CORPORATE MERGERS AND ACQUISITIONS 15 In the opinion of the Commission, the present, and still growing, concentration of economic power in the United States constitutes today's greatest domestic challenge to the American theory of competitive enterprise, and, along with it, all that is embodied in the meaning of the somewhat intangible, but nonetheless real, meaning of the "American way of life" and "freedom of economic enterprise." Concentration has made its most notable advances in the United States through mergers and acquisitions. Unless the resulting consolidations possess nearly complete control of an industry and, in addition, follow unlawful practices, they have been held by the courts to be legal. This immunity from the antitrust laws stems partly from the loophole which exists in section 7 of the Clayton Act. In passing that law in 1914, Congress intended "to arrest the creation of trusts, conspiracies, and monopolies in their incipiency." 2 As passed by Congress, the law granted the Commission power to prevent acquisitions of competing companies which would substantially lessen competition or tend to create a monopoly, if the acquisitions took the form of the purchase of stock. However, the act was silent on the acquisition of assets. Consequently, the intent of the law has easily been evaded for over three decades by the simple process of purchasing assets rather than stock. Moreover, the Commission's powers to prevent acquisitions of stock have been rendered practically null and void by decisions of the Supreme Court, which permitted such acquisitions of stock to take place if they are followed by acquisitions of assets before the Commission is able to enter an order of divestiture. As a result, when the Commission tries to prevent acquisitions which take the form of purchases of stock, it usually finds that the acquiring company purchases the assets, thereby removing the case from the field of possible action by the Commission. In order to determine the impact of mergers and acquisitions which took place during and after World War II, the Commission made a study of the merger movement covering the period January 1940 through December 1946. The report, entitled The Present Trend of Corporate Mergers and Acquisitions, was transmitted to Congress, March 7, 1947. In this study it was found that between 1940 and 1946 over 1,800 formerly independent competitive firms in the manufacturing and mining industries alone disappeared as a result of mergers and acquisitions. That these recent acquisitions have already had a significant effect upon the structure of the economy is indicated by the fact that the asset value of the concerns acquired amounted to $1.1 billion, or nearly 5 percent of the total asset value of all manufacturing corporations in 1943-the latest year for which such data are available. The merger movement was particularly pronounced following VJ-day. In the fourth quarter of 1945 it reached the highest level in the last 15 years. The increase in the merger movement following VP-day parallels very closely the sharp upward movement that took place at the end of World War I. The wave of mergers and acquisitions at the end of the First World War extended through 1919, 1920 and the early part of 1921, until it was interrupted by the postwar depression. The movement was greatly accelerated in the middle 1920's and carried to all-time heights in 1928 and 1929. 16 ANNUAL REPORT OF THE FEDERAL TRADE COMMISSION, 1947 During wartime there is little incentive for large corporations to acquire small businesses. New facilities which are needed to produce war products are supplied in large part by the Government. However, as victory looms in sight, and the elements of competition and control over markets again become important, there occurs a revival of interest in mergers and acquisitions. Furthermore, big corporations generally emerge from war periods with large amounts of liquid funds which can be used to support intensive merger activity. At the end of 1945, the 62 largest listed manufacturing corporations held $8.4 billion of net working capital, which was largely in highly liquid form. This amount was sufficient to purchase the assets of nearly 90 percent of the total number of all other manufacturing corporations in the United States. Thus the large corporations have sufficient funds to support a high level of merger activity for years to come, particularly in those industries in which small business still continues to occupy an important position. The greatest number of acquisitions took place in the food, textile and apparel, chemicals, nonelectrical machinery, and transportation equipment industries. The acquisitions in the last field represented largely the absorption of firms in the war-expanded aircraft industry. A considerable number of acquisitions also took place in petroleum and coal products, primary metals, and beverage industries. A particularly striking feature of the current merger movement is the importance of acquisitions in several of the traditionally "small business" industries. More than one-third of the total number of acquisitions were accounted for by only three industries, namely, food, nonelectrical machinery, and textiles and apparel-all predominantly "small business" fields. This importance of the merger movement in "small business” industries is strikingly illustrated by recent developments in the steel drum, tight cooperage, and wine industries, each of which customarily has been regarded as a stronghold of small business. By means of acquistions, the giant steel corporations have increased their ownership of steel drum fabricating capacity from less than 10 percent before the war to 87 percent at the time the study was made. Similarly, the big distillers moved into the "small business" fields of tight cooperage and wines. Ten independent tight cooperage firms, representing virtually the country's entire capacity, were absorbed by large distillers during 1945-46. Likewise, as a result of the purchase of many leading California wineries and several wine distributing houses, the distillers gained possession of nearly one-fourth of the country's wine storage capacity and about 50 percent of all the aging wines. The logical counterpart of this characteristic of the current merger movement is the relatively small number of acquistions which have taken place in the more highly concentrated industries, such as automobiles, tobacco, and rubber products. This, of course, reflects the small number of small businesses still available for purchase in such industries. One of the outstanding characteristics of the current merger movement lies in the fact that most of the actions have consisted of the acquisition of small companies by large corporations. Nearly one-third (32 percent) of the companies merged since 1940 were absorbed by the very largest corporations-those with assets CORPORATE MERGERS AND ACQUISITIONS 17 exceeding $50 million. Another 41 percent of the total were taken over by corporations with assets ranging from $5 million to $49 million. Hence, nearly three-fourths of the total number of firms acquired during this period were absorbed by larger corporations with assets of over $5 million. At the other end of the scale, the distinctly small firms, those with less than $1 million of assets, have made only 11 percent of the acquisitions. The largest firms, those with assets of $50 million and over, acquired an average of some four firms each, while the smallest acquiring firms, those with assets of under $1 million, acquired an average of less than one and a half firms each. The predominant role of the giant corporations in this current merger movement is strikingly illustrated by the fact that since 1940, 71 out of the 100 largest manufacturing corporations bought up 278 concerns, or 17 percent of all companies acquired; and in addition 49 of the second 100 purchased 175 firms, or 10 percent of all the companies acquired. In other words, 120 out of the top 200 corporations bought up 453 companies, or 27 percent of the total. Only 4 of the 18 most active acquiring concerns were too small to rank among the nation's 200 largest manufacturing corporations. These 18 corporations acquired an average of more than 13 firms each, most of which were purchased during 1944-46. The impact of the merger movement on small business is clearly shown by the fact that fully 90 percent of all the firms bought out since 1940 held assets of less than $5 million, and 70 percent had less than $1 million of assets. On the other hand, only 4 percent of the total number of acquired firms had assets of over $10 million. In short, the figures indicate conclusively that the major impetus behind the current merger movement has been the desire of giant corporations to consolidate their wartime gains and to expand the scope of their domination through acquisitions of smaller, independent enterprise. How has the recent merger movement affected the competitive structure of the American economy? The majority of the actions (60 percent) were horizontal acquisitions; that is, the purchase of firms engaged in roughly similar lines of production. Vertical acquisitions, which involve either the "backward" purchase of suppliers or the "forward" purchase of further fabricating facilities, have accounted for 17 percent of the total number. And conglomerate acquisitions, in which there is no discernible relationship in the nature of business between the purchasing and the acquired firms, represented 22 percent of the total number. Each of these three types of acquisitions contributes to the increase of economic concentration and to the decline of competition. A major result of horizontal acquisitions is to bring together firms producing (1) identical products for similar markets or (2) products which might be substituted for one another. Vertical integrations have a particularly severe effect upon small business during periods such as the present which are plagued by shortages of raw materials, components, etc. During such periods, large firms frequently reached backward to acquire important suppliers, and in so doing reduce the amount of supplies available for small independent business. 