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Antitrust policy and mergers: the wealth effect of Supreme Court decisions.

I. INTRODUCTION

Since its inception in 1890, antitrust has been one of the most controversial areas of law. Some view antitrust enforcement as efficiency enhancing, leading to a greater degree of market competition than would otherwise be attainable.(1) Others view antitrust enforcement as an intrusion into the natural economic order and, as such, efficiency decreasing.(2) The controversy ostensibly is manifested in the uncertainty surrounding the effect of antitrust on the structure of industry in the United States.

An important aspect of the controversy involves the effect of enforcement of the merger law, Section 7 of the Clayton Act, as amended by the Celler-Kefauver Act in 1950.(3) The literature on the enforcement effects of the merger law is generally divided into four branches. One branch concerns the political economy of government antitrust enforcement. For example, Coate et al. |1990~ argued that because "merger challenges, like antitakeover legislation, prevent the exit of resources and votes from a politician's jurisdiction," politicians are expected to respond to organized labor and management interests by instigating FTC merger challenges. A second branch compares the differential effects of the law upon horizontal, vertical, market extension, product extension, and conglomerate mergers. For example, Scherer |1980~ presented evidence that the percentage (measured in asset value) of horizontal mergers declined from 37 percent during the 1948-1955 period to only 12 percent during the 1963-72 period, while the percentage of pure conglomerate mergers increased from 3 percent to 33 percent for the same time periods. A third branch examines the effect of the merger law on market structure. For example, Eckbo |1983~ tested the hypothesis that mergers are used to gain monopoly power. He found evidence to the contrary: mergers in general increased competition. Finally, a fourth branch examines the effect of enforcement on the value of firms involved in merger suits. For example, Wier |1983~ estimated the costs of enforcement to shareholders of firms whose mergers were challenged.

Uncertainty about the effect of enforcement is reflected by Stigler |1982, 44~ who noted that "It would be gratifying to me if I could report that our profession's changing view |on the effect of antitrust~ was based upon the systematic study by economists of the effects of the policy, in short, that hard evidence carried the day. Unfortunately, there have been no persuasive studies of the effects of the Sherman and Clayton Acts throughout this century."(4) Our purpose in this paper is to examine and provide empirical evidence on an aspect of enforcement that has in general been ignored in the literature. Our basic hypothesis is that Supreme Court litigation outcomes have ripple effects that extend beyond their direct effect on the challenged mergers. To test this hypothesis, we examine the magnitude of these ripple effects by measuring the stock market reaction to Supreme Court merger decisions for firms engaged in merger negotiations.

The balance of this paper is organized as follows: section II discusses the effect of Supreme Court decisions on target firm value; section III provides a summary review of previous research on enforcement effects; section IV describes our empirical model; section V presents our empirical results; and section VI contains concluding remarks.

II. SUPREME COURT DECISIONS AND TARGET FIRM VALUE

Supreme Court merger decisions may send important signals about changes in enforcement and thus changes in the cost of compliance to all concerned, including firms participating in ongoing mergers. We argue that market participants perceive the Court's decisions as newsworthy because the Court has been "the central institution in making antitrust law.... That is true because the antitrust laws are so open-textured, leave so much to be filled in by the judiciary, that the Court plays in antitrust almost as unconstrained a role as it does in constitutional law" (Bork |1978, 409~).

More importantly, perhaps, the costs to the defendants in Section 7 cases appear to have been great. In an examination of 205 Section 7 cases that were initiated during 1950-1972 and decided by 1974, Ellert |1976~ found that (i) the government won 82 percent of the cases, (ii) 60 percent of the defendants were required to divest assets, and (iii) on average the litigations lasted about three years. In addition to the costs reflected in Ellert's data, one would expect the defendants in Section 7 cases to put on hold important plans that might depend on the decision of the Court, thus causing potentially enormous opportunity costs.(5)

A Supreme Court decision may send a positive (favorable) or a negative (unfavorable) signal to firms participating in uncontested ongoing mergers, depending on whether the Court allows the contested merger under litigation or disallows it. A favorable ruling reduces the probability that mergers would encounter legal problems, thus decreasing the expected compliance costs. Conversely, an unfavorable decision increases the probability that ongoing mergers would encounter legal problems, thus increasing the expected compliance costs.

