More Mergers Involve Head-on Competitors : Relaxed Administration Policies May Encourage Market Domination, Antitrust Experts Contend

American corporations--prodded by changes in the economy and encouraged by Reagan Administration policies--are becoming increasingly aggressive in proposing mergers that would allow them to dominate their markets, many antitrust specialists contend.

A wave of bold mergers has been building in the last year, they argue, capped by a seemingly nonstop series of airline acquisitions and the two recently proposed combinations of Coca-Cola Co. and Dr Pepper, and Pepsico and Seven-Up Co. The soft-drink deals, if approved by antitrust regulators, would give the two beverage giants a combined 80% share of the domestic market.

The Administration “has been receptive to mega-mergers for five years, but now we’re seeing more and more deals between head-on competitors,” said Harry First, a New York University law professor.

The Administration has presided over a series of the largest mergers in history and heard relatively little opposition to its policies in Congress or elsewhere. But some fear that these combinations between primary competitors--called horizontal mergers--will reduce competition and ultimately drive up prices paid by consumers and other businesses.

Observers say the pending soft-drink and airline deals pose a key test of how far the Administration will go in allowing companies to combine as they wish.

Administration officials now attach less importance to whether a merger allows a small handful of companies to dominate a market. Instead, they give more weight to whether other companies can easily enter a market and compete, and to whether a merger would provide efficiencies that lower production costs and prices.

They are more likely to favor mergers that enable U.S. firms to better compete with their foreign counterparts.

Some antitrust experts believe that corporations sense greater permissiveness toward mergers and have found reinforcement for that view in recent statements by Assistant Atty. Gen. Douglas H. Ginsburg, head of the Justice Department’s antitrust division, and Commerce Secretary Malcolm Baldrige. Observers say Ginsburg takes a more relaxed view of antitrust enforcement than his recent predecessors and note that Baldrige is the prime backer of a package of pending bills that would dramatically relax antitrust laws.

While antitrust policy has gone through a slow but steady relaxation for the last 20 years, “the speed and the magnitude of that relaxation has really increased over the last three or four years,” said Robert Pitofsky, dean of the Georgetown University Law Center and a former member of the Federal Trade Commission.

Some antitrust specialists distinguish between some of the largest mergers of President Reagan’s first term and the recent deals. The marriages of such industrial giants as U.S. Steel and Marathon Oil, and Du Pont and Conoco “raised questions because of their absolute size,” said First of New York University. “There weren’t necessarily compelling antitrust arguments beyond that, because the companies didn’t overlap in product markets.”

Some of the more recent deals “are between smaller companies, yet they seem to be clearer in terms of their anti-competitive impact,” he added.

Second Wave of Mergers

Perhaps the most dramatic illustrations of what some are calling a second wave of mergers have been the proposed combinations of the two leading soft-drink firms.

In January, Pepsico announced plans to purchase Seven-Up from tobacco firm Phillip Morris for $380 million. The addition of fourth-ranked Seven-Up, which has a 6.3% market share, would give second-ranked Pepsico 34% of the U.S. soft-drink business.

Then last month, Coca-Cola said it would purchase third-ranking Dr Pepper for $470 million, a deal that would give Coca-Cola a leading 46% share of the business. The deals, which will be reviewed by the FTC and perhaps several congressional subcommittees, have already raised eyebrows among antitrust specialists.

“It’s a mystery to me why companies would propose these deals that they must recognize don’t measure up under the guidelines,” said William F. Baxter, Reagan’s first antitrust chief and now a professor at Stanford University Law School, referring to the soft-drink mergers.

But other experts do not believe the soft-drink deals will be blocked. “I wouldn’t bet 7 cents on it,” said another former high-level antitrust enforcer who asked to remain anonymous.

Cites ‘Strategic Fit’

When asked whether his company’s perception of a changed antitrust environment played a role in the merger decision, Coca-Cola spokesman Mark Preisinger said: “I’m a little hesitant to say that didn’t enter into it.” He insisted the most important reason for the merger was that it represented a “good strategic fit.”

A Pepsico spokesman, James Griffith, said his company’s deal was proposed entirely “because we saw an opportunity we hadn’t seen before.” He contended the merger is not anti-competitive because Seven-Up is an “underdeveloped, undermarketed brand,” which, without Pepsico’s financial backing, might be forced to cut back distribution to one region of the country.

Pepsi also plans to argue that concentration in the soft-drink business does not count, since soft-drink makers compete not only in the soft-drink market but also with a vast range of other beverages.

“When you sit down for lunch, you don’t just choose among Pepsi and Coke, but also among beer, Perrier, milk and water. That’s the market we’re in,” Griffith said.

The recent round of mergers in the airline business follows the trauma of industry deregulation in 1978, which set off a price-cutting free-for-all. Deregulation gave airlines an increased incentive to combine, so they could increase their financial strength and cut overhead expenses.

Most of the recent deals involve airlines buying up direct competitors:

--UAL Inc., parent of United Airlines, last year purchased the lucrative transpacific routes of Pan American World Airways for $750 million, although United already held a 7% share of that market, and Pan Am a 20% share.

--NWA Inc., parent of Northwest Airlines, last January said it will buy Republic Airlines for $884 million, in a deal that would create the third-largest U.S. carrier. Each has a hub at the Minneapolis-St. Paul airport, and together the airlines account for nearly 80% of boardings there.

--Texas Air Corp. intends to purchase Eastern Airlines, although Eastern and Texas Air’s New York Air subsidiary together account for 90% of boardings on the shuttle routes between Washington and New York, and New York and Boston. The shuttle routes are the world’s busiest air routes and the second-most valuable portion of Eastern’s network after the airline’s Florida routes, analysts say.

