Turnabout Draws Mixed Reviews : Antitrust Officials Praise Benefits of Large Mergers

Once upon a time, when the urge to merge was less common in corporate boardrooms than it is today, Vons took over a Los Angeles food store known as Shopping Bag. That is, it tried to.

However, federal antitrust officials opposed the plan, warning that it would cut competition and push up grocery prices in Southern California. Ultimately, the U.S. Supreme Court agreed.

“What we have . . . is simply the case of two already powerful companies merging in a way which makes them even more powerful than they were before,” declared Justice Hugo L. Black in 1966, ordering Vons to unload more than 30 stores.

If that same deal occurred now, it likely would be met with a blessing, not a battle.

Today, U.S. antitrust officials routinely allow mergers of rival grocers, department stores, manufacturers and other enterprises that enjoy vastly more influence in their local markets than Vons and Shopping Bag had in the 1960s.

In contrast to an era when federal “trustbusters” battled concentrations of corporate power, U.S. officials now cite the economic benefits that mergers can bring. Not only are rivals often allowed to join forces, but once-forbidden deals involving factories, suppliers and distributors are permitted as well.

The policy turnabout has drawn applause from many who see it as belated medicine for the U.S. economy in a competitive world. Yet others accuse the Reagan Administration of jeopardizing consumer interests and ignoring the nation’s anti-monopoly laws.

“It’s been quite an astonishing change,” said John S. Wiley, a UCLA Law School professor, noting that the new thinking began to gain influence in the 1970s. “It’s really--in the space of a generation--the law doing a U-turn in its attitude toward mergers.”

There is no better place to witness the revolutionary change than in the aisles of Los Angeles supermarkets, where mergers are taking place that dwarf the ill-starred Vons-Shopping Bag alliance of years past.

Earlier this year, for instance, officials at the Justice Department and Federal Trade Commission--which share jurisdiction over antitrust matters--declined to challenge Vons’ $408-million purchase of Safeway stores in Southern California.

The FTC asked Vons to sell just 12 supermarkets, leaving in place a 353-store combination that commands a quarter of the region’s grocery sales. By various gauges, it is more than three times as powerful as the Vons-Shopping Bag merger that Justice Black decried.

“It gives you a measure of where we’ve come in the last few years,” said James W. Brock, an economics professor at Miami University in Oxford, Ohio, and a critic of the Administration’s approach.

The policy shift is just the latest chapter in America’s enduring love-hate relationship with big business. In the early 1900s, such tycoons as J. P. Morgan emerged as national symbols of all that was good and bad about corporate power.

Early Trustbusters

Federal trustbusters, meanwhile--empowered by the 1890 Sherman Antitrust Act--gained renown for their attempts to fight the excesses of an early wave of merger mania.

U.S. antitrust enforcers say they now understand what their predecessors did not: that certain mergers are good for consumers. If companies can cut overlapping staff and overhead, for example, the new efficiencies may be reflected in lower prices.

The argument, popularized in the 1970s by academics from the University of Chicago, is that mergers are often a wise response to events in the marketplace, not a strategy to exploit the public.

Advocates say that a clear-eyed view of how an industry really operates--including the potential for new players--is needed to evaluate how a transaction will affect prices. Merely measuring a firm’s share of the market is not enough to decide whether consumers will be ill-served, they argue.

“You look at the facts,” Daniel Oliver, chairman of the Federal Trade Commission, declared in an interview. “You don’t just make up rules and say ‘Big is bad.’ ”

Following this credo, the Reagan Administration has allowed some of the biggest mergers in history. To name a few: Campeau Corp. and Federated Department Stores--an extraordinary, $6.6-billion department store combination; General Electric and RCA, a $6-billion merger; the soon-to-be-completed $13-billion alliance of Philip Morris and Kraft food companies, and many more.

Despite criticism, Administration officials insist that they have opposed mergers likely to harm consumers. In other cases, including General Electric-RCA, they have required companies to unload certain divisions to win approval.

Under federal law, mergers of more than $15 million typically must be brought to the government’s attention.

“The fact is, the Administration, more than any of its predecessors, has made very clear what mergers it will challenge--those that threaten higher prices,” said Assistant Atty. Gen. Charles F. Rule, in a recent speech.

In fact, there have been some challenges, though far fewer than in the past.

Stops Tuna Merger

Earlier this year, for example, the Justice Department stopped Heinz--owner of Star-Kist tuna--from buying San Diego-based Bumble Bee. Together, the brands account for 53% of U.S. tuna sales, and antitrust regulators concluded that a merger would hit consumers in the pocketbook.

In another case that also involved powerful national brands, the FTC blocked plans by Coca-Cola to buy Dr Pepper in 1986. Faced with similar resistance, Pepsico dropped a parallel effort to take over Seven-Up.

Yet the FTC’s approach to the big soft drink makers has not been entirely in opposition. In the same year, it allowed Pepsico and Coca-Cola to buy their major bottlers, which traditionally have been independent companies.

This sort of transaction--involving a company’s producers and distributors or customers--is known as a “vertical” merger. As recently as the early 1970s, antitrust enforcers worried enough about the anti-competitive nature of such setups that they forbade Ford Motor Co. from buying a spark plug manufacturer.

Oliver, the FTC chairman, justified the more recent bottler purchases on the grounds of free enterprise, pointing out that the transactions could bolster local marketing efforts of Pepsico and Coca-Cola. He added: “There is no evidence that the acquisitions have harmed consumers.”

In another big switch from the past, federal officials now look at market share--a company’s proportion of sales within its industry--as a starting point for evaluating a merger, but not as the only factor. Even if an industry has little competition, regulators assume that the possibility of future competition can keep a lid on prices.

