Merger and Monopoly in the U.S.
Seligman, Ben B.
The recent rash , of mergers in American industry has once again highlighted the problem of monopoly. Quite the most glamorous corporate marriages have occurred in automobiles, where the...
...This pricing technique enforced a uniformity that was achieved by adding freight charges to the price of steel at some theoretical mill from the latter point to the place of delivery...
...business tycoons thought it the better 150 part of discretion to let a few small rivals stay put...
...American Steel Hoop Company...
...RCA purchased Estate Stove, giving it a connection with gas ranges and heaters: these are doubtlessly natural neighbors for TV sets in retail shops...
...Among other things, this distinguished-jurist held that there was no proof that DuPont controlled General Motors even though it was at times voting 51% of the stock voted at stockholders' meetings...
...After it was outlawed by the Supreme Court, a ready substitute was discovered in the holding company, an invention of several crafty corporation lawyers who convinced the New Jersey legislature that it was not an unreasonable legal device...
...The business man suddenly faced the problem of idle capacity and overhead...
...This was the time when the "trusts" were born, giving the language a generic term for all industrial combinations...
...Thus, a customer in Chicago would pay the same price as a customer at some distant point despite the fact that the mill might actually be in Gary, close to Chicago, since all prices were calculated "as if" from Pittsburgh...
...In addition, older firms will purchase younger ones in order to take over new inventions and ideas...
...and supply this nation which within the next five years will have a population of 175 million people who will need and want what industries turn out today along with many new products to be developed by research and made available through technological developments...
...An example of the kind of forces that were joined at this time is offered by the spectacular case of the United States Steel Corporation...
...integration) . Little effect was exerted on prices, output or employment policy...
...151...
...American industrial history demonstrates at least this much...
...The magnitude of this growing concentration may be more strikingly visualized if we realize that this was 51/2 per cent of the total assets in manufacturing industry in 1943...
...And so, 600 theatres, six radio stations and five TV stations joined a network of over 300 affiliates in radio and 76 in TV...
...And whatever the other advantages ascribed to monopoly, such as specialization or the ability to use by-products, it must be clear by now that these are derived from the technical features of large scale production, rather than from combination per se...
...H. Daroff and Sons, one of the largest clothing manufacturers in the country, obtained control of Botany Mills, a textile concern...
...Rubber...
...The only thing that could be said for anti-trust was that it inhibited outright monopoly...
...Shelby Steel Tubing...
...In this way, by calculating prices as from an "originating" point plus freight, all firms were able to compete on a roughly equal footing in the same market...
...Thus, General Mills, a food processor, entered the home appliance field and more recently took over a small sponge manufacturing concern...
...markets became national in scope so that a small merchant or manufacturer might no longer expect to retain leadership at home simply because he held a locational advantage...
...Yet this was not all...
...history, a fact of which even the literate public does not seem to be especially aware...
...A rapidly growing market for mass produced goods irrevocably destroyed the century-old grip of local parochial monopolies...
...Some recent examples: American President Lines purchased control of the American Mail Line for $5 million...
...The Clayton Act fared no better—though how well the teeth that were inserted by the 1950 amendment will work remains to be seen...
...American Steel and Wire, combining 19 companies with 80 per cent of total wire capacity...
...He even broadened the traditional approach by pursuing such non-commercial enterprises as the Associated Press and the American Medical Association...
...Whatever the form, there is an undeniable tendency toward control from the center...
...Business men themselves were calling for a temporary halt in empire building, not merely to digest what they had already absorbed, but also to gather strength for the coming economic storms which broke out in 1907...
...THAT CONCENTRATION IN INDUSTRY is intensified by such mergers would seem to be self evident...
...Pious expressions of faith in the Smithian unseen hand notwithstanding, rigorous price competition remains the bane of their existence...
...Probably not, for centralized control of prices and production would doubtless be attained in some other manner...
...There is little proof that governmental action reduced concentration in any sensible way...
