Chapter 6. Zein-layered hydroxide bio-hybrids
6.4 Concluding remarks
American legislation reflects a much more vigilant attitude towards mergers, dating from the Sherman Anti-Trust Act of 1890. Monopolies were considered illegal from the outset, resulting in a much less flexible approach to the control of monopoly power.
Present merger legislation in the US is covered under the Clayton Act (1914), the CellerKaufman Act (1950) and the Hart–Scott–Rodino Act (1976), with the laws being enforced by the Federal Department of Justice and the Federal Trade Commission.
Since 1968 US merger guidelines have directed attention to the market power exerted by the four largest companies in any market. The rigidity of using
merely the four largest companies (see Fig. 5.3 and the discussion below) for evaluating merger proposals has been extensively criticized, and in June 1982 the US Justice Department issued new proposals. These included establishing a new ‘screening’ index to alert the Justice Department as to which merger proposals were worthy of closer scrutiny and which should be immediately prohibited or ‘nodded through’. That index was to reflect the whole market and not just the four largest firms.
The so-called ‘Herfindahl–Hirschman Index’ of market concentration was devised for this screening purpose, together with a number of guidelines for policy action. This index is constructed simply as:
for all n companies in the market. Using a squaring procedure places greater emphasis on the large firms in the market. We can illustrate this by first consider-ing an index which adopts an additive procedure. If a simple additive procedure had been used over all n companies:
Market A: Index # 1(70) ! 30(1) # 100 Market B: Index # 4(20) ! 20(1) # 100
Here the markets would be evaluated as equally com-petitive, yet a strong case could be made for Market B being the more competitive. Using the Herfindahl–
Hirschman Index we have:
Market A: Index # 1(70)2!30(1)2#4,930 Market B: Index # 4(20)2!20(1)2#1,620 The lower the index, the more competitive the market, so that Market B is deemed more competi-tive. The index could, in fact, vary in value from 10,000 (i.e. 1002) for a pure monopoly, to almost zero for a perfectly competitive industry. For example, an industry consisting of 1,000 companies each with a tiny 0.1% share of the market would produce an index value of only 10 (i.e. 1,000 (0.1)2).
Once constructed, the interpretation of the index is still, however, subjective. Figure 5.4 illustrates the range of the index and the three zones of index value identified by the US Justice Department for policy purposes. The chosen dividing lines appear somewhat arbitrary, though it is clear from the guidelines that the two extreme zones are viewed in radically differ-ent lights. The cdiffer-entral zone (1,000–1,800) represdiffer-ents a policy ‘grey’ area, requiring more detailed scrutiny of the proposed merger. In practice, mergers in this zone will receive approval only if there is evidence of easy entry into the market, freely available substitutes and no collusive arrangements between existing members. The intention in this central zone is to prevent further acquisitions in the market by a market leader, whilst allowing smaller companies to combine more freely. The ‘highly concentrated’ zone (p1,800)
n i=1
(% market share)2
Fig. 5.3 Hypothetical markets in the construction of market concentration indices.
70%
1%
Market A: 73% controlled by the top four companies
Market B: 80% controlled by the top four companies
1% 1% 1% 1%
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1% 1% 1% 1%
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of the index would, for instance, include any market in which two companies have shares of over 30%, so that their potential for growth of market share by further acquisition is slim – even the addition to one of these firms of a further 2% of acquisition would trigger the 100-point condition. Yet in the same market, two smaller companies with market shares of less than 5% each could combine without infringing anti-trust policies. The purchase of just one of the competing companies in hypothetical Market A of Fig. 5.3 by the dominant firm would increase the index to 5,070 (i.e. 1(71)2!29(1)2), triggering the 100-point condition in the process and attracting the attentions of the Justice Department.
To see how such guidelines would operate within the UK context, it might be interesting to take the Monopolies and Mergers Commission report on the UK insulation market, published in May 1991. The merger which was investigated was between Morgan Crucible Plc, an international group based in the UK,
and Manville Corporation, a US company. Both companies produced RCF (Refractory Ceramic Fibre) which is used in the steel, petrochemical and aluminium industries as a high temperature heat insulator. The market for RCF in the UK was sup-plied by the following companies; Carborundum (50%), Morgan Crucible (27%), Kerlane (12%), Manville (9%) and others (2%).