--Trans World Airlines said last month that it will pay $250 million to purchase Ozark Airlines. The two carriers each have hubs in St. Louis and together control about 70% of flights to and from that city.

“I don’t believe there’s any way some of these would have been tried until recently,” said F.M. Scherer, a Brookings Institution economist and former director of the FTC office that analyzes the economic consequences of mergers.

The U.S. Transportation Department must review airline mergers for possible anti-competitive effects before they are approved. In each case, the Justice Department’s antitrust division is given an opportunity to offer its views before a decision is made.

Four Deals Questioned

And while many specialists think Justice’s views on antitrust are more relaxed these days, the agency has raised questions about the possible anti-competitive effects of each of the four deals.

In United’s purchase, the agency recommended that the airline be forced to divest one route between the West Coast and Tokyo--a proposal that was not heeded when the Transportation Department approved the deal last summer.

The Justice officials have already voiced reservations about the TWA-Ozark deal and said last month that the Northwest-Republic merger “raises competitive questions” that should be answered before approval is given. “With that kind of overlap in routes, the merger poses real questions on its face,” said James Weiss, chief of the Justice Department office that considers airline mergers.

The Transportation Department has contended that even though a combination might reduce competition, the threat that other airlines might enter their turf would keep the dominant carriers from raising prices too high.

Others disagree, arguing that it is not always easy for airlines to enter new markets, since they must secure landing and gate rights. And, some point out, the recent financial problems of many airlines have made it difficult for any new company to enter the business.

Some Units May Be Sold

Wall Street analysts are already predicting that the merger wave will usher in an era in which half a dozen airlines dominate the business, and raise ticket prices far above their current levels.

Some expect the Justice Department will recommend that the merging airlines solve their antitrust problems by selling off overlapping operations to maintain competition. But critics say overlapping routes are central to the Northwest-Republic and TWA-Ozark mergers and question whether transportation officials would heed such recommendations from Justice in any case.

The Transportation Department “never met a merger it didn’t like,” complains Alfred Kahn, who was chief architect of airline deregulation as chairman of the Civil Aeronautics Board in 1977 and 1978.

Kahn has reservations about the anti-competitive effects of each of the recent deals, including the Texas Air-Eastern merger--although he sits on the board of directors of Texas Air’s New York Air subsidiary.

“This may be disloyal to (Texas Air Chairman) Frank Lorenzo, but the merger does raise problems that at least have to be looked at,” he said. “You lose the benefits of deregulation as soon as competition ends.”

Questions have been raised about mergers between head-on competitors in other industries as well.

Kahn points to the plans of Uniroyal and B. F. Goodrich to merge their tire-making operations in a joint venture. The combined operations will have an 18% market share and will rank second in the industry after Goodyear Tire & Rubber Co.

Questions 48% Share

NYU law professor First points to the acquisition of a leading maker of carburetor-maintenance kits that was approved by the FTC last summer. The agency approved Echlin Inc.’s acquisition of a division of Borg-Warner Corp., even though the companies were the first- and third-largest makers of the kits and together held a 48% share of the market.

The agency approved the deal on grounds that it would be easy for others to enter the business, pointing out that another carburetor-kit maker was an entrepreneur who assembled his products in his house. “They didn’t care that that competitor only had 0.3% of the market and that nobody else had gotten into the business for about the past 20 years,” First said.

Some antitrust specialists believe companies may have recently become more aggressive in proposing such horizontal deals because top executives are only now awakening to the new antitrust policies.

“It may be simply that businessmen now understand what antitrust lawyers have understood for three or four years,” said Joe Sims, who was a ranking antitrust official in the Gerald R. Ford Administration. “They feel freer to think about the possibilities.”

Justice officials contend that the Administration’s policies have been consistent throughout. They say that if companies have grown more aggressive in proposing deals, it is because they understand better what kind of mergers will and will not pass muster.

Voices Skepticism

Corporate lawyers can now “anticipate with reasonable certainty the kind of transactions we object to,” antitrust chief Ginsburg said in an interview. “They have been advising clients away from deals that won’t pass.”

Ginsburg also seemed to voice skepticism that some of the pending deals will win regulatory approval as proposed. “People keep talking about the (soft-drink combinations) and some of the other proposed mergers as if they were done deals,” he said. “But we are a long way from knowing the outcome.”

Others believe companies are also responding to the Administration’s lengthening track record of approving deals. And many assert that corporate America is picking up signals from Administration spokesmen such as Ginsburg, who have articulated an ever more lenient view of antitrust enforcement.

“There is a more pronounced doctrinal air now than there was earlier in the Administration,” said John H. Shenefield, who was chief of the antitrust division in the Jimmy Carter Administration.

Ginsburg “quickly communicated to the legal community that he’s the most relaxed of antitrust chiefs,” said Scherer of the Brookings Institution. “It’s something you pick up in meetings with him, just from the questions he asks and the things he considers important.”

Baldrige Urges Mergers

But most outspoken on the subject has been Commerce Secretary Baldrige. While other officials have taken the view that businesses should usually be free to join forces as they wish, Baldrige has actively urged businesses to merge to meet overseas competition.

The commerce secretary was the prime mover behind the package of five bills, introduced last month, that would revise key antitrust laws to help businesses to better compete internationally. Among other things, the bills would codify the Administration’s guidelines and allow the President to permit mergers among competing companies, if those companies are challenged by imports.

Baldrige has second-guessed the antitrust enforcers. When the Justice Department indicated it would oppose a steel merger of LTV and Republic, “Baldrige called it ‘a world-class mistake,’ ” recalls Shenefield. “That’s got to have an effect.”