An unfavorable decision also reduces the value of the target by eliminating from the takeover battle a number of potential acquirers who may not meet the newly imposed legal constraints. This reduces the number of bids that a target might otherwise have received, thus reducing takeover premiums that multiple bid contests engender. Jarrell |1985~ found that shareholders of target firms receiving multiple takeover bids obtained risk-adjusted returns 17 percent higher than shareholders of target firms receiving only one takeover bid. In addition, an unfavorable decision may increase the bargaining power of the enforcement agencies (the Justice Department and the Federal Trade Commission), leading to an increase in the expected costs of antitrust enforcement for the acquiring firm. Conversely, a Court decision in favor of merger would increase the probability that ongoing mergers would not encounter legal problems, thus leading to an increase in the value of target firms. In general, the higher the expected cost of antitrust compliance with respect to mergers and the fewer the number of offers, the lower will be the market value of target firms, all else equal.

Finally, a Supreme Court decision restricting a merger also raises the expected cost of antitrust compliance to firms that would be involved in future mergers. However, given the difficulties in evaluating the effects of a Court decision on as yet unidentified firms in future mergers, our focus in this paper is on the effect of Supreme Court decisions on mergers under negotiation at the time of the Supreme Court decision.

III. PREVIOUS RESEARCH

Several researchers have applied the event study (or market model) methodology to measure the change, due to enforcement, in the market value of firms involved in specific merger cases. For example, Eckbo |1983~ used this methodology to examine the effect of merger enforcement on the value of participating firms and their competitors. The question of primary interest to Eckbo was whether firms merge to obtain market power. If market power was the expected source of gains from merging, the stock prices of competitors would rise at the announcement of the merger. If, on the other hand, efficiency was the expected source of gains from merging, the stock prices of competitors could possibly fall at the announcement of the merger. Eckbo found that market power was not, in general, the expected outcome of merger activity during the first decades following the passage of Celler-Kefauver.

Wier |1983~ used the same methodology to test the proposition that merger challenges impose costly constraints on defendant firms. This was done by estimating abnormal returns to defendant firms at the time of the Court's final decisions on Section 7 violations, where final decisions were disaggregated into cancelled, convicted, dismissed, and settled categories. Wier found that there are direct costs associated with enforcement. Her empirical results show that the largest negative average abnormal returns occurred to target firms when they voluntarily cancelled mergers following a challenge by the Justice Department or the Federal Trade Commission. These negative abnormal returns were as large as the positive abnormal returns that occurred at the time of the merger announcement (i.e., cancellation wiped out all the gains associated with the announcement of merger intention). Bidding firms made no significant gains at the announcement of merger intent or significant losses at the time of cancellation. Bidding firms which were convicted of a Section 7 violation suffered negative average abnormal returns of less than 2 percent around the final decision date. There was no significant change in value for firms whose cases were dismissed and no significant abnormal returns for firms which settled suits after complaints were filed.

IV. EMPIRICAL MODEL

While Wier examined the cost of Section 7 enforcement to firms whose mergers were directly challenged, her results account for only part of the costs of enforcement. As argued above, firms whose mergers are announced, but are not the subject of any merger suits, can be affected by a Supreme Court decision in a merger case. A gap has thus been created in the literature by the disregard of the enforcement effects of merger policy on firms not subject to a lawsuit.(6) Our first hypothesis is:

H1: Firms that are the target of mergers will decline in market value if the Supreme Court upholds the antitrust challenge and will increase in market value if the Supreme Court denies the antitrust challenge.

Our focus on the effect of Supreme Court rulings on target firms rather than (or in addition to) the effect on acquiring firms is based on a large body of literature that indicates that merger announcements do not have a statistically significant effect on the value of the acquiring firms, on average.(7) More specifically, as discussed above, Weir's results indicate that acquiring firms made no gains at the announcement of mergers and lost no value at the announcement of the cancellation of the mergers following a legal challenge.

Determining the impact of Supreme Court antitrust decisions on target firms involved in merger negotiations requires isolating the dates on which information regarding the outcome of the case became apparent to capital markets. While the date on which the decision is publicly released would seem to be the most obvious time at which this occurs, there is reason to believe that capital markets may in fact anticipate the results of Supreme Court cases prior to the actual release of the decision.

Information regarding the likely outcome of a Supreme Court case probably becomes known to investors on a variety of occasions. The date the Supreme Court agrees to hear the case, the date the case is argued, the date the Court actually reaches a decision, and the date that decision is released publicly all represent dates when capital markets may receive valuable information regarding the likely outcome of an antitrust case. Indeed the observed market reaction on any of these dates is likely to reflect only a portion of the economic impact of a Supreme Court decision. There is good reason to believe, however, that the argument date is the date when the most valuable information about the likely outcome of the case is released. By the scheduled argument day, the plaintiffs, the defendants, and the Justices have had ample time to study the particulars of the case. The plaintiffs and the defendants state their formal arguments and are questioned by the Justices. These discussions signal to the astute observer the likely verdict of these cases and the scope of the decision, based on the Justices' known voting records.