18 ANNUAL REPORT OF THE FEDERAL TRADE COMMISSION, 1947 tributes greatly to the concentration of economic power, since it results in the absorption of many small firms in different and often completely unrelated lines of activity. Perhaps the most important danger inherent in these conglomerate organizations is the economic power they can wield over a large number of different industries. Threatened with competition in any one of its fields of enterprise, the conglomerate corporation may sell below cost or use other unfair methods in that field, absorbing its losses through excessive profits made in its other lines of activity, all rationalized in the name of "meeting competition." The conglomerate corporation is thus in a position to strike out with great force against small business in a variety of different industries. The majority of recent acquisitions in manufacturing as a whole and in most of the individual industries have been of the horizontal type. Horizontal acquisitions have been particularly important in mining, petroleum and coal products, drugs and medicines, paper, beverages, food, and chemicals (other than drugs). As might be expected, forward vertical acquisitions were most pronounced in the basic materials industries, such as primary metals and chemicals (other than drugs), while the backward integrations were outstanding in electrical machinery, textiles and apparel, and paper and allied products. By far the greatest number of vertical acquisitions were of this latter type and were most noticeable in the textile industry as a result of the efforts of converters, selling agents, and apparel manufacturers to secure supplies of gray goods. Conglomerate acquisitions were made in substantial numbers by beverage, metal fabricating, machinery, transportation equipment, and drug corporations. In addition, many acquisitions of this type were made by nonmanufacturing concerns, notably reflecting the absorption of manufacturing firms by financial and banking interests. THE COPPER INDUSTRY, PARTS I AND II The Commission's Report on the Copper Industry, summarized below, was transmitted to Congress March 11, 1947. The copper industry presents an outstanding example of a primary materials field in which concentration has reached an extraordinarily high level partly as a result of acquisitions and mergers. This concentration exists not only in the United States but in the world market. In fact, the interconnecting relationships between international interests through direct financial relations, interlocking directors, or less directly, through large commercial banks, investment houses and industrial consumers in the United States and in foreign countries, are such as to indicate that 5 groups dominate the production and price policies of more than 60 percent of the world's production of primary copper. The individuals who head these dominant groups are (1) Cornelius F. Kelley, chairman of the board of Anaconda Copper Co.; (2) E. T. Stannard, president of Kennecott Copper Corp., the world's largest single copper producing company; (3) Louis C. Cates, president of Phelps Dodge Corp.; (4) A. Chester Beatty, chairman of the board of Rhodesian Selection Trust, Roan Antelope Copper Mines, Ltd., Mufulira Copper Mines, Ltd., director of Rokana Corporation, Ltd., and the controlling figure in British-controlled Rhodesian mines; and (5) Robert C. Stanley, chairman of International Nickel Co. COPPER INDUSTRY, PARTS I AND II 19 Ownership of a large part of the nearly 50 percent of known world reserves controlled by American nationals is concentrated in three American mining companies as follows: An adequate supply of copper is an essential element in the economy of an industrial nation. This natural resource is one of great international importance because presently developed producing capacity and known future reserves, except in the United States, are located in only slightly industrialized nations and colonies far from the principal consuming areas. Even the United States no longer has within its borders enough new copper and scrap copper to supply all industrial needs for high level industrial activity. It, therefore, in common with Great Britain, France and other highly industrialized countries, faces growing dependence on copper imported mainly from areas such as Chile and the colonial regions of Africa. The tariff on raw copper imported into the United States, which since 1932 was 4 cents per pound, or the equivalent of over 22 percent at the open market price of 17.5 cents in November 1946, was suspended by Act of Congress in March 1947 until March 31, 1949. The Commission's Report on the Copper Industry was among the sources of information used by Congress in deciding to suspend the tariff. The opening up of the world supply of copper on a duty-free basis to American users brought an end to the crisis in copper supply in this country and stopped the precipitate rise in price which had reached 24 cents per pound, New York electrolytic, and threatened to go even higher. The price dropped to 21.5 cents per pound and futures contracts on the New York Commodity Exchange indicated further price recessions. Known commercial copper reserves of the world as of January 1, 1945, have been estimated at 111 million short tons of recoverable copper of which about half is in South America and Africa, some 29 million tons in the United States, and the balance widely scattered. Three nationalities control nearly 83 percent of the world copper reserves as follows: American-United States, Mexico, Bolivia, Peru, Chile.. Total All other nationalities.. Total world reserves The above tabulation showing control of 26.48 percent of world reserves by British nationals indicates a sharper separation of |