Maybe most things do go better with Coke, but Dr Pepper isn't one of them.
So said the Federal Trade Commission last week in one of the most important decisions in the government's 96-year-old effort to protect consumers from the market power of monopolists and dominant corporations.
By voting to oppose Coca-Cola Co.'s bid to buy Dr Pepper Co. and PepsiCo's plan to acquire Seven-Up Co., the FTC preserved the status quo in the soft-drink business, at least for now, and left antitrust policy tied to its present moorings.
If the FTC had allowed those combined mergers to go through, Coke and Pepsi stood to share more than 80 percent of domestic carbonated soft-drink sales. Business would have read that vote as a signal that the barrier was down to virtually any merger or acquisition, regardless of the size of the firms, say many veterans of antitrust legal practice.
As the soda company lawyers made the rounds of FTC commissioners and staff last week, they were asked about the kind of precedent these deals would establish. If Coke could buy Dr Pepper and Pepsi could acquire Seven-Up, what kind of merger would not be allowed? If Coke tried to buy Pepsi, the lawyers replied, that would be illegal.
So General Motors couldn't buy Ford, and IBM couldn't make a bid for Apple Computer, but beneath that stratospheric ceiling, the merger light would be green. The result would have been an Alaskan gold rush, as companies hooked up with competitors to divide up their businesses to their mutual advantage.
Instead, four FTC commissioners voted to send their lawyers to court to block both mergers. Coca-Cola is contesting the FTC action, but Seven-Up's owner, the Philip Morris Cos., has pulled out of its agreement to sell the soft-drink company to PepsiCo.
The commission's ruling says that two companies can't pull off acquisitions that would give them a combined market share as high as 80 percent. But it doesn't shed light on how far toward that mark companies can go.
As Robert Pitofsky, dean of the Georgetown University Law Center, notes, the government's policy toward mergers among competitors in the same markets has been swinging from very stringent in the 1960s to far more lenient.
Twenty years ago, the U.S. Supreme Court blocked a merger of two grocery store concerns in Los Angeles, each of which had less than 5 percent of the local market. Since then, the pendulum has moved steadily in the opposite direction, pushed by new arguments about the nature of competition.
At the beginning of the Reagan administration, it appeared that companies that shared 15 percent to 20 percent of a market or less could combine without running afoul of antitrust regulators, Pitofsky said.
More recently, conservative economists have rallied around the theories of Robert Bork, antitrust scholar and now a U.S. Court of Appeals judge, who argued that mergers by firms controlling up to 40 percent of a market would be fine if there was strong competition and easy entry into that market.
The FTC -- which shares responsibility for merger policy with the Justice Department's antitrust division -- saw no problem last year with the acquisition of five Borg-Warner auto-parts divisions by a competitor, Echlin Manufacturing Co. The deal gave Echlin nearly 47 percent of the market for carburetor kits, but the FTC concluded that it would be easy for new competitors to challenge Echlin if it raised its prices too high.
That was part of the argument made by Coke and Pepsi. Their battleground wasn't just soft drinks, they said. It included other beverages sold by other strong producers, who would jump into the soft-drink business if Coke and Pepsi ran soda prices up. Or consumers would desert colas for competing beverages, the lawyers said.
If the FTC had accepted that reasoning, it would have marked a dramatic expansion of antitrust policy to embrace new economic arguments about competition and product substitution, said Joe Sims, an antitrust attorney with Jones, Day, Reavis & Pogue, who was not involved in either case. Coke and Pepsi "had to get the market expanded to include orange juice" to prevail, he quipped. They failed.
Coke and Pepsi also contended that their joint dominance of the market wasn't a problem because they are such diehard commercial enemies. The soft-drink market is a model of competitive pricing, constant new product offerings and bare-knuckled rivalry, says Bob Tollison, director of the Center for Public Choice at George Mason University, who aided Pepsi in its arguments to the FTC.
But the FTC concluded that the Coke and Pepsi acquisitions involved such a concentration of power that the risk of collusion and price fixing was too much to accept. Now the deck will be shuffled and the hands redealt. Coca-Cola will fight the FTC and in court, if only to show that its bid for Dr Pepper was serious.
Seven-Up's owner, Philip Morris, having canceled its deal with Pepsi, has activated its answering service and will soon be receiving bids for Seven-Up's U.S. and foreign operations, according to industry sources.
Pepsi remains interested in Seven-Up's foreign operations as a way to close the gap with Coca-Cola's profitable overseas business. And the list of possible suitors for Seven-Up's domestic business is growing, reportedly including Anheuser Busch Inc. and Seagram Co. Ltd. There are bidders looking at Dr Pepper, too, industry sources say. If anything, the competition to Coke and Pepsi will increase. And the new guidelines for mergers and acquisitions will have to be drawn by other companies in other industries.