In addition, we expect the significance of the argument date to be greater for close decisions (e.g., 5-4, 6-3) than for lopsided decisions (e.g., 9-0, 7-2).(8) The astute observer may be in a better position to anticipate the outcome of a lopsided decision before the argument date than for close decisions. As a result, much of the economic impact of lopsided decisions may be reflected in security prices prior to the argument. This will be true if some information is leaked to the market in lopsided decisions about how most of the Justices view the case (perhaps due to their votes in prior cases) and thus the event represented by the argument date may not bear as much valuable information. Thus, our second hypothesis is:

H2: Close decisions will generate greater changes in market value on the argument day than will lopsided decisions.

Given the uncertainty regarding the precise date on which economically valuable information from Supreme Court decisions is reflected in security prices, three event periods were examined: the argument date and the following day; the argument date and the following five trading days; and the decision announcement date and the following day.

A. Sample Selection Criteria

We identified a total of eleven Supreme Court decisions for the purpose of testing our hypotheses, beginning with Brown Shoe Co. v. United States, June 25, 1962 and ending with the United States v. General Dynamics Corp, March 19, 1974.(9) These eleven cases include all merger cases decided by the Supreme Court under Section 7 of the Clayton Act, not involving regulated industries, from 1950 through 1989.(10) We used only ten of the eleven cases for lack of appropriate data for Brown Shoe (as will be discussed below).

We measured the enforcement effect of the Supreme Court decisions by calculating changes in the value of merger targets not subject to the Court's decision. For our study, each Supreme Court case argument and each decision announcement constituted an event. Target firms involved in successful mergers were identified in the Federal Trade Commission's Statistical Report on Mergers and Acquisitions, 1979. This report classifies mergers by type, i.e., horizontal, vertical, market extension, product extension, and pure conglomerate, and includes all mergers in manufacturing and mining industries that took place in the United States between 1948 and 1978 in which the size of the acquired firm exceeded $10 million in assets. Target firms in unsuccessful mergers were identified using various issues of the Wall Street Journal Index. Merger type was determined by examining the financial reports of the target and acquiring firms.

The criteria for selection were (i) a merger was announced in the Wall Street Journal prior to the argument date of a corresponding case and consummated or cancelled after the decision date, and (ii) from the targets identified in (i), those firms that were traded on the American or New York Stock Exchanges for at least two hundred days prior to the merger announcement were selected. The second criteria ensured sufficient stock return data on the CRSP tapes for estimation of the premerger return generating process. A total of fifty-two targets associated with ten Supreme Court cases met the above conditions. Unfortunately, we could not include in the sample the targets of the mergers associated with Brown Shoe, the first Supreme Court Section 7 case after the passage of the Celler-Kefauver amendment, because of data limitations (the CRSP tapes include daily price data only beginning in 1962).

Table I contains information about the Supreme Court cases considered for this study. Column 1 lists the cases by name; column 2 lists the corresponding argument dates; column 3 lists the Justices' votes (for the enforcement agency-against the enforcement agency); column 4 lists the merger types for each case; and column 5 lists the number of target firms included in our sample that corresponded to the Supreme Court case and met the two criteria discussed above. Thus, the analysis discussed below is based on ten Supreme Court cases and their corresponding fifty-two target firms. Appendix 1 details our sample, listing the target firms included, the type of merger in which they were involved, and the Supreme Court cases with which they were associated.

B. Assessment of Changes in Market Value

To assess the impact of Supreme Court cases on the value of the merger targets in our sample, we rely on the conventional event-study methodology developed by Fama et al. |1969~. This approach assumes that the market model adequately represents the stochastic process which generates returns for security j in time period t. The market model specifies each security's period t return as a linear function of the contemporaneous return on the market portfolio plus a stochastic error term which reflects security-specific effects. That is,

|R.sub.jt~ = |a.sub.j~ + |b.sub.j~|R.sub.mt~ + |e.sub.jt~,

where |R.sub.jt~ is the return on security j over time period t, |R.sub.mt~ is the return on the market portfolio of common stocks over time period t, and |e.sub.jt~ is the disturbance term for security j at time period t where E(|e.sub.jt~) = E(|e.sub.jt~|center dot~|e.sub.jt-1~) = 0 and |Mathematical Expression Omitted~.

