The Reagan administration yesterday rewrote the antitrust guidelines that have governed business since the Johnson administration, signaling a more permissive era for corporate mergers.
Unveiling a 44-page statement of the new merger policies, Attorney General William French Smith said they "constitute an evolutionary change but a very important change from the practice of prior administrations."
Not only do these guidelines herald a more lenient attitude toward large mergers but they also establish for the first time a number of instances in which the Justice Department will not challenge mergers.
"There is no question they are somewhat more permissive," said Assistant Attorney General William F. Baxter, the chief architect of the new policies. "Their underlying philosophy"--one that the Reagan administration has been following even before the guidelines were issued--"is that mergers are a very, very healthy phenomena of the capital markets and should not be interfered with except under exceptional circumstances," Baxter added.
"One of the most important things these guidelines do is to indicate regions of safe harbors where management can plan without having to worry about whether the Antitrust Division will pop out of the closet," he said.
Even so, Baxter said he did not expect a new wave of mergers as a result of these guidelines.
Within minutes after the Justice Department unveiled its new merger policies, the government's other antitrust agency, the Federal Trade Commission, announced the first merger guidelines in its 68-year-history. FTC Chairman James C. Miller III said the commission voted unanimously to issue its own policy after careful consultation with the Justice Department.
The policy makes it clear that the FTC will give great weight to the Justice Department guidelines when it decides whether to challenge a merger. However, Miller noted that the commission would be a bit more flexible in its approach and not adhere strictly to the firm mathematical formulas laid out by the Justice Department in its guidelines.
Under consideration for more than a year, the Justice Department's guidelines no longer include a special set of rules for conglomerate mergers between companies in different business areas or for vertical mergers, in which a manufacturer buys a supplier or a retail outlet that sells his goods. Under the new rules, these mergers will be judged solely on how they affect the companies that will be in direct competition with the merged company.
The 1968 guidelines divided horizontal mergers between companies in the business into two different categories: those in which the four largest firms had more than 75 percent of the market and those in which the four largest firms had less. For each category, the Justice Department had established a sliding scale under which it said it would challenge mergers.
Under the new rules, the department has set up a new mathematical formula, the Herfindahl Index, to determine the concentration of an industry. It is meant to show when a merger would make a industry so concentrated that producers would be able to raise prices above a competitive level and thereby violate the antitrust laws. In almost every case, it would take a larger merger to spur the Justice Department into action now than under the previous policy.
In applying the Herfindahl index, the Justice Department would calculate the percentage of the market each firm would have as a result of a merger. Each percentage then would be squared and all added together to get the Herfindahl index. Thus, 10 firms, each with 10 percent of the market would have a Herfindahl index of 1,000.
If the index is less than 1,000 after a merger, the Justice Department would not challenge the merger, considering the market to be unconcentrated. If the index is above 1,800, a challenge would be more likely. Six firms, each with approximately equal shares of the market, would give the industry an 1,800 rating, for example, the Justice Department said.