As you know well, there has been legislation proposed in the two chambers which would require companies to provide information on their contemplated mergers, and this would, of course, provide us with such information. Senator HART. Do you know whether the Commission has ever sought the means to obtain this fuller body of information? Dr. MUELLER. Yes; we did make an effort in 1962 to initiate an economic inquiry which would have given us this kind of information. The study, so-called intercorporate relations among American manufacturing companies, would have required that the largest companies, those with assets of about $25 million or so, would have supplied to the Commission the history of their merger activity since 1950. Senator HART. What happened to that? Dr. MEULLER. The Appropriations Committees of the two Houses deleted that study from our budget. Senator HART. Up to this point I would think that a study like that would be of great value. My statement was based on an ex parte presentation of the need for it. It was not my conclusion. You talked about factors that suggest, or experience which indicates, that mergers increase when the economy is strong, and decrease as the economy grows weak. Does that not suggest that the acquisition of failing companies, bankrupt companies, is not a major factor in mergers? Dr. MUELLER. That is correct. I believe we presented some information in my previous testimony which we broke down the financial conditions of the large companies for which we had this information. A very small percentage of these companies were failing. And it is a common fact that during the depression when many firms do fail, especially small ones, merger activity reaches low levels. Senator HART. On that same point, often we are told or assume that mergers result because of a desire to obtain greater efficiency. But if the merger cycle shows more mergers in periods of good times and fewer in periods of bad times, does that not raise a question as to whether the search for efficiency is a major reason for mergers. It seems to me that a company is looking for greater efficiency, greater economy when the market is in trouble than in a period when it can afford to be inefficient. Dr. MUELLER. I am sure that certain mergers are initiated and consumated for reasons of efficiency. I would think, as I think your question suggested, that these causes would be present at all times. And I know from personal experience that there are a great many mergers among small companies for this reason. But this particular pressure, insofar as it is present, would seem to be present at all times. The incentive for achieving efficiency in order to survive and to increase profits would seem to be greater during poor times than good times, as you suggest. I might add that it is a complicated question as to just exactly why mergers occur at a certain time in history. But I think our analysis of the dairy industry reveals the closeness of the timing of merger activity in prosperity more explicity than other people have been able to do. Senator HART. Senator Fong? Senator FONG. From your testimony it seems that the fact that competition is not really the key or the controlling reason or the really primary reason for merger, is that correct? Dr. MUELLER. I don't think I have answered that question precisely. Senator FONG. It does not seem that the elimination of competition is the big reason for mergers. Dr. MUELLER. This is correct in the sense that the elimination of competition, direct competition, would be reflected in horizontal mergers, and horizontal mergers are perhaps less numerous, or are less numerous among these large companies than others. Is that your question, has the elimination of competition been the motive? Senator FONG. Yes. Dr. MUELLER. For particular mergers or this whole group of mergers? My answer would be that viewed from an individual businessman's standpoint, mergers make good sense; and if each were the only merger occuring in its broad industry group it probably would not have an anticompetitive effect. There I think, the effects are to be inferred from the whole series of mergers and groups of mergers. In terms of motivation, I think that there is little evidence that the vast number of mergers that are occurring today have the elimination of competition as their motive. Senator FONG. Looking at it as a whole, we don't find that prevalent or we don't find that as one of the big factors? Dr. MUELLER. I agree that this is not a substantial factor in motivation insofar as you can infer that from the information we have. Senator FONG. The fact that we have had all these mergers, you have not yet been able, analysts have not yet been able to analyze the serious anticompetitive effects of these mergers, have they? Dr. MUELLER. Of all of these mergers? Senator FONG. Yes. Dr. MUELLER. Or some of them? Senator FONG. We have not yet concluded as to whether they have serious anticompetitive effects. Dr. MUELLER. I think that is correct. The precise effect of these on industrial performance isn't entirely clear. There are certain inferences which can be drawn which depends, I think, on your interpretation of industrial history and your concepts of competition. But the study has not yet been done. I hope after this series of hearings there will be more light shed on this. Senator FONG. Do you think a study of it will reveal it, or whether time will have to elapse before we can come to a conclusion? Dr. MUELLER. I think that we can and have come to some conclusions with respect to certain aspects of this merger movement, and I certainly think we can come to some conclusions with respect to even the broad compass of this. During the great merger movement that transferred the structure of our economy, I think economists debated too long. There now is general agreement as to its effects, but there wasn't at that time. Senator FONG. I see. You pick out certain industries and certain mergers and you can arrive at certain conclusions, but when you look at the broad picture of mergers in its broad significance, could you arrive at such a conclusion? Dr. MUELLER. I think I can draw certain inferences which are warranted logically and supported by experience. Senator FONG. What would that inference be? Dr. MUELLER. In trying to place these mergers into a perspective which has some meaning, I think you first have to recognize this fact, and it is a fact demonstrated by prior studies of this committee. American concentration in manufacturing industries, especially the large industries, is substantial. Concentration ratios are high. On average, they have been fairly steady over the last decade or so. That is the first fact we know, that concentration is substantial in a great many American industries, the big industries. Two, and this is again revealed by facts in the committee reports, the large companies, the 200 largest or so, already populate very heavily these industries. They are large diversified enterprises which cut across all of these industries, and so you find these largest companies among the leaders in most industries. Now we add the third fact. These large companies, based on experience, are the main potential entrants into one another's industries. They have been entering one another's industries for years; in large part through mergers in recent years, but this is by no means the only way in