Based on this model of the return-generating process, abnormal returns for each security were calculated as

A|R.sub.jt~ = |R.sub.jt~ - (|a.sub.j~ + |b.sub.j~|R.sub.mt~),

where |a.sub.j~ and |b.sub.j~ are the ordinary least squares parameter estimates obtained from a regression of |R.sub.jt~ on |R.sub.mt~ over an estimation period preceding the beginning of the merger announcement. The term A|R.sub.jt~ represents returns earned by the target firm after adjusting for the "normal" return process.

The market-model regression was estimated using daily return observations from the CRSP data base from two hundred trading days before the first mention of the merger in the Wall Street Journal through fifty days before the first mention of the merger. We excluded the fifty days prior to the merger announcement to avoid distortions in the normal return-generating process caused by any ongoing merger negotiations. Abnormal returns for each firm were calculated over the day the case was argued before the Supreme Court and the following day. As mentioned above, we calculated abnormal returns for two other event periods as well: the argument date and the following five trading days and the decision date and the following day.

To test the hypothesis that Supreme Court decisions restricting (allowing) mergers reduce (increase) the value of targets of mergers, the abnormal returns for each target firm were cumulated over the three event periods described above. These cumulative abnormal returns (CAR) were then standardized and formed into a portfolio. To test the significance of these abnormal returns we rely on the test statistic described by Dodd and Warner |1983~.
TABLE I

Supreme Court Cases Included in Tests

Case(a) Argument Date Vote Merger Type(b) N

Alcoa 4-23-64 6-3 1 3
Continental Can 4-28-64 7-2 1,3 6
Consolidated Foods 3-11-65 9-0 2,3 6
Von's Grocery 3-22-66 6-2 1 5
Dean Foods 3-28-66 5-4 1 6
Pabst 4-27-66 9-0 1 6
Proctor & Gamble 2-13-67 7-0 3 11
Ford Motor 11-18-71 7-0 2 2
Falstaff 10-17-72 5-2 4 3
General Dynamics 12-5-73 4-5 1 4

TOTAL 52

(a) Case references (with decision dates) are as follows:

U.S. v. Aluminum Co. of America, 377 U.S. 271 (6-1-1964).
U.S. v. Continental Can Co., 378 U.S. 441 (6-22-1964).
FTC v. Consolidated Foods Corp., 380 U.S. 592 (4-28-1965).
U.S. v. Von's Grocery Co., 384 U.S. 270 (5-31-1966).
FTC v. Dean Foods Co. et al., 384 U.S. 597 (6-13-1966).
U.S. v. Pabst Brewing Co., 384 U.S. 546 (6-13-1966).
FTC v. Procter & Gamble Co., 386 U.S. 568 (4-11-1967).
Ford Motor Co. v. U.S., 405 U.S. 562 (3-29-1972).
U.S. v. Falstaff Brewing Corp. et al., 410 U.S. 526
(2-28-1973).
U.S. v. General Dynamics Corp., 415 U.S. 486 (3-19-1974).

(b) Merger types 1, 2, 3, and 4 represent horizontal, vertical,
product extension, and market extension mergers, respectively.


The methodology described above conforms to the methodology widely used in the financial economic literature to associate returns to shareholders with particular events. It is also comparable to that employed by Wier |1983~, Eckbo |1983~, and Ellert |1976~ and thus allows comparison with other studies on antitrust enforcement and the value of merger participants.

V. RESULTS

In discussing the results, it is important to note that except in General Dynamics (where the Court's decision was favorable), the Court sent a negative signal in the cases examined. To include all targets in the portfolio for statistical testing, we changed the signs of the abnormal returns of targets associated with General Dynamics before computing cumulative abnormal returns. The results from the test described above appear in Table II. Row 1 details the results for the change in market value of the targets for the date the case was argued and the following day (|CAR.sub.2~). The results offer support for the first hypothesis of this study. Target firms suffered an average decline in value of -1.38 percent (Z=-2.98) over the two days surrounding the argument date of a Section 7 case before the Supreme Court. In addition, 78 percent (t=4.63) of the target firms declined in value over the two days surrounding the argument before the Supreme Court.

TABULAR DATA OMITTED

Row 2 details the results for the argument date and the following five trading days (|CAR.sub.6~). The results indicate that target firms experienced a marginally significant decline in value during these six days, averaging -1.52 percent (Z=-1.35). Row 3 details the results for the date the decision was publicly announced and the following day (|CAR.sub.d~). These results provide no evidence of significant declines in market value associated with the public announcement of the Supreme Court decision.

In addition, we have hypothesized that close decisions will be associated with greater declines in target firm value on the argument date than lopsided decisions. Table III compares the differential effect of lopsided decisions and close decisions on the value of the targets of mergers in our sample. Of the ten Supreme Court cases, three represented close decisions: Aloca (6-3), Dean Foods (5-4), and General Dynamics (4-5). The remaining cases represented lopsided decisions: Continental Can (7-2), Consolidated Foods (9-0), Von's (6-2), Dean Foods (9-0), Proctor & Gamble (7-0), Ford Motor (7-0), and Falstaff (5-2).

