Up Against The Wall, Monopolist

Why Clinton's antitrust cops are getting so tough

For months, WorldCom Inc. figured its record $37 billion deal to buy mci Communications Corp. would sail through the Justice Dept. It figured wrong. Turns out the antitrust division frets that the megacombo could own more than half the communications lines handling Internet traffic--and set unfair prices for rivals that need to hook on. "This is the first case that defines Internet competition," says William P. Barr, general counsel of GTE Corp., one rival.

But it's not the first time that the Clinton trustbusters have staked out new ground. And it won't be the last. WorldCom insists that its deal will eventually go through and that no one company can dominate the ultracompetitive Internet. Still, it's clear that the harsh scrutiny is a sign of change in Washington. After watching idly as massive consolidation rolled through industry after industry, the Justice Dept. and the Federal Trade Commission are launching a new antitrust offensive.

One reason for the new scrutiny: the 1990s merger mania. In 1997, antitrust regulators reviewed 3,702 deals, up from 1,451 in 1991. To trustbusters, many of the latest deals take consolidation just a step too far--into anticompetitive territory. "The message for Corporate America is that if you're in a consolidating industry, you want your merger to go through first," says New York antitrust attorney Kevin J. Arquit.

Philosophy has as much to do with this newfound zeal as the economic landscape. FTC Chairman Robert Pitofsky and Justice's Joel I. Klein are big believers in government's power to fix market glitches, a major swing from their predecessors in the Bush and Reagan Administrations. "There was a sense in the mid-1980s that antitrust enforcement should be minimal because the market would take care of most problems," says Pitofsky. "Enforcement today is more skeptical that the market will solve these problems. There are deals that will harm consumers."

Of late, the trustbusters have been working overtime to make their point. On Mar. 6, Justice officials told Lockheed Martin Corp. and Northrop Grumman Corp. that their proposed $11.6 billion merger was in trouble. On Mar. 3, the FTC halted plans for four major drug wholesalers to become two, arguing consumer prices would rise. Last year, the FTC also blocked Staples Inc. from acquiring Office Depot Inc.; it claimed the combination would limit competition in the office-supply superstore sector.

Regulators aren't just concerned with deals between competitors. They're also eyeing vertical hookups between suppliers and major customers. In the Lockheed-Northrop case, Justice worries about the implications of a marriage between a fighter-jet manufacturer and a maker of radar and electronic countermeasures in a vastly shrunken defense industry. If the merger goes through as proposed, Raytheon Co. and ITT Corp., Northrop's chief rivals in the electronics field, fear they would be left with only one plane customer--Boeing Co. So Justice wants full divestiture of Northrop's electronics business.

BEYOND MERGERS. Since getting the electronics was a key reason for the deal, Lockheed will fight hard to keep it but will counter with a less radical spin-off and other proposals to preserve competition. The plan "will address Justice's concerns," says spokesman Charles P. Manor.

Trustbusters are also looking beyond mergers to other allegations of anticompetitive practices. The FTC is now investigating whether MasterCard and Visa are forcing merchants who accept their credit cards to use their less popular debit cards as well, a practice that could dampen debit-card competition.

And in what would be the biggest antitrust action in decades, Justice is weighing a broadscale suit against Microsoft for compelling computer makers to take both its Internet browser and software.

If the new push for antitrust enforcement is giving Corporate America pause, it's hard to detect. Deals are proceeding at the same staggering pace, and with investors demanding an ever improving bottom line, companies still would rather take their chances with an aggressive Washington than face disappointed investors on Wall Street.

    Before it's here, it's on the Bloomberg Terminal.