which a company can grow. So these facts suggest this to me: Concentration already is high. The largest firms are the leading actual competitors of one another and they are the leading potential competitors of one another. Both economic theory and business experience demonstrate that the forces of potential competition are real ones which have a restraining influence on competitive behavior. But with the merger movement, these large industrial concerns are entering one another's industries through the merger route. This removal of many substantial firms may well eliminate many potential competitors. When viewed in the aggregate, this is having an effect which we can't ignore. If we are really concerned about the longrun performance of the economy, a merger movement which is drying up a large number of substantial independent concerns and which is having the effect of removing leading potential competitors, this could well have an effect on competitive behavior. So I think-and this is in broad scope that even at this aggregate level there is a basis for an inference that this merger movement is having an effect on the structure of the industry which could influence its future performance. Senator FONG. When you referred to the 200 manufacturing companies in the years from 1950 to 1962 Dr. MUELLER. Yes, sir. Senator FONG (continuing). Having increased their assets by 11 percent, you are talking about the broad spectrum? Dr. MUELLER. Yes, sir. Senator FONG. Of manufacturing companies, have you available in these figures of these 200 companies as to where they fit in the manufacturing field, for example, in steel and in chemicals? Dr. MUELLER. The 200 largest companies are really American manufacturing the heavy manufacturing. They are the large steel companies, the large petroleum companies, the large automobile companies, and the large food concerns. So they cut across all these fields. I am not sure this answers your question. We have the names of the companies. The companies are listed. Senator FONG. Could you give an idea of an industry, for example, in these 200 companies which probably breaks down out of the 200 companies which you are talking about, in this particular field it may be only 5 or 6 companies operating. Dr. MUELLER. Of these largest ones? Senaor FONG. Yes. Dr. MUELLER. Well, in the first case it would be automobiles, but that everyone knows. There are just a handful of companies there. If your question is an industry in which these five or so would do all Senator FONG. Yes. Dr. MUELLER. The large percentage of the business? Senator FONG. Are there many cases, for instance, in these 200 manufacturing companies, which have through mergers increased their assets by 11 percent? Are there many industries that are concentrated in a few hands? Dr MUELLER. Well, the best information on this is in your report covering the 1958 census, and it shows that, in a substantial number of large industries, the 4 largest concerns account for a substantial percentage of the shipments and, in some cases, all 4 of the companies, say the top 4, would be among the top 200. The rubber tire industry would be an example. In other cases, and they are usually the small, low concentration industries, there will be practically none of the top 200 among the leading 4 or so companies. Senator FONG. You stated that with good times we have many mergers and in bad times we do not have the number of mergers that we have in good times. Does that mean that because of optimism and the expansive spirit of, say, the board of directors or the mangers of the company, that that leads to mergers? Dr. MUELLER. I am not sure as to the precise reason for this. As I explained, there are a number of explanations of this. The gentleman from Price Waterhouse explained how an incentive exists because of the disparity in the stock earnings ratio. I think in part your question specifically was whether this is associated with the buoyancy of business expectations. Senator FONG. Yes, optimism. Dr. MUELLER. I think that the third explanation which I gave is one of the main reasons, it is that there is a relationship with business expectations, and in our economy this means an opportunity for a profit. There are profit opportunities. So when there are profit opportunities, people acquire other concerns, in part in attempting to achieve them. Senator FONG. They get bullish? Dr. MUELLER. Yes; you might put it that way. Senator FONG. When depression sets in, or when the market just folds up, there is a more pessimistic spirit and they act conservatively. Dr. MUELLER. That may be one of the explanations. Senator FONG. So the reason for merger, although it may not be to stifle competition, may lead to the stifling of competition? Dr. MUELLER. Yes, sir. Senator FONG. Isn't that the concept? Dr. MUELLER. I don't associate bad motives with most mergers? Senator FONG. Yes. Dr. MUELLER. We have investigated mergers. I have seen the memoranda of companies. They explain why they have gone about it. And it isn't necessarily bad in an ethical sense. It is like other forms of business behavior, which a company may engage in which seems perfectly rational and ethical from the company's standpoint, and yet may have an anticompetitive effect or have an effect on consumers, which is deceiving or misleading. So as economists it is with the effects of these mergers that we are concerned, not just the motives. Senator FONG. The motives are Dr. MUELLER. They may be important, but they aren't the ultimate determinant of what is good for society, you might say. Senator FONG. The motive is not to destroy competition, but the motive is for profit, because in time it may lead to an expansive position and they take advantage of that. Dr. MUELLER. I think that is one of the explanations. I think that there are I think I have probably overstated my position in explaining the sort of noncompetitive reasons for mergers. Although they are not designed to destroy competition, many mergers are designed to avoid competition, to avoid increasing competition. If you are a fluid milk operator in Honolulu, as in one of our cases, and you have a certain share of the market, rather than to compete your way into remaining part of the market or expand your market share, you buy a competitor, and this is very commonplace. The reason you buy a supplier is that you want to buy your way into the market rather than to compete your way into the market, so that in this sense it is a thin coin probably. It is the other side of the coin of trying to destroy competition, and there is a very significant difference. But it has in this sense an anticompetitive effect, or this desire to avoid competition, which in effect may be as important as the desire to actually eliminate it. Senator FONG. What is the route taken by most of these companies in merging? Is it by cash or by the issuing of stock? Dr. MUELLER. First, I should again plead ignorance. I don't know about all mergers by any means. But in general terms, the large mergers involve exchanges of stock. The small mergers involve acquisition for cash, or seems to in a substantial number of cases. But I really don't know precisely what the relative terms are. It is just my observation from looking at many individual cases. Senator FONG. In securing your information concerning mergers, is there a law which says that this must be reported to you? |