Commentary: The New Math Of Antitrust

Federal Trade Commission Chairman Robert Pitofsky stands accused of inventing antitrust rules as he goes along. Critics are puzzled why his commission approved the $81 billion Exxon-Mobil merger in December, then voted down the much smaller $29 billion marriage between BP Amoco and Atlantic Richfield Co. on Feb. 2. "This merger seems to have been held to a higher standard than anyone before it," says Ed Porter, manager of research for the American Petroleum Institute, a trade association of oil and gas companies. Perhaps, critics say, Pitofsky simply has seen one oil merger too many.

The truth is more interesting. If the FTC were simply capricious, as critics claim, companies would have little to fear--because the courts would be unlikely to back its decisions on appeal. What Pitofsky and his trustbusting counterparts at the Justice Dept. have accomplished is a much more profound shift. They have seized the initiative in defining what constitutes competition in a complex business world.

SPIN-OFF SCRUTINY. Now, instead of using a few broad rules of thumb to test for antitrust, they're digging down into the details of proposed mergers to look for anticompetitive problems. Even if average prices aren't expected to go up in the wake of a deal, for instance, the FTC will comb through data to see whether a merger will raise prices for particular groups of consumers. And they're trying to forecast whether a merged company could raise prices excessively in the long run, even if it has no current pricing power. FTC officials argue that such close analysis will better preserve competition and lead to sounder decisions about whether a deal should go through or not. The drawback? It complicates life for businesses, which have a harder time now sussing out exactly how the FTC or the Justice Dept. might rule on any given deal.

An example of the new approach is the FTC's tougher line on divestitures. Merging companies frequently offer to spin off some assets to allay antitrust concerns. But according to a recent study by the agency of 37 cases, such remedies failed to promote competition as intended a quarter of the time. In several cases, acquirers of divested assets were too weak to compete. That explains why the FTC now closely examines the quality of the assets offered for sale and--crucially--whether whoever buys the assets will be able to mold them into a competitive enterprise.

Arco and BP Amoco are among the first companies to run afoul of the FTC's evolving test. They say their proposed divestitures are bigger than what was demanded of Exxon and Mobil. But the FTC says it's not size that matters. It argues that even after the divestitures, the combined entity would still have a chokehold on oil production on the North Slope of Alaska and be able to raise prices for refiners on the West Coast as well as on transportation of oil to the Cushing (Okla.) trading hub.

It's not just the FTC that has zeroed in on problems in specific markets. Justice rejects Microsoft Corp.'s argument that it is competing in a marketplace as vast as the entire Internet. Instead, Justice has persuaded U.S. District Judge Thomas Penfield Jackson that the relevant market is software for desktop computers, where Microsoft clearly dominates.

The ground-level approach to merger review can be unsettling. "How do you generalize from these...cases? How will we know it will be okay to do X but not to do Y?" asks Charles E. Biggio, a former antitrust official in the Clinton administration who is critical of the FTC's role in BP Amoco.

A fair question. Pitofsky's answer is to invite companies that are considering a potentially anticompetitive action to enter into a dialogue with trustbusters. "We're not looking for ways to say no," Pitofsky said in a BUSINESS WEEK interview preceding a Feb. 17 speech on the topic. He argues that if he were overstepping his bounds, far more FTC decisions would have been challenged in court.

Pitofsky wants to be seen as a partner of business more than a cop. That may take some getting used to. But barring any post-election policy changes, merger-happy dealmakers may have little choice.

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