By Steven Pearlstein
Wednesday, February 22, 2006; D01

In deciding in the next few weeks whether to oppose Whirlpool's $1.7 billion purchase of Maytag, the Justice Department's antitrust division faces perhaps its most important decision since settling the Microsoft case.

On its face, this one ought to be a slam-dunk. Whirlpool and Maytag are, arguably, the two leading brands of home appliances in the U.S. market. Depending on how you calculate it, they and their affiliated brands -- KitchenAid, Amana and Jenn-Air, along with much of the Sears Kenmore line -- have a combined market share of 50 to 80 percent for washers, dryers and dishwashers, with refrigerators not far behind. Such shares fall well outside the long-established guidelines for industry mergers.

In the antitrust world these days, however, nothing is that simple.

After decades as one of the more respected brand names among consumers, Maytag has fallen on hard times because of high costs, stodgy products and some bad luck with a front-loading washer that tarnished its reputation for reliability. And in recent years, the market has been turned upside down by the successful entry of foreign suppliers that, with the support of big-box retailers, are giving the established brands a run for their money. Prices are declining and quality is improving, while consumers are presented with an increasing variety of styles and electronic features.

Whirlpool and its lawyers argue that in such a hyper-competitive market, it is silly to believe that a merger even of two leading suppliers would seriously harm consumers. With European and Korean manufacturers now well established in the U.S. market and Chinese and Eastern European brands itching to get in, even a combined Whirlpool-Maytag would not be able to unilaterally raise prices or reduce the pace of innovation. The company also notes that with so much consolidation at the end of the distribution channel, no manufacturer is in the position of dictating terms or prices to Home Depot, Best Buy and Sears, which are very aggressive about playing one supplier against the other.

Over the past decade, those same arguments have been used with increasing frequency and effectiveness to justify just about any merger. The result has been the rapid consolidation of many global industries into a top tier of three or four players that control 80 percent of the market. And, in truth, in most of those markets, productivity has increased, competition appears to be robust and it is hard to find evidence that consumers have suffered.

It's now hard to imagine a merger that wouldn't survive government scrutiny. Even the Bush Justice Department was stirred to action when Oracle proposed to purchase rival PeopleSoft, which would have left Oracle with one significant competitor, Germany's SAP. Even that effort was thrown out by a federal judge. Thomas Barnett, the Justice Department lawyer most closely associated with that case, recently took over as head of the antitrust division. His first big decision is whether to risk another precedent-setting defeat by accepting staff recommendation to oppose a Whirlpool-Maytag merger.

Despite those new legal and economic realities, there are good reasons for Barnett to challenge this combination.

Every one of the arguments I've heard from Whirlpool and its lawyers to defend the deal could just as well be used, a year from now, to justify Whirlpool-Maytag's purchase of General Electric's appliance division. And you can bet that such a scenario would be considered the next time the economy turns down and General Electric questions whether it wants to remain in such a low-margin commodity business.

It is also a tad contradictory for Whirlpool to argue that Maytag is a dying company and that there is no longer any consumer loyalty to Maytag or any other appliance brand. If Maytag is so weak and its brand commands no loyalty, why was Whirlpool was willing to pay $1.7 billion of its shareholders' money, a 50 percent premium, a price equal to 39 times its expected earnings?

The reason, of course, is that Whirlpool didn't want the "worthless" Maytag brand to fall into the hands of China's largest appliance maker, the Quingdao Haier Group, whose bid for Maytag jolted Whirlpool into action. To argue now that Haier or any other foreign group is free to buy some other American brand is a bit disingenuous. Thanks to all the mergers, there aren't many left.

The other faulty bit of logic is that consumers would be well protected by those powerful big-box retailers negotiating the best deals with suppliers. That's true for the moment. But what happens if the new Whirlpool-Maytag tells a retailer that if it wants any of its brands, it must take them all -- forcing some other competitor off the showroom floor? And down the road, once the weak players disappear and the markets consolidate into a handful of giants, the big appliance makers and the big retailers would quickly realize that there is more profit to be made by quietly cooperating to reduce competition.

That's why God invented antitrust laws, and why they still need to be enforced, even in an era of intense global competition.