The Merger Review Process
 


Mergers, Efficiencies Gained or Competitors Lost?

Speakers Include: Mr. Louis H. Dupart, Fleischman and Walsh; Hon. Harold FurchtgottRoth, Commissioner, Federal Communications Commission; Hon. James F. Rill, Collier, Shannon, Rill & Scott.

COMMISSIONER FURCHTGOTT- ROTH: Imagine, if you will, that you were a small entrepreneur in — it could be the 18th century, it could be the 19th century, could be the 20th century. Let's say that you were hypothetically a law firm and you wanted to acquire an antitrust practice, and you went to Jim Rill and said, "I would like to acquire your practice." And he says, "well, how much?" And you all negotiate a price and terms and conditions, and lo and behold, suddenly you have acquired an antitrust practice.

Nothing prevents it unless you're doing something that's outside the law, and the law does not exhaustively limit what you may do; it simply limits what in many cases you may not do in terms of mergers and acquisitions.

Now assume that you're not just a private party in the 18th, 19th or 20th century, but let's assume that you're a government agency, and you want to get into the antitrust business. Let's say you're a government agency that has absolutely no authority whatsoever to do antitrust.

[Laughter.]

But like your privatesector counterpart, you decide you really want to do antitrust. You desperately want to do antitrust. All the fun is in antitrust, isn't it?

So what you do is you go off and do a hostile acquisition, maybe go to Jim Rill's firm and raid the firm, hire some of his bright young associates or bright lawyers there. And then you decide you're going to go off and tell businesses that you're the new antitrust authority.

Now, you have no legal basis to do it, but as a government agency, you say, "well, look, my private counterpart can do that, they can go off and get into the antitrust business by simply going off and acquiring someone. Why can't I as a Federal agency do this?"

This is one of the fundamental differences between the private sector and the public sector. Government agencies are bound by what they may do in part by law which specifically tells them what they may do. That is not something that we as private individuals in the private sector are bound by. Government agencies are bound in some sense by what the law tells them they can do.

Now, this little hypothetical story frankly sounds a little bit too familiar to me. Because I can think of at least one Federal agency that has very limited antitrust authority under the Clayton Act and refuses to use that, and it has instead invented an antitrust authority that the entire world seems to believe it now has. If you say it loudly enough, if you go off and you hire some bright lawyers, and if you go around extorting companies and they come in and negotiate with you in secret, then the world believes you have antitrust authority.

What the FCC does have the authority to do is license transfers, plain, simple vanilla license transfers. We do tens of thousands of them every year. What we do is we let a lot of them through without any kind of detail review. We hold a few up to a light bit of scrutiny, and a few that involve mergers within the telecom industry. You won't find it in any FCC rulemaking because we have no rules about how we do license transfers at the FCC. But it appears that if you are a major telecom company and you're doing license transfers, that you will be held up to a very high degree of scrutiny and invited to come in and explain why these license transfers are in the public interest. And something very bad might happen to you, but you don't know exactly what that is. We call this merger review at the FCC.

Of course, no one ever applies to the FCC for approval of a merger. People go to the Department of Justice or the Federal Trade Commission for that. They go to the FCC for approval of license transfers, and we often put conditions on those that have nothing to do with the license transfers but have everything to do with the broader merger, and we get away with this. Private parties refuse to take us to court. Reporters continue to write about the FCC's merger review, which we don't conduct, about a merger review under a public interest standard which we do not have, and the world keeps going. It's amazing.

So I probably have said enough to get into a little bit of trouble for today.

[Laughter.]

MR. RILL: Antitrust is not in the USA a codified blueprint, cookiecutter business. Let me be the first to concede that. And that may be part of the problem we see with overlapping jurisdiction.

COMMISSIONER FURCHTGOTT ROTH: There is no overlapping jurisdiction.

MR. RILL: The overlapping jurisdiction that some of your colleagues may assert.

[Laughter.]

MR. RILL: There actually is some under Section 7.

COMMISSIONER FURCHTGOTT ROTH: Which we never use.

MR. RILL: The Sherman Act itself has been called a Magna Carta of economic liberty. It is somewhat more ambiguous and opaque than probably the Magna Carta. The Clayton Act, Section 7 of the Clayton Act, deals with mergers, stock or assets, and transactions of stock or assets which may substantially lessen competition or tend to create a monopoly in any line of commerce in any section of the country. Those statutory terms have led to an evolution of interpretation that I think has been generally healthy within the framework of the antitrust agencies.

In the 1960s leading up to the mid1970s, merger review at the Department of Justice was extraordinarily intrusive. Criteria of a non economic nature were employed, social policy was rampant. Concern with small business was high. Structural analysis was paramount.