Row 1 presents the average change in the value of the target firms in mergers associated with the three close decisions for the argument date and the following day (|CAR.sub.2~), for the argument date and the following five days (|CAR.sub.6~), the decision date and the following day (|CAR.sub.d~), and the corresponding Z-statistics. Row 2 does the same for the seven lopsided decisions.

Row 3 presents the student-t statistics for the difference between the average change in the value of the targets as presented in rows 1 and 2. The reductions in the average values of the target firms associated with close decisions and lopsided decisions for the two-day window were -3.22 percent (p|is less than~.01) and -.76 percent (p|is less than~.05), respectively. The difference between -3.22 percent and -.76 percent is significant at the .01 level. The reductions in the average values of the target firms associated with close decisions and lopsided decisions for the six-day window were -5.20 percent (p|is less than~.01) and -.29 percent (not significant), respectively. The difference between -5.20 percent and -.29 percent is significant at the .01 level. These results support our second hypothesis that Supreme Court arguments associated with close decisions contain more valuable information than arguments associated with lopsided decisions.

TABULAR DATA OMITTED

Table IV presents the results for each individual case. Column 1 lists the names of the Supreme Court cases, column 2 lists the number of targets associated with each case, columns 3 and 4 list the cumulative abnormal returns for the argument date plus one (|CAR.sub.2~) and the Z-statistic, columns 5 and 6 list the cumulative abnormal returns for the argument date plus five (|CAR.sub.6~) and the Z-statistic, and columns 7 and 8 list the same for the decision date plus one (|CAR.sub.d~). Small sample sizes for each case generally hamper efforts to make strong inferences about the effect of individual cases.

All cases except for Von's and Ford were associated with returns to target firms of the hypothesized sign during the two days surrounding the argument date. Alcoa, Dean Foods, and Falstaff were associated with a statistically significant decline in market value for targets engaged in merger negotiations at the time the cases were argued. Consistent with our expectation, General Dynamics was associated with a (marginally statistically significant) increase in market value for its corresponding targets.

Four cases had statistically significant returns in the hypothesized direction for the argument date plus five (Alcoa, Dean Foods, Falstaff, and General Dynamics). Average abnormal returns for the five target firms associated with the Von's case were positive and statistically significant, however. The three target firms associated with the Falstaff case exhibited marginally significant returns during the two-day decision announcement period.

Up to this point we have discussed the results without considering the relationship between the legal issues in the cases and the corresponding market conditions surrounding the mergers in our sample. Our hypothesis has been that any negative signal sent by the Supreme Court in the merger cases, regardless of the specific antitrust issue, will be construed by merger participants in the market as a general tightening of enforcement.

It might also be desirable, however, to identify in detail the legal issue(s) in each of the Supreme Court cases and include in the corresponding sample of mergers those that would have very similar legal problem(s) if challenged.(11) In general, we TABULAR DATA OMITTED would expect the value of target firms to decline more the more specific the legal issues in the case are to the proposed merger. Unfortunately, our search for detailed data on the fifty-two mergers in our sample did not provide useful information on the closeness of the proposed merger to the legal issues involved in the Supreme Court case. In addition, we have argued that an important cost of antitrust enforcement is the loss of potential bids for the target firms. Assessing the relationship between bids discouraged and the legal issues of the Supreme Court case is yet more problematic.

As an alternative to testing for the closeness of legal issues, we repeated the test of Hypothesis 1 for the subset of target firms which were of the same general type as the Supreme Court case argued during the merger negotiations. For example, Alcoa involved a horizontal merger. Of the three target firms involved in merger negotiations at the time of the Alcoa case, two were involved in horizontal mergers. In this test, we include only these two target firms in the sample. In all, twenty-five target firms in our sample were involved in merger negotiations of the same type as the merger under consideration by the Supreme Court at the time.

Table V details the results for this subset of merger targets. Row 1 of Table V lists the results for the argument date and the following day (|CAR.sub.2~) for the twenty-five target firms. Row 2 lists the results for the argument date and the following five days (|CAR.sub.6~). Row 3 lists the results for the decision date and the following day (|CAR.sub.d~). The results for the subset of target firms engaged in merger negotiations of the same type as that considered by the Supreme Court at the time are largely consistent with those for the entire sample. TABULAR DATA OMITTED Abnormal returns averaged -.94 percent (z=-1.75) over the argument date and following day. Furthermore, 72 percent of these target firms experienced a decline in firm value (t=2.44). Abnormal returns averaged a marginally significant -1.86 percent (z=-1.36) over the argument date and the following five days. Over the decision date and following day, abnormal returns averaged an insignificant .10 percent.