...Many of these socio-economic phenomena are obscured by the current post-war prosperity...
...One argument in favor of combination hinges on the ostensible heightening of industrial efficiency...
...Avco Manufacturing Company, a creation of Victor Emanuel, one of the country's shrewdest financiers, originally made airplanes, but now it handles household appliances, engines, boilers and castings...
...When they finally allowed themselves to be taken over, they were given 30,000 shares of General Mills stock...
...Steel with 45 per cent of the industry's ingot capacity...
...By 1926, the third wave period, a number of new industries had reached a state of economic maturity: motion pictures, public utilities, radios, automobiles...
...Retirement often will be something of a factor in merger sales...
...The FTC and the Justice Department assert that they have nipped in the bud dozens of proposed mergers that would have been monopolistic...
...Mergers, patent control, cartels, price leadership all tend to create higher prices, a lower level of output, wastage of resources, and excessive profits...
...The burden of excess capacity may make it difficult to adjust to changing economic situations...
...Large corporations have been literally hunting for new industrial conquests...
...Quite the most glamorous corporate marriages have occurred in automobiles, where the overwhelming strength of Chrysler, Ford and General Motors forced Hudson into the arms of-Nash, compelled Kaiser to embrace Willys and linked Studebaker with Packard...
...144 a striking illustration: here coal mines, iron ore fields, foundries and a host of fabricating plants are brought together to provide a continuous manufacturing process from raw material to finished product...
...One of the most heralded mergers (but not consummated because of government opposition) was that planned between Youngstown Sheet and Tube and the Bethlehem Steel Company...
...The trust, it will be recalled, was the device utilized by the Standard Oil Company . In this combine some 40 firms turned over their voting stock to a board of trustees for trust certificates, thus enabling them to control effectively prices and production for the entire group...
...After 1904 the American public, giving vent to its traditional hostility to corporate bigness, began to clamor for a breakup of the trusts...
...Government lawyers said that competition was healthy and monopoly bad for the body politic...
...However, the outstanding feature now was the absorption of small firms by large ones...
...The reaction to altered conditions is made not through reduced prices but through curtailed production, thereby effectively shifting the burden of the ensuing idle capacity on to that part of the population least able to bear it, while investment possibilities are determined by the shifting strategy of maintaining market control...
...WHATEVER SHAPE MONOPOLY MAY TAKE, the social costs are essentially the same...
...Bethlehem Steel can no longer compete with Inland Steel in the midwest...
...Under the New Deal industrial concentration was viewed with a certain amount of undefined horror...
...Tossed 145 into the hopper were certain fabricators: American Tin Plate Company (itself a merger of 36 companies) with 75 per cent of the nation's tin plate capacity...
...But the business community did not hesitate to subject them to reorganization, combination and merger...
...Had this been approved by Justice Department attorneys it would have created an integrated firm with a capitalization of over $2%2 billion...
...Allis-Chalmers took over an engine making firm, the Buda Corporation...
...on the contrary, monopoly in the widest sense seems to have increased despite the close concern of the government...
...Of course, the question of how competition is not reduced in an industrial combir^ ation may not be an easy one for a jurist to decide.* The word "merger" is a somewhat vague one: it applies not only to combinations in which two or more enterprises are displaced by a new corporate entity but also to the case in which complementary manufacturing processes are brought together...
...But Youngstown Sheet and Tube does own 2%2 million tons of capacity in East Chicago...
...The underlying factors in this first merger wave were, of course, more basic...
...In Europe, where the cartel has been usually employed, some concession is made to individual corporate identity...
...George Stigler, a fairly conserva148 tive economist, said in 1950 that not one steel company had been able to add as much as 4 per cent of ingot capacity through attracting new customers, implying thereby that the greatest part of growth was to be explained by merger, consolidation and asset purchase...
...and so Inland Steel still has the upper hand in the midwest...
...Whatever the merit of these notions, they are at best palliatives, since the hardening tendency that the merger movement implies continues unabated...
