II. The existing situation....... III. The present inadequacy and inability of the Interstate Commerce Commission to protect the public interest in passing on railroad 1. The vagueness of present merger criteria and the refusal by the Page 3. The Commission's own economic staff has questioned the adequacy of rail merger criteria and has criticized pres- ent methods and patterns of testing such criteria__ 4. An answer from the Chairman of the Interstate Commerce Commission to a letter of inquiry directed by the chair- 5. Is the public interest adequately protected by the present "adversary" method of processing merger cases?___ 6. The danger of the piecemeal approach to merger approval. 7. A railroad merger policy is needed.. IV. The present inability of administrative agencies to cope with the transportation merger problem... V. The questions presented by the proposed mergers: 1. The railroad arguments in support of giant trunkline mergers 2 Some experts question whether the railroads' financial plight 3. Competent experts have indicated that increasing the size of trunklines through proposed mergers may result in sub- stantial diseconomies which will have to be offset by more severe shrinkage of the rail plant_____ 4. The need to retain rail competition and to protect economic 5. Alternatives to consolidations between large trunkline car- I. Senators Everett McKinley Dirksen and Roman L. Hruska: 1. Introduction-Jurisdiction__ 2. Contrary to the majority's contention, the Interstate Com- merce Commission is able to protect the public interest in 3. The present ability of administrative agencies to cope with 4. A review of the testimony relative to point V, entitled “Ques- THE RAILROAD MERGER PROBLEM A REPORT TOGETHER WITH INDIVIDUAL VIEWS I. INTRODUCTION This subcommittee has voiced a continuing concern over the general trend toward concentration of economic power in major industries and the effects which such concentration has had in the substantial elimination of competition and in the increase of corporate and operational controls in the hands of a few. Its investigations with respect to the automobile, steel, bread, drug, and electrical machinery industries, among others, have dramatized the dangers inherent in oligopolistic and monopolistic markets where prices tend to become stabilized or "administered," products and services lack innovation, quality becomes uniform, and industrial policies with respect to production and sale became regimented and unbending. 1 The existence of the independent competitor, the individual businessman or company which cannot be controlled or influenced is one of the most precious elements in our free enterprise system. In nearly every industry it has been this independent fighter for business freedom who has prodded the way toward lower prices, better quality, improved design, and new products. One of the most serious threats to American private enterprise is the declining role and power of the independent competitor and the increasing strength and control of industrial giants in the marketplace. It was concern over this threat which led Congress to strengthen section 7 of the Clayton Act in 1950.2 In its most recent decision defining the scope and application of this law, Brown Shoe Co. v. United States, 370 U.S. 294 (1961), the Supreme Court has given a clear interpretation of congressional intent with respect to the problem of economic concentration. Said the Court: 3 The dominant theme pervading congressional consideration of the 1950 amendments was a fear of what was considered to be a rising tide of economic concentration in the American economy. Apprehension in this regard was bolstered by the publication in 1948 of the Federal Trade Commission's study on corporate mergers. Statistics from this and other current studies were cited as evidence of the danger to the American economy in unchecked corporate expansions through merger. Other considerations cited in 1"Study of Administered Prices in the Automobile Industry," report of the Subcommittee on Antitrust and Monopoly, Committee on the Judiciary, U.S. Senate, 85th Cong., 2d sess. (1958). "Study of Administered Prices in the Steel Industry," report of the Committee on the Judiciary, U.S. Senate, 85th Cong., 1st sess. (1958). "Study of Administered Prices in the Bread Industry," report of the Committee on the Judiciary, U.S. Senate, 86th Cong., 2d sess. (1960). "Study of Administered Prices in the Drug Industry," report of the Committee on the Judiciary, 87th Cong., 1st sess. (1961). "Price Fixing and Bid Rigging in the Electrical Manufacturing Industry," hearings before the Antitrust and Monopoly Subcommittee, 87th Cong., 1st sess. (1961). 15 U.S.C. 18, as amended by the act of Dec. 29, 1950, c. 1184, 64 Stat. 1125, 81st Cong., 2d sess. (H.R. 2734, Public 889). At pp. 315-318. support of the bill were the desirability of retaining "local Similarly, in United States v. E. I. du Pont de Nemours and Co., 353 U.S. 586 (1957), the Supreme Court said: 4 The Clayton Act was intended to supplement the Sherman Act. Its aim was primarily to arrest apprehended consequences of intercorporate relationships before those relationships could work their evil, which may be at or any time after the acquisition, depending upon the circumstances of the particular case. 6 A recent report by the Senate Antitrust and Monopoly Subcommittee entitled "Concentration Ratios in Manufacturing Industry, 1958" 5 has indicated that industrial concentration in major industries has continued despite the intentions of Congress that it be abated. This report showed that the 200 largest manufacturers in this country increased their share of industry output from 30 percent in 1947 to 38 percent in 1958, and that there is extraordinary concentration already existing in industries such as motor vehicles and parts, steel, aircraft and aircraft engines, petroleum refining, organic and inorganic chemicals, aluminum, copper, flour and meal, tires and inner tubes, electrical appliances, cigarettes, plastics, and other basic industries.? A recent staff report of the Select Committee on Small Business of the House of Representatives entitled "Mergers and Superconcentration" 8 indicated that much of the concentration in industrial economic 4 At p. 597. Other recent cases where the courts have recognized and enforced Congress' intention to halt increased concentration in already concentrated markets are United States v. Bethlehem, 168 F. Supp. 576 (S.D. N.Y. 1958); Crown Zellerbach Corp. v. Federal Trade Commission, 296 F. 2d 800 (9th Cir. 1961); and A. G. Spaulding & Bros., Inc. v. Federal Trade Commission, 301 F. 2d 585 (3d Cir. 1962). """Concentration Ratios in Manufacturing Industry, 1958." Report prepared by the Bureau of the Census for the Subcommittee on Antitrust and Monopoly of the Committee on the Judiciary. U.S. Senate, 87th Cong., 2d sess. (1962). Ibid, p. 8. For 1958, the 100 largest manufacturing companies in the United States were shown to account for 30 percent of the total value added by manufacture. See also article by Norman R. Collins and Lee E. Preston, "The Size Structure of the Largest Industrial Firms, 1909-58" in the American Economic Review, vol. LI, No. 5, December 1961, p. 989, where it is shown that the 100 largest firms in manufacturing, mining, and distribution have almost 30 percent of the total assets of all industrial corporations. 