Stelzer, Irwin M.

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St. John's University School of Law

St. John's Law Review Volume 44 Number 5 Volume 44, Spring 1970, Special Edition Article 5 December 2012 The Conglomerate: An Agglomeration of Views Reviewed Irwin M. Stelzer Follow this and additional works at: https://scholarship.law.stjohns.edu/lawreview Recommended Citation Stelzer, Irwin M. (1970) "The Conglomerate: An Agglomeration of Views Reviewed," St. John's Law Review: Vol. 44 : No. 5 , Article 5. Available at: https://scholarship.law.stjohns.edu/lawreview/vol44/iss5/5 This Symposium is brought to you for free and open access by the Journals at St. John's Law Scholarship Repository. It has been accepted for inclusion in St. John's Law Review by an authorized editor of St. John's Law Scholarship Repository. For more information, please contact selbyc@stjohns.edu. THE CONGLOMERATE: AN AGGLOMERATIONOF VIEWS REVIEWEDIRWIN M. STELZER*The impressive array of papers which makes up this volume touchesalmost every aspect of the problem raised for antitrust policymakers andimplementers by the conglomerate form of business organization. Since Ihave been cited in one of these papers (Kuhlman and Duke) as one whosees the conglomerate as "a new and dangerous threat . . . " and on thebasis of an earlier article1 in this journal have been termed a defender ofthese same conglomerates, I feel ideally situated to attempt to place thesevaluable, separate contributions in some broader perspective. Who, afterall, is better qualified as a synthesizer than one who has himself straddledthe issues?The range of the papers here included is impressive. They reflect thefact that many economists are seriously concerned about any further weak-ening of the vigor of competition in our economy, vaguely feel that con-glomeration poses some such threat, but find, in Richard Miller's words,that "the analytical links between a conglomerate merger and an increasein monopoly power are generally unconvincing .. " Professor Kamerschen,in fact, finds that the recent wave of conglomerate mergers "has had littledirect impact on market concentration." It is, of course, correct that con-glomerate mergers, by definition, do not create a problem of added concen-tration in some "relevant market." Indeed, the Justice Department hasrelied on no such argument; rather, it has based its policy position on thefear of "superconcentration." This argument rests on the view that our anti-trust laws are rooted in a social philosophy which abhors excessive concen-tration of economic power. Mr. McLaren, for example, has noted that theantitrust laws seek to preserve competition because "it protects our politicalsystem by promoting a broad dispersion of economic power among themany, rather than concentration in the hands of a few." 2 With this inter-pretation of the social objectives of the antitrust laws it is difficult to quar-rel. And there is little question that, when the Congress amended the Clay-ton Act3 in 1950, it had similar objectives, fearing what RepresentativeCeller called "the level of concentration in American industry";4 and whatRepresentative Boggs called "one of the most detrimental movements to afree enterprise economy-. . . the conglomerate acquisition." 5 Indeed, theHouse Report accompanying the bill sought "to make it clear that the bill* President, National Economic Research Associates, Inc B.A., New York University,1951; M.A., New York University, 1952; Ph.D., Cornell University, 1954.1 Stelzer, Antitrust Policy and the Conglomerates, 44 ST. JOHN'S L. REv. 196 (1969).2 Current Antitrust Division Policy on Mergers, Acquisitions and Joint Ventures, ad-dress by Richard W. McLaren, Town Hall of California, Los Angeles, California, May 27,1969, at 3 (mimeo).3 15 U.S.C. § 12 et seq. (1964).4 95 CONG. REC. 11,489 (1949).5 Id. at 11,496.ST. JOHN'S LAW REVIEWapplies to all types of mergers and acquisitions, vertical and conglomerate aswell as horizontal .... 6 But, it adds, "which have the specified effects ofsubstantially lessening competition . . .or tending to create a monopoly. "7So, we come full circle. Conglomerate mergers are to be prevented whenthey lessen competition. But do they?The views expressed in these papers cover a wide range. Stanley Hol-lander finds conglomerates to have a beneficial effect on competition andconsumer welfare in the retail trades; William Smith favors a "sympathetic"attitude toward financial congenerics; and John Kuhlman and RichardDuke find it "impossible ... to assert that conglomerate acquisitions re-duce competition within the traditional interpretation of that phrase."Werner Sichel more or less concurs: "Conglomerateness per se does not im-pede competition," and is joined by Richard Miller, "Analysis ... indicatesthat conglomerate mergers and corporate diversity may improve competitionor be neutral, contrary to the analysis contained in current merger policy."On the other hand, Joel Dirlam has