...From 1938 to 1941, Arnold, as head of the Anti-Trust Division of the Justice Department, chased monopolies with headlines and large appropriations...
...Yet all this was merely a prelude to the wave of mergers that reached its peak in the last two years...
...Nor do mergers necessarily increase economic stability, as Schumpeter once intimated...
...The merger of General Mills and O-Cel-O, the sponge company alluded to above, is a case in point...
...This first wave of mergers was the greatest in American history and clearly had the most profound impact on subsequent economic growth...
...Professional promoters, discovering that capital was readily available, prepared to turn an easy profit...
...In 1947 John M. Blair, a Federal Trade Commission economist, presented fairly conclusive evidence to show that combinations did not bring about decreased costs...
...In addition, technological advances inexorably increased the ratio of fixed to variable costs...
...This was one of the few instances where the Federal government hesitated to approve a merger...
...Soon Thurman Arnold, who in an early book had lightly dismissed anti-trust action as folklorist whimsy, began to wave the big stick...
...From 1919 to 1921 mergers were initiated either through holding companies or outright consolidations expressly for the purpose of taking advantage of a bull market in securities...
...by 1920 it was useless...
...Production facilities in the industry have become more and more market oriented...
...For the 1940-1947 period the following data suggest a picture quite different from that painted by Lintner and Butters: Value of Acquired Percent of Firms Size of Buying Firm Acquisitions Millions Per Cent Under $5 million 24.5 $ 451.3 13.9 $5- 10 million 12.8 830.2 10.1 Over $10 million 62.7 2473.6 76.0 149 WOULD OUTRIGHT PROHIBITION of mergers have any effect...
...In these ways maximum control of market and production is incessantly sought...
...To anyone familiar with the mathematics of percentage calculation this should not be surprising, nor is it especially meaningful, for ratios must necessarily be smaller in the group with the larger arithmetical base...
...THE FIRST GREAT MERGER MOVEMENT took place from about 1898 to 1904...
...the proposed merger therefore would have placed Bethlehem Steel on an equal footing with Inland Steel in the Chicago market...
...THERE IS LITTLE DOUBT THAT BUSINESS MEN welcome mergers...
...Electric Boat got itself into the airplane business by securing control of Consolidated Vultee...
...Bringing together plants, financial structures and selling apparatuses, the merger, which is something of an imperative in American capitalism, has largely been made possible by the ineffectiveness of, the anti-trust laws...
...The latter, whose annual sales approximated $3 /2 million compared with GM's yearly gross of $480 million, was founded by three young men, previously DuPont engineers, who within a few years had built up a fairly respectable business...
...A favorable climate for a second wave of mergers was created by post-war optimism...
...Some writers feel that changes in corporation law, taxes and the patent system may create incentives for industrial giants to disgorge their subsidiaries...
...From 1932 to 1938, according to a Federal Trade Commission report, numerous consolidations continued to take place...
...The answer is, no...
...in oil $832 million absorbed $42 million...
...This was about 1.4 per cent of the total, a significant chunk in a company where the largest single block was but 4 per cent...
...Furthermore, the Lintner-Butters study was based on data derived only from companies actually involved in mergers, thus omitting the many small firms that had not taken part in the combination movement...
...This is done under the 1950 Celler Amendment to the Clayton Act, which requires that business show that a merger will be in the public interest and will not substantially reduce competition...
...The elimination of troublesome competitors is often motivated more by high profit considerations than by the desire for low cost...
...In 1900, the Carnegie Company of New Jersey took over the Carnegie Steel Works and the H. C. Frick Coke Company, to come up with 18 per cent of national ingot capacity...
...This authoritative statement notwithstanding, there have been several studies in recent years which sought to deny this relationship...
...in auto accessories, $377 million in assets took over $28 million...
...Underlying the desire for this merger was the abandonment of the once universal basing-point system...
...In many ways, this is due to the legal philosophy that underlies anti-trust...