Finally, we compared the merger announcement premia for the target firms in our sample to the declines in their value reported in Table II. We defined the merger announcement premium as the percentage increase in the target firm's stock price from sixty trading days prior to the merger announcement through the merger announcement date. The merger announcement premia averaged 16.77 percent for the sample of target firms. Hence, the 1.38 percent decline in firm value over the two-day window surrounding the argument date represents 8.2 percent of the merger announcement premia the target firms received. The 1.52 percent decline in target firm value over the six days surrounding the argument represents 9.1 percent of the merger announcement effect. Thus, a substantial portion of the merger announcement premium was lost as the Supreme Court heard arguments of the antitrust cases.

VI. CONCLUDING REMARKS

There is widespread perception that antitrust policy has had a dramatic impact on merger strategies in the United States. Stigler |1966~ presents data on the striking decline in horizontal mergers and corresponding striking increase in conglomerate mergers during the 1950s and 1960s and concludes that "the anti-merger statute has been a powerful discouragement to horizontal mergers". Scherer |1980, 124~ extends the data on mergers through 1977 and comes to the same conclusion. Shleifer and Vishny |1990~ state that the "most likely reason for diversification |in the 1960s~ was the antitrust policy which turned fiercely against mergers between firms in the same industry when the Celler-Kefauver Act passed in 1950" and that "the failed conglomerate wave was a direct consequence of this policy".

Further, Shleifer and Vishny conclude that the restructuring of the 1980s will likely raise efficiency because it has been characterized by the selling off of unrelated businesses and the return to undiversified firms that can take advantage of specialization |1990, 74~. This is supported by Mitchell and Lehn |1990~ who found that firms became targets for hostile takeovers when they engaged in inferior conglomerate merger strategies and that "hostile bust-up takeovers promote economic efficiency by reallocating the target's assets to higher-valued uses".

Our results suggest that during the 1960s and 1970s public policy against mergers, as signalled by Supreme Court arguments, was binding as it lowered the value of targets in uncontested ongoing mergers. This result obtains regardless of whether unchallenged mergers were of the same type as the cases before the Court or of different types. The empirical results indicate that unfavorable Supreme Court decisions lowered the value of target firms in uncontested mergers by about 1.38 percent (p|is less than~.01) during a two-day window and by about 1.52 percent (p|is less than~.1) during a six-day window.

The drop in the value of the target firms in our sample is nontrivial. For the two-day window, the firms lost, on average, 8.2 percent of the premia resulting from the announcement of an intended merger and for the six-day window they lost, on average, 9.1 percent of the premia. The magnitude of the decline in value is perhaps surprising given the consistency in the Supreme Court rulings--namely, the government won all of the cases except General Dynamics.(12)

The methodology used in this study assumes that the entire impact of the focal event occurs during the period over which the abnormal returns are cumulated. In this study, we cumulated the abnormal returns over a two-day period and a six-day period beginning with the argument day before the Court. If capital market participants anticipate some aspects of a decision prior to the argument date, then some portion of the impact of the Court's decision would be incorporated in security prices prior to the actual event date (Binder |1985~). This is likely to be true for cases in which the decision votes are lopsided and is likely for important Supreme Court cases which are argued in public and are part of a stream of related decisions. Thus, the methodology we employed in this study may have underestimated the impact of these cases on the value of the firms in our sample and led to conservative results. Finally, to the extent that enforcement discourages future mergers, our results underestimate the true effects of Supreme Court decisions.

TABULAR DATA OMITTED

APPENDIX 2

Summary of Supreme Court Cases Examined

Alcoa (1964)

The issue in Alcoa was the scope of the product market. Alcoa, a producer of aluminum and aluminum products (including aluminum cable) acquired Rome Cable, a producer of predominantly copper cable that also produced aluminum cable in 1959. Alcoa argued that the relevant market was conductor cable (of all types), in which the combined company did not have a dominant market position. The Court ruled that the relevant market could be defined more narrowly as aluminum cable, finding that the combined company did possess a dominant position. In his dissent, Justice Harlan referred to this decision as "an abrupt and unwise departure from established antitrust law."

