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Thursday, December 22, 2011

Vertical and Horizontal M&A: A Bias in Antitrust Policy?

The Obama Justice Department developed a track record in challenging horizontal mergers and acquisitions—those in which a company buys a direct competitor—in industries that are already highly concentrated. In deals that are not between direct rivals, such as those that occur in vertical integration, the Obama Administration approved the deals, albeit with the imposition of legally binding restrictions on the acquirer’s ability to use its “in house” supplier to engage in unfair competition.
As one example of unfair competition through the use of a purchased distributor, Standard Oil under John D. Rockefeller bought a company that owned and operated pipelines through which oil was transported. Besides using the company to obtain competitive information, he made sure that higher rates were charged to competitors—even though who had no other means of transport available. Where practicable, going by pipeline was preferable to barges and railroads from a cost standpoint—although Rockefeller obtained substantial rebates from the railroads (from his volume or market power—this point is subject to debate). In addition, the railroads granted Standard Oil drawbacks—a cut from the railroad’s business in servicing other customers, including competitors of Standard. Given Standard’s sheer volume, the rationale went, trains being used to haul others’ product were not available for Standard and thus represented a cost in terms of foregone volume transported. Even so, from the ethical standpoint of fairness, both the rebates and especially the drawbacks were subject to substantial critique—especially that of Ida Tarbell, whose text (History of the Standard Oil Company, 1904) on Rockefeller’s helmship of Standard was scathing.
More than a century later, the Obama Justice Department allowed Comcast to take control of NBC Universal and Google to buy travel software maker ITA Software. The government’s rationale is that companies can save money from synergies and thus lower prices for consumers (or increase salaries, retained earnings or dividends). Even in a competitive market, however, the “lower prices” scenario seems to have doubtful validity, given tacit collusion on price, non-price means of competing, and executive managers’ interests in increasing their compensation and keeping investors happy.  Similarly, by the way, reducing companies to being “job creators” is not only reductionistic; it also demonstrates an ignorance of what businesses are designed to do (i.e., earn profit by selling widgets—jobs being merely a means).
Moreover, the assumption that “legally binding restrictions on the acquirer’s ability to use its prize to unfairly harm competitors” are a sufficient means of checking or thwarting baleful consequences from what is an institutional or structural conflict of interest seems to be highly tenuous, in my opinion. Just as water in a stream “seeks” ways to go downstream even when temporarily blocked (and a cat obstructed from food laid out continuously seeks ways to get around the obstacles), the managers of company A that owns company B, which acts as a supplier or distributor for competitors of company A, will doubtlessly (and inevitably) seek ways around the restrictions. In the parlance of trade, such ways are known as “non-tariff barriers.” They are notoriously difficult to stop (think: stop the cat).

                                                                                WSJ

In conclusion, the Obama administration’s differential treatments of vertical and horizontal mergers and acquisitions evince a bias caused by understating the strength of a structural conflict of interest that is inherent in one company buying a distributor or supplier that services competitors of said company. Perhaps the underlying culprit is an understating of the more sordid aspects of human nature combined with an overstating of the efficacy of government regulation. If highly concentrated, massive stocks of capital, such as are evinced in banks or companies that are too big to fail, represent a risk both to competitive markets and to representative democracy, then not only should both vertical and horizontal mergers and acquisitions be subject to higher hurdles, but also existing companies that are too big to fail should be broken up, as the U.S. Supreme Court broke up Standard Oil a century ago.


Source:
Thomas Catan and Brent Kendall, “After AT&T: The New Antitrust Era,” The Wall Street Journal, December 21, 2011.