7 Ibid, pp. 43-50. The report showed the following concentration percentages of value added for top eight firms: motor vehicles and parts (81 percent); petroleum refining (55 percent); steel mills (70 percent); aircraft (83 percent); aircraft engines (77 percent); organic chemicals (70 percent); inorganic chemicals (51 percent); prime aluminum (100 percent); prime copper (99 percent); aluminum rolling and drawing (85 percent); copper rolling and drawing (68 percent); electrical appliances (57 percent); and tires and inner tubes (88 percent). "Mergers and Superconcentration, Acquisitions of 500 Largest Industrial and 50 Largest Merchandising Firms." Staff report of the Select Committee on Small Business, House of Representatives, 87th Cong., 2d sess. (Nov. 8. 1962). power has stemmed from mergers and acquisitions by the larger corporations. Among other things, this report showed that during the period 1951-61, the 500 largest industrial corporations absorbed some 3,404 other firms and the 50 largest merchandising firms acquired 332 companies. In particular, the report stated that the "face and form" of the current merger movement is to be found in the pervasive rise of the conglomerate corporation, which it says is a threat to the "potentialities for entry, growth, and survival" of small business.10 However, while the trend toward oligopoly and monopoly power is moving forward in the manufacturing fields, it is being promoted with much greater vigor in the regulated industries, where service, rather than production and distribution, is the chief output. For example, in the commercial banking industry, between 1950 and 1958, there were 731 national banks and 601 State banks absorbed by merger, involving banking resources of over $26 billion. This represented about 10 percent of the assets of all commercial banks in the Nation." The 1961 annual report of the Federal Deposit Insurance Corporation indicates that some 133 banks operating over 423 banking offices with total resources of almost $6 billion were absorbed by consolidations, mergers, and acquisitions.12 During the past years, certain key "big banks," heavily involved in the national money market, have either merged or signified their intentions to combine and are awaiting approval.13 Concentration already is substantial in the banking industry. Although there are some 14,000 commercial banks in this country, 50 percent of their total assets are held by only 1 percent of such banks. The No. 1 bank accounts for 4%1⁄2 percent of all commercial bank assets. The top 20 banks account for almost 25 percent of such assets." In the airline industry, a recently approved consolidation between two giants (United and Capital) has given that merged carrier over 25 percent of the domestic airline market. Now pending is a merger between the second and fourth largest carriers (American and Eastern) which, if approved, will give it over 33 percent of that market thereby leaving only three major trunkline carriers in control of over 75 per Ibid, pp. 23 and 39. The 250 largest industrials were shown to have accounted for 2,263 mergers and the 25 largest merchandising firms for 214 acquisitions. 10 Ibid, p. 44. A conglomerate merger or acquisition is one where "there is no discernible relationship in the nature of business between the acquiring and acquired firms." It is to be contrasted with the more recognized forms of merger such as horizontal (those in which the firms involved are engaged in roughly similar lines of endeavor) and vertical (those in which the purchase represents a movement either backward from or forward toward the ultimate consumer). (Statement of the Judiciary Committee of the House of Representatives, Rept. 1191, Aug. 4, 1949, describing the types of mergers and acquisitions to which amended sec. 7 of the Clayton Act was to apply.) The conglomerate merger or acquisition (and the existing conglomerate corporate entity developed without merger) has been described as a serious threat to medium and small business entities with respect to their entry, their growth, and their survival. In its "Report on the Merger Movement," in 1948, the Federal Trade Commission stated, in part, at p. 59: "With the economic power which it secures through its operations in many diverse fields, the giant conglomerate corporation may attain an almost impregnable economic position. Threatened with competition in any one of its various activities, it may sell below cost in that field, offsetting its losses through profits made in its other lines-a practice which is frequently explained as one of meeting competition. The conglomerate corporation is thus in a position to strike out with great force against smaller business in a variety of different industries." 11 George D. Reycraft, Chief of Section Operations, Antitrust Division, U.S. Department of Justice, "Antitrust and Banking," remarks to the Independent Bankers Association, Milwaukee, Wis., Jan. 22, 1962 (mimeo 16 pp.). 12 Annual Report of the Federal Deposit Insurance Corporation 1961, p. 11. 13 Chase National Bank and the Bank of Manhattan merged in March 1955 (total 1961 resources: $10 billion); First National Bank of City of New York and City Bank Farmers Trust Co. merged February 1959 (total 1961 resources: $9.5 billion); Manufacturers Trust Co. and the Hanover Bank merged in September 1961 (total 1961 resources: $6.3 billion); J. P. Morgan & Co. and Guaranty Trust Co. merged April 1959 (total 1961 resources: $5.2 billion); and Chemical Bank & Trust Co. and New York Trust Co. merged September 1959 (total 1961 resources: $5 billion). 14 Reycraft, "Antitrust and Banking," supra, note 6, at p. 6. Also Fortune Directory "500 Largest U.S. Industrial Corporations, etc.," August 1962. |