Under the Herfindahl–Hirschman index the indus-try would already have been regarded as concen-trated, with a value of 3,458 (i.e. 1(50)2!1(27)2! 1(12)2!1(9)2!1(2)2). However, the merger would have increased the market share of the combined group to 36%, so that the index would have risen to 3,944 (i.e. 1(50)2!1(36)2!1(12)2!1(2)2). The increase of 486 would have been much higher than the 100-point criterion for attracting the attention of the US Justice Department. Interestingly, this merger was allowed to go ahead in the UK on the basis that Carborundum, the BP-owned company, was Fig. 5.4 The Herfindahl–Hirschman Index as an instrument of merger policy.
Pure monopoly 10,000 Guidelines
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0 Market A
Market B UK market for RCF
Perfect competition
1,800–10,000
A highly concentrated market Mergers increasing the index by ⬎ 100 points are likely to be prohibited
Mergers increasing the index by ⬍ 50 points would normally be permitted
1,000–1,800
Moderately concentrated zone needing qualitative guidelines 0–1,000
Mergers creating an index in this region are unlikely to be questioned
continuing to grow, and that the French company, Kerlane, was also increasing its share of the market.
In other words, all companies would retain some power in the UK market and competition could still continue. Although US merger policy is not solely dictated by the value of the index, the adverse initial movement of the index would certainly have created a context in which subsequent investigation in the US was less likely to decide in favour of the merger than in the UK.
Despite the attractive simplicity of this index, a number of criticisms have been directed towards it.
First, the index cannot cope adequately with vertical or conglomerate mergers since they cannot be viewed merely in terms of increasing market concentration.
As a result, even with this index, non-horizontal mergers between companies in different industries or market sectors remain an area of uncertainty in terms of Justice Department reaction. Second, there is often no clear way to determine in exactly which market the market share should be measured. For example, in the investigation into the proposed alliance of British Airways and American Airlines in 1998, the carriers themselves asserted that the relevant market was travel between the US and Europe (where their com-bined market share is modest), while EU officials focused on travel between the US and the UK (where their combined market share is substantial). Third, even where the definition of the market is clear, the relation between changes in the index and changes in market power may be rather obscure. For example, although two firms, Coca-Cola and Pepsi-Cola, control 75% of sales of the US soft drinks industry, such market concentration has in no way diminished the aggressive price competition between these rivals.
Officials have increasingly resorted to a range of indicators in addition to the Herfindahl–Hirschman index in order to evaluate proposed mergers. For example, a key issue may be whether mergers are likely to drive prices higher. In 1997, the proposed merger of Staples and Office Depot, the two super-store office chains, seemed to provide no problem in terms of market concentration as thousands of other US retailers also sell office supplies. However, when the Federal Trade Commission (FTC) used electronic scanners to scrutinize data on sales price and quanti-ties for every item sold, they found a distinctive pattern. Staples’ prices were found to be lower in cities where Office Depot had a store compared to cities where Office Depot had none. This was seen by
the FTC as evidence that the proposed merger would in all probability allow Staples to raise prices after the merger. The merger was therefore blocked. It is often technological developments, such as the availability of powerful computer resources and electronic retail price scanners in this example, which have permitted such data to be collected and analysed, providing additional indicators to be used alongside the Herfindahl–Hirschman index as an aid to decision-making.
Two of the most important developments during the 1980s and 1990s were the acceleration in the trend towards corporate restructuring, and the financing of takeovers by ‘leveraged debt’.
While larger mergers continued, other forms of restructuring seemed to go against this trend.
Restructuring took two directions: the taking apart of diversified conglomerates, and the putting together of focused global companies. There are obvious advan-tages in creating diversified conglomerates, such as less risk of financial distress and a decreased threat of being taken over. However, in recent years many larger conglomerates have found that they need to concentrate on operating a more limited range of com-panies or divisions, especially those which can gener-ate cash. For example, Pearson p.l.c., which owns the Financial Times and a large number of publishing companies (e.g. Penguin, Pitman, Addison Wesley Longman, Prentice-Hall), sold many of its non-media-related companies during 199798, such as those involved with leisure interests (e.g. Madame Tussaud’s, Warwick Castle) and financial services, in order to focus on its core, media-related activities.
During 2001–02, Kingfisher, the home improvements and electricalfurniture retailer giant, was involved in a large restructuring programme designed to focus on its core activities (B&Q stores) in order to strengthen its market power and financial position in the home improvements sector. For example, in 2001 it de-merged from Woolworth and sold off its Superdrug and Time Retail Finance businesses and went on to acquire the French home improvement company, Castorama, in 2002. Finally, a major phase in Kingfisher’s strategy of focusing on the home