Continental Can (1964)

The merger of Continental Can and Hazel-Atlas Glass Company was challenged on three grounds: 1) as a large, dominant multi-product firm, Continental Can-Hazel-Atlas would have an advantage over smaller, single-product firms; 2) if allowed, this merger might tend to trigger additional mergers; and 3) that Continental Can and Hazel-Atlas were potential competitors in both markets and should not, therefore, be allowed to remove themselves from the rank of potential competitors. The Supreme Court disallowed the merger on all three grounds.

Consolidated Foods (1965)

The FTC challenged the acquisition of Gentry, Inc. (a processor of dehydrated onion and garlic) by Consolidated Foods (a diversified food processor and wholesaler) on the grounds that such an acquisition allowed Consolidated to instigate harmful reciprocity agreements. The Supreme Court found that Consolidated was in a position to foreclose some of the market for dehydrated onion and garlic by forcing its suppliers to purchase from Gentry in exchange for Consolidated's purchase from the suppliers. This decision broadened the scope of the government's charge of market foreclosure by extending it to possible reciprocity agreements.

Von's Grocery (1966)

In the Von's Grocery Case, the Supreme Court further extended the scope of the incipiency doctrine by applying it to industries in which single-owner firms were declining in number. The primary consideration in this case was the disappearance of Mom and Pop groceries and the increasing number of multi-store grocery chains. The Supreme Court disallowed the merger of Von's and Market Basket (both retail grocery chains in the Los Angeles area), stating that the "Celler-Kefauver Anti-Merger Act requires not merely an appraisal of immediate impact of merger upon competition, but prediction of its impact upon competitive conditions in the future."

Dean Foods (1966)

The issue in the Dean Foods Case was whether the FTC had the authority to request a temporary restraining order from the Appellate Court to prevent an impending acquisition. The Supreme Court found that the FTC could make such an appeal, even though no such authority had been granted by Congress, because the Appeals Court derives its authority from the All Writs Act, not the Clayton or FTC Act. This greatly increased the power of the FTC to prevent pending mergers.

Pabst (1966)

The issue in the Pabst Case was whether or not the government had to specify a particular geographic market that would be adversely affected by a market extension merger. The Supreme Court found that no such specific evidence was required, stating that, "Certainly the failure of the Government to prove by an army of expert witnesses what constitutes a relevant 'economic' or 'geographic' market is not an adequate ground on which to dismiss a Section 7 case."

Proctor & Gamble (1967)

The issue in the Proctor & Gamble Case was the presence of potential competition in a market. The Supreme Court found that the acquisition of Clorox by Proctor & Gamble violated Section 7, because, absent the acquisition, Proctor & Gamble might have entered the household bleach market with an internally developed product. Although there was no evidence to support this supposition, the Court found that the acquisition removed Proctor & Gamble as a potential competitor in the bleach market.

Ford Motor (1971)

The two issues in the Ford Motor case were 1) foreclosure of the market (previously decided on in the Brown Shoe case) and 2) potential competitor status (previously decided on in the Proctor & Gamble case). The Supreme Court found that the acquisition of Autolite by the Ford Motor Company violated Section 7 on both grounds.

Falstaff (1972)

The issue in the Falstaff Case was potential competition in a geographically concentrated market. The Court ruled that Falstaff was important as a potential competitor in the Northeast because that local market was very concentrated, creating the potential for the existing brewers to charge monopoly-like prices. Falstaff's presence as a potential competitor "in the wings" would lesson the ability of the incumbents to charge high prices. Therefore, the entry of Falstaff, by acquisition rather than by internal expansion, violated Section 7.

General Dynamics (1974)

The issue in the General Dynamics Case was whether changing market conditions (in the coal industry) could be used to justify a failing-firm defense. The case is significant because the Supreme Court, in a 5-4 close decision, found that the post-acquisition evidence of weakness on the part of the acquired firm was sufficient to find that the merger did not substantially lesson competition, i.e. the failing-firm defense was successful. This was surprising because an earlier case (Citizens' Publishing Company v. United States, 1969) had sufficiently proscribed the failing-firm defense so as to render it virtually useless according to Neale and Goyder |1980~.

1. In a poll taken from a number of economists, 85 percent agreed with the statement that "the antitrust laws should be used vigorously to reduce monopoly power from its current level." See J. R. Kearl et al. "A Confusion of Economists?" American Economic Review, Papers and Proceedings 69(2), May 1979, 28-37.

2. For example, see Robert H. Bork, The Antitrust Paradox: A Policy at War With Itself. New York: Basic Books, 1978.

3. The Celler-Kefauver Act provides "that no corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another corporation engaged also in commerce, where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." 38 Stat. 730, 15 U.S.C.G. 12-27.