But in cases where a future increase in competition is unlikely, officials may rule against a proposed deal.

The FTC used this reasoning in 1987 to block Pacific Resources, an independent oil refiner in Hawaii, from buying local oil tanks and gas stations owned by Shell Oil. The FTC concluded that environmental restrictions made it doubtful that a competing oil refiner would ever set up shop.

“In the end, the effect would be felt by motorists, consumers,” said Patrick M. Sheller, an attorney who advises Oliver.

Given such pronouncements, why does the Administration policy spark controversy?

Experts Voice Concerns

Many antitrust experts simply do not believe that mergers can take place at their recent pace without eroding competition and hurting the consumer. Their concerns have been prompted by a pronounced pullback in anti-merger actions.

U.S. regulators challenged 2.5% of mergers filed in the pre-Reagan period of 1979 and 1980, according to Robert Pitofsky, dean of the Georgetown University Law Center and an FTC commissioner from 1978 to 1981. By contrast, challenges plunged to just 0.7% in the Reagan years of 1982 to 1986, he said.

“I think it has been a very lax antitrust policy, and I think if it’s allowed to continue over time, you’re going to see serious adverse effects,” Pitofsky said in an interview.

What is more, some critics worry that the wave of mergers is reshaping corporate America for the worse, creating powerful companies that may prove unresponsive to consumers--if not be downright arrogant.

“One of the purposes of antitrust is to restrain naked corporate power,” maintained Jonathan W. Cuneo, a Washington attorney and critic of the Administration policy, adding that deals on the scope of Philip Morris-Kraft “raise questions in that regard.”

Factors Behind Price Hikes

Unfortunately for critics, it is extremely hard to prove that a price hike for--say, a can of peaches--was caused by the merger of two food chains. Many factors play into the hurly-burly of the marketplace.

But there is no shortage of studies finding that when competition is rare, prices tend to be higher than they otherwise would be.

In addition, critics claim that the Reagan Administration has sometimes ignored its own merger policies in a rush to approve deals. The charge is hard to prove, however, because the government analyses are confidential.

In any case, the skeptics have powerful allies, including a growing number of state attorneys general who are bringing lawsuits to block mergers that have gone unopposed by federal regulators.

“There’s been a major vacuum in leadership at the federal level over the last eight years in terms of antitrust and consumer protection policies,” California Atty. Gen. John K. Van de Kamp declared in an interview.

Van de Kamp and his counterparts across the country have grown increasingly upset by the Administration’s tolerance of mergers that affect the consumer most immediately--at the retail level. These include not just supermarkets and department stores but a whole range of services, such as funeral parlors, sporting goods stores and others.

“We can file comments with the federal authorities till we’re blue in the face,” complained Thomas P. McMahon, chief of Colorado’s antitrust unit. “It won’t get us anywhere.”

Van de Kamp brought suit earlier this year when American Stores, owner of 252 Alpha Beta markets, bought Lucky Stores, owner of 340 markets. Although the $2.5-billion purchase was completed, the merger of the two chains is stalled in federal court, with American running the two chains independently.

As a condition of its approval, the FTC asked American to unload 37 stores. Van de Kamp’s office concluded, however, that more was needed to adequately preserve competition.

Bruce W. Marion, a professor of agricultural economics at the University of Wisconsin who advised Van de Kamp to oppose the merger, said he based his view on five separate studies showing that areas with less grocery competition tend to pay more for groceries.

If the deal goes through, “One could expect that in the long run there will be a gradual rise in prices,” warned Michael Strumwasser, a special assistant attorney general.

In another recent case, the attorneys general of Massachusetts, New Hampshire and Maine all threatened to sue Canadian retail magnate Robert Campeau after he decided to buy Federated Department Stores.

Added to his own properties, Federated would have given Campeau control of more than half the department store sales in Boston and several other metropolitan areas in New England and Florida. Campeau quickly reduced his New England holdings by unloading Filenes.

“There’s an example of where the states stepped in and got a solution the FTC probably could have gotten if it wanted to,” said Benjamin Cohen, an aide to Rep. Thomas A. Luken, (D-Ohio), chairman of a House panel that oversees the FTC.

For all the debate, however, few foresee a major change in approach when George Bush becomes President.

Even critics recognize that the world has changed since the 1960s and that a U.S. company’s market power must be considered in a global context. The legal situation also has evolved since the trustbusters’ heyday, with the newer views increasingly affecting court decisions.

Close observers of antitrust issues also have noted that one of the President-elect’s antitrust advisers is Timothy J. Muris, a professor at George Mason University in Virginia and former FTC official who champions the new approach.

Another sign: U.S. Atty. Gen. Dick Thornburgh, who will keep that job in the Bush Administration, appears to view merger issues in the newer, global context in light of his public comments that foreign companies increase competition in the U.S. marketplace.

“I would expect Bush to follow (Reagan’s approach) almost lock step,” maintains Tom Jorde, a professor at the UC Berkeley Law School.

At least one change can be expected: Airline mergers may get tougher scrutiny. Some of the most criticized mergers, such as TWA-Ozark, occurred under supervision of the Department of Transportation, but Congress is switching jurisdiction back to the FTC and Justice Department.

Congressional scrutiny may also increase next year, in light of public concerns about the size of the Philip Morris-Kraft merger and other transactions. Some experts believe that the FTC already has become slightly more skeptical about mergers than it was earlier in the Reagan Administration.

In a broader sense, however, few expect the historic shift in antitrust philosophy to be reversed anytime soon.

“Because the next Administration will not turn back the clock on the economy and the law,” predicted the Justice Department’s Rule, “antitrust policy for the near future at any rate is not likely to change very much.”