Counterattacking Big Consolidations:Antitrust Regulators Trained Their Guns On Drug Wholesale and Defense Megadeals

Times change fast in antitrust regulation. Until recently, the U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) waved along big deals in consolidating industries, such as defense, pharmaceuticals distribution, and telecommunications, sometimes requesting only a modest sell-off to round off the edges. That was then. Now comes a much tougher stance and the prospect of heated conflict in a field that had been relatively quiet for more than a decade and a half. The FTC aimed a one-two punch at the drug wholesaling area by opposing mergers involving the four largest players that have reached present proportions by scooping up dozens of smaller rivals over the last several years. The deals would link industry leader McKesson Corp. with No. 4 AmeriSource Health Corp. in a $1.79 billion transaction and Cardinal Health Inc. and Bergen Brunswig Corp., Nos. 2 and 3, respectively, in a $2.62 billion acquisition. The companies vowed to fight. Meanwhile, DOJ, with help from the Defense Department, got in its licks by taking on the $8.3 billion marriage of military contractors Lockheed Martin Corp. and Northrop Grumman Corp. Both constituents were formed by megamergers of big-name defense suppliers in the last three years. In both cases, the regulators are leaning heavily on two key props of the new-age antitrust policy that has been devised to relate m&a to real-world technological and economic trends of the 1990s. One is the concept of screening deals on the basis of resulting market power, or the freedom to raise prices without getting much flack from competitors and customers. That kind of clout could be considered anticompetitive and a threat to raise prices. In a related exercise, the regulators have evolved the theory of unilateral effects, which suggests that deals between clear-cut industry or market leaders can by themselves aggravate the pricing situation. Aside from those established ideas, the regulators more specifically are questioning when consolidation means too much concentration that may feed undue market power and prove out the dark side of unilateral effects. The FTC already has killed one megadeal based on unilateral effects when its opposition forced “big-box” stationery retailers Staples Inc. and Office Depot Inc. to call off their deal. The agency saw upward pressure on prices if the deal went through. Should the drug distribution deals be completed, the two surviving firms would control about 70% of the market. Market share alone is not the sticking point. What bothers regulators is that the wholesalers may be able to dictate prices on products they sell to their retail pharmacy customers in a field where cost constraints are important. Radar Concentration With the Lockheed-Northrop deal, Justice and Defense have underscored the whittling down of the military gear industry to a handful of large players which have one principal customer, the Pentagon. Both departments are especially uptight over a resulting hammerlock on early-warning radar and other electronic systems. It has been unusual for the Defense Department to oppose military supplier mergers because its primary concern has been the ability to procure what it needs from solid, dependable companies. DOJ also is taking a long look at the acquisition of MCI Communications Corp. by WorldCom Inc., the $37 billion blockbuster that will become the largest deal in history if completed. The regulators are not so concerned about the combined company’s position in the core telecom business but whether it poses a threat to dominate Internet services.