Mergers: New Powers for Trustbusters

Out of the competitive economics of baby food jars and beer cans, aluminum cable and sodium chlorate, the U.S. Supreme Court is fashioning a broad extension of the Government’s trustbusting powers. In two decisions last week, and a third in the past month, the court looked sternly upon mergers, whether in the same or in rival industries; it also raised new barriers against the acquisition of smaller competitors or the forming of joint ventures. In effect, it put corporate giants on notice that most future growth must come from within rather than by merger.

Main points of the court’s rulings: > Major companies will find it tougher to initiate joint ventures. Last week’s case in point involved the Penn-Olin Chemical Co., set up on a fifty-fifty basis by Olin Mathieson Chemical Corp. and Pennsalt Chemicals in 1960 to make sodium chlorate for use in the pulp and paper industry. A lower court had dismissed a complaint against the creation of the firm. But the Supreme Court said, in effect, that companies cannot enter joint ventures if there was a “reasonable probability” that either would have gone into the line, of business alone. While the case was sent back to the lower court for new evidence of that probability, Associate Justice Tom C. Clark de clared for the 6-3 majority that “the same considerations apply to joint ventures as to mergers.” > A major manufacturer cannot acquire the producer of a different but possibly competitive product. Specifical ly, the court disapproved of the 1956 merger between Continental Can and Hazel-Atlas Glass, ruling 7-2 that Continental’s cans and Hazel’s bottles were not in separate industries but were all part of the “competitive overlap” in the packaging market. > In a highly concentrated industry, a large company may not acquire a relatively small competitor. A month ago, the court held that Aluminum Co. of America violated antitrust laws by its 1959 acquisition of the Rome Cable Corp. Rome had only 1.3% of the aluminum cable market v. Alcoa’s 27.8%. But Associate Justice William O. Douglas, writing the 6-3 majority opinion, applied a principle used in recent anti-merger decisions: “If concentration is already great, the importance of preventing even slight increases in concentration is correspondingly great.” Justice Department lawyers believe that the decision will help win similar cases against Kaiser Aluminum, which hopes to acquire U.S. Rubber’s aluminum fabricating plant, and Kennecott Copper, which intends to merge with the cable-making Okonite Co.

The court’s tougher line stems from the 1950 amendments to the Clayton Act, particularly to the broad and vaguely worded Section 7. It now prohibits a corporation from acquiring stock or assets of another “where in any line of commerce . . . the effect . . . may be substantially to lessen competition, or to tend to create a monopoly.” In case after case, the trustbusters are applying Section 7 with success. It was the basis for the 1957 decision forcing Du Pont to sell its 23% of outstanding stock in General Motors; in the important 1962 Brown Shoe-Kinney case, the court used it to rule out a merger between a manufacturer and a retailer in the same line of business. During the past year, the court relied on Section 7 to break up bank mergers in Philadelphia and Lexington, Ky.

Justice Department lawyers boast that they have not lost any important antitrust case since 1953, and U.S. Solicitor General Archibald Cox has a string of 15 straight Supreme Court victories. “If I were in private practice,” says a trustbusting lawyer, “I would advise my clients in concentrated industries that nearly any merger undertaken today is apt to be challenged successfully unless cleared with us beforehand.”

Nearly all businessmen do check first with the trustbusters, whose increased authority makes merging far more difficult but not impossible. There have been 667 mergers announced this year, compared with 482 in the same 1963 period, and every one has undergone at least preliminary Government scrutiny. In most cases, the trustbusters found that the companies were either too small or too diverse for them to take action. Instead, they zero in on bigger targets, where they feel that they have a good chance to win. Justice Department lawyers have a long list of investigations pending, have filed seven new suits this year, including several very big ones in the chemical and oil industries. Once in the Supreme Court, the busters are hard to beat.