Then in 1981, one of the true giants of antitrust assumed the head of the Antitrust Division, William F. Baxter, and Bill Baxter put together guidelines . . . that went into competitive effects as an analysis and made clear that while efficiencies were to be considered at the discretion of the government, they were nevertheless relevant as a positive effect in evaluating whether or not a merger had a substantial lessening of competition. As a result, merger cases became much more factintensive. There was a much more careful look taken at the market.

From about 1982 to the present time, the evaluation of mergers in the antitrust field has proceeded along generally the same analytical path, sharply different from the '60s and the mid70s, but basically the same from the early part of the Reagan administration through the Bush administration into the Clinton administration.

While the analytical basis has remained the same, industry has changed dramatically. The technology in the business that we're talking about today, broadly the telecom business, including voice, data, and video, is totally different from what it was in 1984 when the MFJ was entered under the leadership of Professor Baxter.

We have dramatic changes occurring daily, transactions occurring daily, mergers of major proportions having occurred in industries that were unknown and may not have been known until the merger itself occurred.

New strategies emerge. Learned Hand in his abomination of the Alcoa case described the monopolist as sleepy, tired leviathans whose sole desire was the quiet life. Today, the monopolists are seeking continually, through research, through the advantages of networks, through the developments of preclusive standards, through acquisitions of access to their business, dare I say browsers and platforms to operating systems, to expand their monopoly both to protect their existing monopoly and to reap profits where possible in adjacent industries. They are not sleepy leviathans; they are aggressive, often very competent, very innovative players.

The comment is sometimes made that antitrust is not capable of dealing with hightech industries where the strategies are different, where there are network effects, where the dynamics are such that the technology evolves daily and new technology in the bushes so that we don't even know about that's going to pop out immediately. Not surprisingly, but also I think accurately, most antitrust lawyers and the economists would say baloney. Certainly antitrust theory, antitrust principles, principles relating to tying, relating to difficulty of entry, relating to market definition, relating to the probability of enhancement of market power, those principles are fully applicable to high technology industries.

The problem really is one of process, not of principle. The issue is, where there is a challenge or an unlimited opportunity to review accorded a government agency, the ability of the agency to move with sufficient alacrity without sacrifice of certainty to take appropriate action in the context of traditional antitrust principles.

The alltime horror story, of course, is the IBM case that was filed on the day that Lyndon Johnson left office. That case went on for ten years before Bill Baxter closed it down, and they hadn't even concluded discovery, and to his great credit, Baxter said, "enough is enough." To the market's great credit, IBM's position had eroded not entirely but very substantially by the time that case was closed.

The case against Microsoft has moved much faster. Is it fast enough? It remain to be seen when we get around to seeing if there is a liability finding and then perhaps more importantly let's look to see what the remedy is and what the market conditions are at the time the remedy is imposed.

Nobody foresaw AOLNetscape at the time that case was brought. Today I don't think we even know the significance of it until it is fully litigated. But antitrust at least in the merger context operates under very confined timetables because of the HartScottRodino process — 30 days first filing, 20 days after compliance with their second request until the final determination, so antitrust must act within a timetable that is statutorily fixed.

In a merger context, a decision has to be made. Failing to take action can be sometimes as risky as taking action. Blocking a merger of course is an extraordinarily strong statement . . . but Justice has done this.

I think as bad as making the wrong choice and blocking the mergers is letting it die a death by a thousand cuts of the delays that result from the unlimited, interminable, purportedly competitionrelated reviews occurring at other agencies. The FCC and state and municipal agencies that intrude in this — it's not just the FCC. You can have three or four agencies, sometimes the Competition Directorate of the European Commission, which also operates under a timetable at least, working in this field.

With the Bell AtlanticNYNEX merger was passed without question by the Department of Justice. But the FCC added . . . limitations on the merger, which I think evolved from their notions of competition. Performance monitoring reports, negotiated performance standards and enforcement mechanisms — these are the FCC bells and whistles on Bell AtlanticNYNEX. Carriertocarrier testing of operational support systems, enabling the resale of unbundled network elements, prices based on forwardlooking economic costs — does this all sound familiar? This is all part of the merger settlement with the FCC. Shared transport facilities based on minutes of use and easy payment plans for nonrecurring charges — this literally was motivated by competition concerns on the part of the FCC.

There are other stories. In SBC- Ameritech FCC staff (apparently with the parties agreement) that the companies would enter some approximately 30 markets not currently served within a particular time period. This regulatory intrusion is justified by the FCC majority as derived from the purported authority of the Commission not merely to see whether a merger is not anticompetitive, which is after all the role of the Department of Justice as prescribed by the Clayton Act, but to see affirmatively that the merger must be procompetitive. If that is the standard, it is a lousy standard and almost unconstitutionally vague and invites social engineering with a vengeance.