4. Quoted in Buchanan and Lee |1992, 218~.

5. Some authors, e.g., Elzinga |1969~ and Pfunder et al. |1972~, have argued that the relief obtained in Section 7 cases has generally been minor, given the purposes of the suit. This has been especially true in cases that are settled out of court rather than litigated. It is important to note, however, that these authors do not define relief in terms of the litigation costs directly borne by the defendants; or the costs borne by merging partners in ongoing mergers; or the costs borne by unidentified participants in future mergers; or the cost borne by society for the mergers that are discouraged due to the Court's Section 7 decisions. These authors, instead, view costs in terms of whether the status quo ante is established after the litigation. The fact that the government has not been successful in establishing the status quo ante does not mean that the defendants of Section 7 cases bear no costs.

6. As discussed in note 5, we are not suggesting that the indirect costs associated with Supreme Court Section 7 cases are limited to participants in ongoing mergers. Unfavorable Supreme Court decisions could also discourage mergers that would otherwise be attempted. Unfortunately, it is costly, if not impossible, to identify future merger participants.

7. For example, see Jensen and Ruback |1983~ and the references cited therein.

8. We thank the editor for pointing out the likely differential effects of close and lopsided decisions.

9. Fox and Fox |1989~, Appendix 1.

10. We did not include cases in regulated industries in order to avoid possible confounding effects of regulation on our results.

11. The legal issue(s) associated with each case are summarized in Appendix 2.

12. Von's is famous for Justice Stewart's remark that the only consistency he could find in the Section 7 cases was that "the government always wins."

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Buchanan, James M., and Dwight R. Lee. "Private Interest Support for Efficiency Enhancing Antitrust Policies." Economic Inquiry 30(2), 1992, 218-24.

Coate, Malcolm B., Richard S. Higgins, and Fred S. McChesney. "Bureaucracy and Politics in FTC Merger Challenges." Journal of Law and Economics 33(2), 1990, 463-82.

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Fama, Eugene F., L. Fisher, M. Jensen, and R. Roll. "The Adjustment of Stock Prices to New Information." International Economic Review 10(1), 1969, 1-21.

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Jarrell, Gregg A. "The Wealth Effects of Litigation by Targets: Do Interests Diverge in a Merger? Journal of Law and Economics 28(1), 1985, 151-77.

Jarrell, Gregg A., and Michael Bradley. "The Economic Effects of Federal and State Regulations of Cash Tender." Journal of Law and Economics 23(2), 1980, 371-407.

Jensen, Michael C., and Richard S. Ruback. "The Market for Corporate Control: The Scientific Evidence." Journal of Financial Economics 11(1), 1983, 5-50.

Kearl, J. R., Clayne L. Pope, Gordon T. Whiting, and Larry T. Wimmer. "A Confusion of Economists?" American Economic Review, Papers and Proceedings 69(2), 1979, 28-37.

Mitchell, Mark L. and Kenneth Lehn." Do Bad Bidders Become Good Targets?" Journal of Political Economy 98(2), 1990, 372-98.

Neale, A. D., and D. G. Goyder. The Antitrust Laws of the United States of America: A Study of Competition Enforced by Law. Cambridge: Cambridge University Press, 1980.

Pfunder, Malcolm R., Daniel J. Plaine, and Anne M. G. Whittemore. "Compliance With Divestiture Orders Under Section 7 of the Clayton Act: An Analysis of the Relief Obtained." Antitrust Bulletin, 17(1), 1972, 19-179.

Scherer, Frederick M. Industrial Market Structure and Economic Performance. Boston: Houghton Mifflin, 1980.

Shleifer, Andrei, and Robert W. Vishny. "The Takeover Wave of the 1980s." Science, 249, August 1990, 745-49.

Stigler, George J. "The Economic Effects of the Antitrust Laws." Journal of Law and Economics, 9, October 1966, 225-58.

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Wier, Peggy. "The Costs of Antimerger Lawsuits." Journal of Financial Economics, 11, 1983, 207-24.

ASGHAR ZARDKOOHI, Assistant Professor, Arizona State University-West, Associate Professor, Chapman University and Professor, Texas A&M University. The authors wish to thank Rodney Smith, editor, and two anonymous reviewers, as well as Bruce Johnsen, Rafael Gely, George Bittlingmayer, and Gale Mosteller and the other participants of the Western Economic Association International meeting in San Diego, 1990, for helpful comments and suggestions. The generous support of Zardkoohi's research by the Private Enterprise Research Center at Texas A&M University is also gratefully acknowledged.
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Author:McWilliams, Abagail; Turk, Thomas A.; Zardkoohi, Asghar
Publication:Economic Inquiry
Date:Oct 1, 1993
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