...A year later, National Steel was formed out of several other firms, making up 12 per cent of ingot capacity...
...Then, in 1901, financiers brought all of these together to form U.S...
...The merger is the classic American way of building an industrial empire...
...147 Frequently a profitable firm will buy up unprofitable ones in order to save taxes through balancing acquired losses against accumulated gains...
...Continental Can Corporation bought up five large bag-making factories...
...Yet whatever the immediate reason, the basic acquisitive urge is to achieve a dominant position in the trade...
...Then came the first World War...
...All this represented the crest of the fourth wave of mergers in US...
...International Shoe acquired the Florsheim retail chain...
...But here business men prefer to buy out their rivals, taking over plants and assets in Coto and fusing disparate enterprises into new and wonderfully complex organizations...
...Sometimes the motive for a merger is euphemistically described as diversification or the need for having a fuller line of products...
...In the steel industry during this time, firms worth $3 billion in assets swallowed firms worth $217 million...
...But should the pressures of an exacerbated international political crisis be relaxed, the underlying drives will tend to assert themselves and then the economic sclerosis toward which the current merger movement contributes will be exposed to full view...
...When automobiles' Big Three got through with their share of the market last year, the six independents were left with a mere 4 per cent of the industry's total output...
...Hilton beat out the fabulous William Zeckendorf for control of the Statler hotel chain 146 with an offer of $75 million...
...This substantiated in the main the arguments of Arthur S. Dewing, a noted economist of the Twenties, who showed at that time that profits after a merger were all too frequently lower than for the total of the previously independent companies...
...All that could be said is that legal action or the threat of legal action influenced the shape that mergers assumed (that is, asset vs...
...The profit on the deal amounted to $1700 for every $100 originally invested and was subject to tax at capital gains rates, which are considerably lower than ordinary income levies...
...While all this vertical integration does improve stock marketability and often enables a firm to secure working capital more easily, it also tends to create monopolistic industrial structures...
...Said the Magazine of Wall Street last year: "Mergers are part of a national trend that demands greater integration and a higher degree of efficiency in operation if our industries are to further develop...
...In 1898, the Minnesota Iron Company, one of the largest iron ore producers in the country, and a large rail and lake carrier as well, merged with Illinois Steel and Lorain Steel to create the Federal Steel Company, which now had 15 per cent of the industry's total ingot capacity...
...American Bridge Company...
...And so there came a realization that "live and let live" would be the ideal rule...
...The word also has been used to describe common control of such entirely different enterprises as hotels and sugar factories...
...The Sherman Act was emasculated by judicial interpretation...
...Two economists, John Lintner and J. K. Butters, have argued in their "Effect of Mergers on Industrial Concentration, 1940-1947" (Review of Economics and Statistics, February, 1950) that no correlation between mergers and concentration could be demonstrated...
...A Clayton Act amendment in that year, yet to be tested in the courts, makes mergers which tend "substantially to lessen competition" legally dubious...
...Did all this furious activity ever alter anything...
...As the FTC later demonstrated, the large companies, that is, those with assets over $10 million, accounted for 63 per cent of the number of acquisitions and 76 per cent of the total amount of assets bought...
...In at least 10 per cent of the mergers of small firms the tax element is predominant, while this holds true for at least 25 per cent of the large firms...
...The absorption of the American Broadcasting Company by Paramount might be said to have been an effort to overcome technological competition...
...This outlook, accepted by the great assortment of liberals that gathered under FDR's banner, created a certain feeling of kinship with the American radical tradition...
...Examining only the size of the companies involved in mergers, they made the remarkable discovery that the percentage growth in assets during the period was smaller for the large companies...
...SINCE THE END OF WORLD WAR II the FTC has found that there have been about 700 to 800 mergers a year...
...all too often real collusion or behavior close to conspiracy must be demonstrated...