For the bottom line, several thoughts occur to me. One, there may be something to be said for abolishing regulatory agencies but it is not in the cards and Congress wouldn't let it happen because it's a source of power. But now that I have irritated the FCC and Congress, the possibility is to let the Department of Justice determinations as to competition be final and any attempt to deviate from that should be reviewed and subject to veto by the Department. Then let the Commission deal with such things as universal access. Second, legislation that puts timetables on the FCC is I think very important. The delays are unconscionable. I think these would be a very very helpful step towards refocusing telecom competition policy in the direction of market competition within the framework of the antitrust laws.

MR. DUPART: I was formerly Chief Counsel for the Antitrust Subcommittee. I started in February of 1997. It was one year after the Telecom Act was started. Mike DeWine's brief to me was very clear. Two things. One, I want you to get into every major issue that is going on right now where competition is a problem and where there isn't enough of it — cable, the aviation industry, the telecommunications industry. We looked at Defense. We looked at international competitive factors, and we looked at Microsoft and the Netscape issue. We are looking today at telecom and after two years there have been seven telecommunications hearings.

Mike DeWine's brief initially was we don't need to do a lot of legislating in this committee because basically we were working with a hundredyearold statute that's stood the test of time. It became very clear, though, after a while, that the long delays in handling mergers and the different standards that were being applied to different merger candidates was basically unfair.

That led to the introduction by Senators DeWine and Kohl of Senate bill 467, which put timelines on the FCC. It also led ultimately to Hatch and McCain introducing their bill to strip the FCC of any merger review authority. It led last week to Chairman Hyde and Mr. Gekas and Mr. Goodlatte introducing legislation to strip the FCC of their merger review authority. The net effect of that was a couple things.

One, when these were introduced in the spring the FCC was still meandering along in the review of the SBCAmeritech merger. Three weeks after the legislation was introduced a statement was issued by the Chairman that they would finish the review by June. Now that was the first concrete action we saw as to a defined date when they would finish it.

That is very important to companies, not only from a financial standpoint but also from the fact that lots of people are affected. They wonder what is going to happen with their lives as they wait and wait and wait and wait and wait for somebody to make up their mind as to what is going to happen and what conditions are going to be applied.

There are several things, I think, that we concluded after all these hearings that we had. The first one was, and I was very skeptical and I think some of the others were as well, that you have to get bigger in order to compete. But the phase of consolidation is coming along at such a rapid pace that I think we came to the conclusion that there will be five to six, maybe seven, large companies delivering telephony services across the United States through tiered rollouts of not only telephone, broadband, data, some of them will have video. But they will be there and the rest of them, a lot of these companies are not going to exist.

AT&T obviously in the next year is going to move aggressively into the local phone market, and that's great as long as the Bell operating companies are in a position to also field their services so that we have vibrant competition throughout all of the telephony marketplace so that we all can benefit from it. That is what Mike DeWine and Herb Kohl were looking for: The delivery of as much competition as possible on the theory that one of the great benefits of the Telecom Act was in wireless where you have vibrant competition, prices have gone down, services have improved, and the offerings are greater than they have ever been before.

If you have that kind of competition in the delivery of residential phone services, data, whatever else, prices will go down, service will improve, and the offerings that you will receive from these companies will only get better.

The competitive local exchange companies, the CLECs. You are going to see a lot of them go away because these companies as they move into the marketplace if the conditions that have been applied to Ameritech and others who come behind them are — and that framework is going to be the same. They have to get into lots of little markets. The only way they are going to be able to do it is by acquiring companies, and they can't just go out there and start them all up themselves because it takes awhile to get the licenses, the people, the resources, and the easiest way to do it is to buy it, and so you will see a lot of acquisitions.

As a result of that, I guess our final conclusion would have been that we are in a different stage now. The beginning of the Telecom Act is over. We are in a separate part of robust competition. And people are determining what the rules of the game are going to be but there is a lot more and, as I used to say, people are bulking up, ready to be real Sumo wrestlers to have the "Clash of the Titans."

As far as the legislation goes, something will move this year. Whether it actually gets signed into law, it's not clear, but it has put some pressure on the antitrust agencies — reviewing agencies, and particularly the Justice Department — to be more efficient, and in particular the FCC, and we will see what happens. That is essentially where we are after two and a half years in the Senate.

[EXCERPT FROM QUESTION PERIOD, WHICH HAD DISCUSSED THE POLITICAL FEASIBILITY OF BILL THAT LIMITED THE FCC'S MERGER AUTHORITY]

COMMISSIONER FURCHTGOTT ROTH: I was just going to make a comment on the absence of the Commission opposing a bill. The Commission may lawfully take a position on legislation. I just have personally said I think it is improper for me as a Government official to be lobbying Congress about changing the law and this one really makes my head spin — to lobby Congress not to change the law to prohibit me from doing something that I am unlawfully doing today.

[Laughter.]

   

2001 The Federalist Society