a less sanguine view concerningthe structural impact of conglomerates. "As the diversity and size of theconglomerates grow, the possibility that further mergers will eliminate po-tential competition is easier and easier to envisage." In this view he is joinedby Charles Berry, who sees conglomerate mergers as "a way, if not of cre-ating market power, certainly of augmenting such power."As I read these papers, certain generalizations suggest themselves.First, as indicated above, the dominant view concerning the relation ofconglomerates to market structure is that they do not increase concentration,but do increase business size. Those who focus on the former aspect of mar-ket structure tend to be relatively undisturbed by the now-ebbing conglom-erate merger wave; those who fear business "site" (Dirlam) or "power"(Corwin Edwards), or "corporate scale" (Berry) are more troubled by theconglomerate phenomenon. My own view is that while conglomerates doindeed increase the size and scope of business units, they provide the impor-tant offsetting advantage of enabling newcomers to rise to positions of eco-nomic power, introduce new ways of financing and managing businesses,and unseat entrenched managements. This, rather than some concept ofoptimum corporate size, may be just the fluidity the antitrust laws seek topreserve. Mr. Mitchell has admonished that conglomerate mergers may "in-deed be a threat to our ... social structure."8 But they may be a "threat"in a very different sense from that understood by the Attorney General'sauditors. When the respected London Economist reported on the moveagainst the LTV-Jones &c Laughlin merger, it noted:Outside Washington a discreet cheer for the suit against Ling wasraised in the boardrooms of the big steel companies; the steel tradeunions liked it too. A raider like Ling-Temco-Vought is an instant and6 H.R. REP. No. 1191, 81st Cong., 1st Sess. 11 (1949).7 Id.8 Address by John N. Mitchell, Georgia Bar Association, Savannah, Georgia, June 6,1969, at 4 (mimeo).THE CONGLOMERATEunwelcome competitor to the established giants, and with its higherearnings multiples can even threaten to buy them out. As for the unions,they find it harder to bring a multi-product company like Ling to itsknees in a dispute than a mammoth but almost single-product company.9And Senator Philip A. Hart, Chairman of the Senate Antitrust andMonopoly Subcommittee, wondered about the sudden spurt in interest inattacking new, but not "established," diversified firms in an attempt "tomaintain the status quo."' 0 There are, after all, "close to a dozen apparentlytraditional U.S. corporations . . . which possess a breadth of unrelateddiversification at least as great as that of the so-called conglomerates."' 1 In-deed, as L. E. Birdzell notes in his paper, diversification is a traditional andaccepted practice in American industry, although he suggests that, to someextent, "the older multi-product firms in fact diversify more from necessitythan from choice ... The direction in which policy is pushed by a desire to preserve com-petition is, then, not clear. Conglomerate mergers would appear to provide,in many instances, the only realistic possibility of entry by a newcomer -management with, perhaps, a different view of such things as the efficacy ofprice competition - into concentrated industries. They often provide, intheir take-over bids and threats, an opportunity for stockholders to unseatotherwise all-but-impregnable, self-perpetuating managements. Fortunenotes, "The recent merger wave, especially the take-over bid, has powerfullyrevived the influence of stockholders."' 2That the entry of a newcomer via merger, rather than through theconstruction of new productive capacity, can be unsettling there is littledoubt. Take the case of Wheeling Steel during the period of Norton Si-mon's reign. In contrast to the other steel producers, Wheeling adopted apolicy of protecting its customers against price increases instituted aftertheir orders were taken. This, in the words of the trade press "broke thesolid steel front of 'price in effect at time of shipment.' "18 Whether or notWheeling could handle the resultant flood of business is irrelevant for ourpurposes; the fact remains that a new manager of existing assets tried a newmethod of pricing, to the consternation of the steel establishment. Wouldthe cause of competition have been served by keeping the Hunt Foods con-glomerate out of the steel business? Jules Backman is undoubtedly correctwhen he points out, in his article, "By 'shaking things up' the conglomeratecan add a new dimension to competition in many markets."When we turn from structure to problems of business practice, the dif-ficulties increase. The most widely discussed problem is that of reciprocity.9 Biting the Hand of Business, THE ECONOMIST, Apr. 5, 1969, at 35.10 Address before the Lawyers Club of the University of Michigan, Ann Arbor, Michi-gan, Apr. 8, 1969, at 2 (mimeo).11 The Multicompanies: Conglomerate, Agglomerate and In-Between, FoRBEs, Jan. 1,1969, at 77.12 Got a Light, McLaren? FoRTUNE, May 1, 1969, at 62.1s IRON AcE, Sept. 1, 1966, at 142.ST. JOHN'S LAW REVIEWAnd here, two questions are raised: (1) Is reciprocity "bad"? (2) Does con-glomeration enhance the possibility of its occurrence?Mr. Birdzell feels that reciprocity is neither "unambiguously evil" ineffect or so likely of occurrence "that otherwise reasonable forms of businessorganization must be suppressed in order to avoid reciprocity." Backman,in an extensive discussion of reciprocity, attempts to distinguish "the oppor-tunity for reciprocity" from "the actual practice of reciprocity." Indeed, hegoes further, and argues that where price and other factors are identical,"it is illogical to hold that a company is guilty of an anticompetitive actwhen purchases are made from its friends," i.e., "a supplier who also is agood customer." Why, then, do so many place such emphasis on the reci-procity problem? I suspect it stems from two basic sources. First, as Dirlampoints out, "Expansion through conglomerate merger increases the numberof markets in which there may be a danger of reciprocity." Second, thepublic sense of equity is offended by the notion that a corporate interrela-tionship, rather than efficiency, determines who becomes a major corpora-tion's supplier.In my own view, diversification (not only conglomeration) does enhancethe possibility of reciprocity. A business firm engaged in many areas of ac-tivity can demand from suppliers of one division reciprocal business for an-other. Indeed, in some instances it need make no explicit demand; thematter can be left to its suppliers' imaginations, and what Judge Timbershas called the "reciprocity effect" may occur.14 And there is little doubt thatreciprocity is a widespread practice, although one which is probably declin-ing (at least on a formalized basis).' 5 But the potential for reciprocity whichconglomeration produces is as likely to be the result of diversification byinternal expansion as it is of conglomeration by mergers. Consequently, ifwe were to forge a public policy aimed at preventing the creation of anypotential for reciprocal business dealing, we would have to develop someprogram aimed at preventing diversification via internal growth as well asvia merger. And this none of the authors represented here states a clear will-ingness to do. Perhaps we shall have to learn to live with the potential threatwhile sharpening our attack on the actual practice of reciprocity. This canbe done by careful analysis of the extent to which a company's purchasingpolicy is guided by a desire to reward customers. In this connection it hasbeen my own experience that the more usual quantitative methods are oflittle value. The simple statement, "I'll buy from you if you buy from me,"would imply the usefulness of measures of interrelationship (correlation) todetect reciprocity. But we have found that such techniques yield spuriousresults in some instances. Another technique and its associated statisticaltests may, however, be used to detect and measure reciprocal practices.14 United States v. International Tel. & Tel. Corp., 306 F. Supp. 766, 781 (D. Conn.1969).15 Mr. McLaren has noted that as a result of the Department's enforcement efforts,"[flirms that engaged in systematic reciprocity more or less in self-defense have tendedto abandon it .... " Address by Richard W. McLaren, in BNA ANTITRUST & TRADE REG.REP. A-5 (Feb. 3, 1970).THE CONGLOMERATEThis technique employs the use of purchase and sales data of potentialreciprocity and nonreciprocity candidates. Detailed comparisons of sales andpurchage increases and decreases can be developed. These then can be com-pared with the kinds of increases and decreases which one would expect inthe presence or absence of reciprocity. These relationships can be analyzedstatistically and tested through probability analysis. The final output fromthis analysis is then twofold: the qualitative acceptance or rejection of thehypothesis that "reciprocity has existed," and a quantitative determinationof its extent, if any.These should provide supplements to the studies of the factors sug-gested as relevant by Judge Timbers: whether the product characteristicslend themselves to reciprocal dealing (Backman notes that some products"are not susceptible to reciprocity"); the size and diversification of othercompetitors; and so on.By thus focusing on the practice, as the Justice Department did in thecase of U.S. Steel, it can eliminate the dichotomous policy of moving againstconglomerate mergers which create only the potential for reciprocity, whilesupporting a bill which would be likely to permit banks to enter the insur-ance, travel agency and other businesses- this in a period of tight moneyand where many states have interest rate ceilings. For banks are, as Fitz-gerald said of the very rich, different from the rest of us. Not only do they, asHemingway reportedly