...Insofar as industry itself was concerned, the major motivation for mergers stemmed either from a desire to establish vertical combines, thereby ensuring a regular supply of raw materials or from a need to rationalize sales and marketing operations...
...However, if this is to be defined as the lowest possible cost level, then it can be demonstrated that such is not always the outcome...
...stock purchase or outright amalgamation vs...
...the National Lead Company has branched into other metals...
...Yet price maintenance and restricted production may be achieved without collusion...
...Chrysler bought Briggs Manufacturing Co., an auto body maker, thus strengthening itself while at the same time weakening Packard, a one-time Briggs customer...
...Easy entry into an industry, one of the prime requirements of competition, at least in textbooks, is severely circumscribed...
...This method in effect understated the activity of the large firms by making it seem that a relatively large number of small firms comprised the bulk of merged companies...
...National Tube Company which had 85 per cent of tubing capacity...
...The merger movement is basically a struggle for greater market strength and, larger profit, with personal ambition playing a not insignificant role...
...Between 1940 and 1947 more than 2500 firms with total assets of over $5 billion disappeared...
...The steel industry offers * An illustration of this problem was made available by the recent ruling of Federal Judge W. J. LaBuy in dismissing anti-trust charges against DuPont, General Motors and U.S...
...It is not often realized that this sort of corporate stability frequently becomes rigidity...
...This was a powerful factor in the Kaiser-Willys get-together...
...Even better, some thought, would be "living together as one," for then anxieties concerning mavericks who might willy-nilly cut prices could be entirely eliminated...
...and the Lake Superior Consolidated Iron Mines...
...The simple fact is that anti-trust has been a dismal failure...
...Nor did these cease with the onset of the depression...
...The first solution was a price war calculated to destroy his rivals...
...but this only raised a dilemma, for the ensuing cutthroat competition threatened to wipe out everyone...
...Today, the FOB mill pricing system is used, so that firms are able to develop a territorial advantage...
...For this he had to thank the fantastic growth of cheap transportation facilities...
...Price leadership, "moral suasion" and mutual understanding among giant rivals, are all acknowledged social forms for obtaining monopolistic control, yet in such instances it is virtually impossible to discover conspiracy within the meaning of the law...
...These laws, sufficient for controlling loose arrangements such as trade associations, were unable until 1950 to place any restraint at all on merger activity...
...What is interesting is the admission by Lintner and Butters that the larger companies were more active in the merger movement: they found that not only was the proportion of companies acquiring one or more outside firms larger in the big company group but that the average number of acquisitions per acquiring firm was higher for the large companies...
...At any rate, ABC was helped immeasurably by the additional capital that Paramount was able to bring into the combine...
...The monopolists (if we want to be technical, we might call them oligopolists) will employ whatever means are necessary to keep out newcomers, as witness the attempt of the auto industry to keep out Kaiser-Frazer just after the war...
...They admitted that between 1940 and 1947 over 2500 firms disappeared as a result of mergers, but nevertheless insisted that this form of combination was not an important source of corporate growth...
...Whatever gain large corporations made, he said, was in the purchase of materials...
...The alternative, it is said, is to control mergers through a judicious enforcement of the anti-trust laws...
...FTC economists were quite correct when they argued that Lintner and Butters should have related their statistics not merely to the affected firms but to the whole complex of industry...
...Limiting their survey to manufacturing and mining, they concluded that small companies actually did better in mergers than large ones...
...The urge to monopolize is not the sole motive drive in mergers...
...From 137 in 1949 mergers increased to 822 in 1952 and have since remained close to 800 each year...
...New companies meant new stocks and in a rising market a handsome gain could be easily realized...
...The small firm is frequently willing to let itself be hooked because the bait is so attractive...
...The ensuing mergers were desperate attempts to hold on to even this small segment of the auto business...
...Small firms while having a good saleable product may have insufficient working capital...
...Yet the simple fact is that aside from an occasional Bethlehem Steel case, present-day mergers continue their merry way...
Vol. 2 • April 1955 • No. 2
