger of two of those companies, though, would automatically push the index to 2,800, and the 800-point increase would almost certainly provoke a challenge under the new guidelines. By contrast, the index for a market in which 20 companies each have 5% of the business would total 500. A merger between two of them would increase the index to only 550, an acceptable limit.

Though Reagan Administration critics quickly attacked the new rules as too lenient to Big Business, there seems little likelihood that the regulations will unleash a new wave of Wall Street merger mania. They actually just put down in a more formal fashion the policy followed by the Reagan Administration during the past year and a half.

In fact, last week, even as the new regulations were going into effect, the Justice Department announced that it would move to block the G. Heileman Brewing Co. of La Crosse, Wis., from acquiring Pabst Brewing of Milwaukee. It was the second time in the past year that the department had refused to permit Heileman, the fourth largest American brewer, to take over another beer company. In October, Washington stopped its drive to acquire the Jos. Schlitz Brewing Co. Last week the Justice Department ruled against Heileman's offer to pay $24 per share for Pabst, the fifth largest U.S. brewer. While the Reagan White House is more amenable to mergers than the past few Administrations, not all takeovers can count on its blessing. After the publication of the merger guidelines last week, the rules of the game will now be a little clearer.

This file is automatically generated by a robot program, so viewer discretion is required.