1. Chapter 10 Antitrust, Mergers, and Competition Policy McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, All Rights Reserved.

2. Ch. 10: Key Learning Objectives  Understanding the dilemmas corporate power presents in a democratic society  Knowing the objectives of antitrust and competition laws  Recognizing the key issues in contemporary antitrust policy  Analyzing the reasons for mergers and acquisitions, and how have they affected the relationship between business and its stakeholders  Assessing how competition policies compare around the world, and what impact globalization has had on antitrust enforcement 10 - 2

3. 10 - 3 The Dilemma of Corporate Power  Corporate power The capability of corporations to influence government, the economy, and society, based on their organizational resources  Power can be a function of size and world’s largest corporations are very big  Figure 10.1 shows 10 largest global corporations  Corporate power The capability of corporations to influence government, the economy, and society, based on their organizational resources  Power can be a function of size and world’s largest corporations are very big  Figure 10.1 shows 10 largest global corporations

4. 10 - 4 Figure 10.1 The 10 Largest Global Corporations, 2005-2006

5. 10 - 5 The Dilemma of Corporate Power  Economic power is evident when compare largest corporations’ annual sales revenue with countries whose GPD (gross domestic product) is at same level  Figure 10-2 shows this comparison  The dilemma of corporate power concerns how business uses its influence, not whether it should have power in the first place

6. 10 - 6 Comparison of Annual Sales with GDP for Selected Transnational Companies and Nations, 2004 Figure 10.2

7. 10 - 7 Antitrust Laws  Antitrust Laws that prohibit unfair, anti-competitive practices by business  Term derives from trust, the old-fashioned word for groups of companies that joined together to divide up markets and limit competition  New term for trust is cartel  The term antitrust law is used in the U.S., most other countries use the term competition law

8. 10 - 8 Objectives of Antitrust and Competition Laws  The protection and preservation of competition  To protect the consumer’s welfare by prohibiting deceptive and unfair business practices  To protect small, independent business firms from the economic pressures exerted by big business competition  To preserve the values and customs of small-town America

9. 10 - 9 The Sherman Act  Prohibits contracts, combinations, or conspiracies that restrain trade and commerce  Prohibits monopolies and all attempts to monopolize trade and commerce  Provides for enforcement by the Justice Department, and authorizes penalties for violations

10. 10 - 10 The Clayton Act  Prohibits price discrimination by sellers  Forbids requiring someone to buy an unwanted product or service in order to get another one they want  Prohibits companies from merging if competition is lessened or a monopoly is created  Outlaws interlocking directorates in large competing corporations

11. 10 - 11 The Federal Trade Commission Act  Created the Federal Trade Commission to help enforce antitrust laws  Prohibits all unfair methods of competition  Gives more protection to consumers by forbidding unfair business practices

12. 10 - 12 The Antitrust Improvements Act  Requires large corporations to notify the Justice Department and the Federal Trade Commission about impending mergers and acquisitions  Expands the Justice Department’s antitrust investigatory powers  Authorizes the attorneys general of all 50 states to bring suits against companies that fix prices and to recover damages for consumers

13. 10 - 13 Antitrust Law Exemptions  Some organizations are not covered  For example, Major League Baseball  Others not covered  Labor unions  Agricultural cooperatives  Insurance companies (regulated by State law)  Business transactions related to national defense

14. 10 - 14 Antitrust Enforcement at the Federal Level Figure 10.3

15. 10 - 15 Key Antitrust Issues - Monopoly  Does domination of an industry or a market by one or a few large corporations necessarily violate antitrust laws?  Should the biggest firms in each industry be broken up?  The courts have found that monopoly per se is not illegal  If a company dominates the market because it offers a superior product or service, has invented something unique, or even because it is just lucky, that is not against the law  If, however, a firm uses its market dominance to restrain commerce, compete unfairly, or hurt consumers, then it may be found guilty of violating antitrust laws

16. 10 - 16 Key Antitrust Issues - Innovation  In early days of antitrust law, regulators promoted competition in order to provide consumer choice and keep prices down  Today, in the fast-paced economy, regulators have increasingly promoted competition to foster technological innovation  Quote from Federal Trade Commission Chairman:  “Innovation is more and more the central arena in which competition plays out. [It] is the hot issue for the foreseeable future.”