pointed out in response, have more money, but theirsubstantial power over credit creates such a probability that their customerswill feel obliged to use their other divisions, that bank diversification shouldbe separately and more closely restricted. (But note carefully WilliamSmith's contrary argument that the analysis on which this conclusion rests"failed to acknowledge the essential dynamics of market structure whereresale price maintenance with free entry prevails.")The other widely treated problem is that of subsidization, with Dirlamperhaps raising the issue most squarely. There can be little question thatconglomeration creates a danger of subsidization. Conglomerates can, if theyso choose, finance operating losses of one subsidiary or division with profitsfrom another - and for protracted periods. This results in resource mis-allocation as well as in possible competitive injury to the efficient, non-diversified competitor. The latter finds himself faced with the competitionof a division immune from the market test of its efficiency, and from thepenalty for inefficiency.Again, however, we are faced with a problem which is implicit in allconglomeration, not only conglomeration via merger. The question, whichit seems to me can only be answered on a case-by-case basis, is whether thispotential for subsidization actually materializes and what policies can bedeveloped to minimize the extent of subsidization.That there is a substantial amount of short-run subsidization in anydiversified enterprise I do not doubt. Whether there is long-term subsidiza-tion of uneconomic ventures I do not know- this is one of several areasin which our lack of knowledge of the behavior of diversified enterprises is14 ST. JOHN'S LAW REVIEWmonumental. Consequently, as Dirlam notes, in this as in other areas "pub-lic or private conclusions must be tentative." But we do know that con-glomerate managements are under particularly severe pressure to mfitntainrapid growth in earnings (see Kuhlman and Duke's paper). We also cansafely guess that what Henry Einhorn in his article terms "improved dis-closure rules," perhaps including divisional profit reporting, are just aroundthe corner. Perhaps for these reasons, there seems to be a growing pressureon big firms to spin off their losing and marginal operations. The tradejournal of the merger movement, Mergers and Acquisitions, looks to thesale of divisional subsidiaries or branch operations as a source of "muchactivity in the coming decade."' 6 M & A notes, "There is far more statusto lose in the management community by keeping a loser going than intrying, failing and getting out quickly."'1 7 As a consequence, over 20 percentof the consummated mergers now represent the sell-off of a division, sub-sidiary or product line - and these sell-offs are occurring at twice the aver-age of earlier years,' 8 Examples abound: Walter Kidde & Company is report-edly considering selling divisions which might, as independent companies,command higher market multiples; Computing c Software, Inc. sold itsGencom Agency to E.M.I. Electronics Ltd. (Gencom distributed E.M.I.'selectro-optical products) to permit "further management concentration on thecompany's primary business endeavors"; 19 Bendix sold its semiconductorbusiness to Solitron Devices, Inc., and so on. (These sales may, of course,represent something other than disposal of a loser: an acquirer may possesssome scarce resource which will accelerate the growth rate of another com-pany's division, and hence be in a position to offer an irresistibly attractiveprice.)To the extent, then, that we now have sell-offs of divisions, and thatthis will be accelerated by the advent of divisional profit reporting, thedanger of subsidization is reduced. And, of course, any systematic subsidiza-tion aimed at driving out a competitor always has been subject to antitrustaction. Consequently, in view of the fact that subsidization is a potentialdanger inherent in all diversification, not only conglomeration via merger,and in light of the considerations discussed above concerning the need tomaintain fluidity, the potential for subsidization does not seem to providea clear and sufficient basis for an overall anti-conglomerate twist to antitrustmerger policy.But these tentative conclusions are my own. The wide range of infor-mation and the sharp insights provided by the authors represented in thisvolume certainly permit quite contrary judgments to be reached. In eithercase, however, the judgments will be more informed, and the level of thedebate elevated, by the existence of this volume.16 The Merger Boom -How Long Can It Last?, MERGR & AcquiSlTONS, Spring 1967,at 8.17 Id. at 9.18 Corporate SellOff, MERGERS & AcQuiSITIONS, May-June 1969, at 78.19 Id. at 79.

The Conglomerate: An Agglomeration of Views Reviewed

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The Conglomerate: An Agglomeration of Views Reviewed

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