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.]
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