17. 10 - 17 Key Antitrust Issues – High Technology Businesses  Economy has changed from when antitrust laws were crafted in the late 19th and early 20th century  We are now in the information age, where primary currency is intellectual property  Some argue that the basic principles of antitrust law are not applicable today  Monopolies in high-tech businesses are inherently unstable with low barriers to entry and dynamic technological change constantly changing basis of competition  Courts are struggling to resolve ways antitrust laws apply to high tech industries

18. 10 - 18 Corporate Mergers  Corporate merger A combination of one company with another  Vertical mergers  Occur when the combining companies are at different stages of production in the same general line of business  Horizontal mergers  Occur when the combining companies are at the same stage or level of production or sales  Conglomerate merger  Occurs when firms that are in totally unrelated lines of business are combined

19. 10 - 19 Three Different Types of Corporate Mergers Figure 10.4

20. 10 - 20 Forces Driving Mergers in the 1990s and 2000s  Technological change  Major companies jockeyed for position in rapidly evolving technologies  Changes in regulatory environment  Examples include telecommunications deregulation and changes in health care industry laws  Globalization  Companies found they needed to be big to operate on the global stage  Stock price appreciation  Bull market in late 1990s gave some companies the means to purchase others

21. 10 - 21 Value of mergers and acquisitions, 1990 – 2005 Figure 10.5

22. 10 - 22 Consequences of Corporate Mergers  What stakeholders will be helped and what stakeholders will be hurt by wave of corporate mergers?  Mergers bring benefits to the firm, like economies of scale and access to new technologies  Sometimes, however, undermine responsibility to some stakeholder groups  Examples include employees losing their jobs and communities negatively impacted by companies moving out  Shareholders can lose if the merger is not well thought out or acquisition was overpriced

23. 10 - 23 Comparative Competition Policies  Europe has lagged behind U.S. in antitrust regulation, but is catching up  EU today has complete set of competition policies, however enforcement emphasis is different  Attention paid to market domination by former state-run enterprises  Concern with price discrimination across borders  Strong inclination to protect small business  Developing nations have moved to adopt their own competition policies

24. 10 - 24 Globalization and Competition Policy  Rapid globalization of business has created challenges for antitrust enforcement:  Should a government permit mergers, or joint ventures, even if they reduce competition, if they enhance the ability of domestic businesses to compete internationally?  Should a country government move to break up monopolies, if the global marketplace for the products offered is highly competitive?  Should regulators try to enforce antitrust laws against foreign companies if they operate subsidiaries within their borders?  What steps can governments take to create a level playing field, so that corporations operate under a common set of antitrust rules and regulations wherever they do business?

25. 10 - 25 Antitrust Enforcement and National Competitiveness  Regulators have dilemma when goal of competitive market conflicts with goal of strong economy, relative to other countries  Since mid-1980s U.S. has permitted cooperative activities among firms where appropriate to enhance their competitiveness in the global economy  The 1984 National Cooperative Research Act (NCRA) sought to balance cooperative R&D with competition by instructing the courts to use a “rule of reason”  European regulators have similarly permitted joint R&D aimed at improving the competitiveness of their industries  Regulators have also loosened rules governing joint production agreements to permit economies of scale

26. 10 - 26 Enforcing Antitrust Laws against Foreign Firms  In recent years, regulators have been more willing to address possible violations of antitrust law by foreign companies  Example - requiring merged Swiss drug companies Sandoz and Ciba-Geigy to divest product lines in the U.S. to avoid being a monopoly  European regulators have become more active in enforcement against U.S. companies  Example – European court in 2005 upheld EU’s veto of General Electric’s acquiring of Honeywell

27. 10 - 27 Harmonization  Harmonization is process being used to coordinate laws and enforcement of competition policies across countries  Several bilateral treaties are in place  OECD has worked to coordinate antitrust enforcement  EU and U.S. now jointly review global mergers  EU also coordinating more closely with Japan Fair Trade Commission  Despite these efforts, lack of common standards creates a problem for cross-border mergers  Brookings Institution report has called for multi-country effort to harmonize competition policies