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In the wake of these court rulings and in an effort to avoid similar situations in other geographic regions,
coordination among antitrust regulatory authorities in different countries has improved. For example, in
mid-2010, the U.S. Federal Trade Commission reached a consent decree with scientific instrument
manufacturer Agilent in approving its acquisition of Varian, in which Agilent agreed to divest certain
overlapping product lines. While both firms were based in California, each has extensive foreign
operations, which necessitated gaining the approval of multiple regulators. Throughout the investigation,
FTC staff coordinated enforcement efforts with the staffs of regulators in the European Union, Australia,
and Japan. The cooperation was conducted under the auspices of certain bilateral cooperation agreements,
the OECD Recommendation on Cooperation among its members, and the European Union Best Practices
on Cooperation in Merger Investigation protocol.
Discussion Questions
1. What are the important philosophical differences between U.S. and EU antitrust regulators?
Explain the logic underlying these differences? To what extent are these differences influenced by
political rather than economic considerations? Explain your answer.
Answer: In Europe, the main goal of antitrust policy is to ensure that all companies are able to
compete on a level playing field. The impact of a merger on competitors is just as important to
regulators as its impact on consumers. Consequently, complaints about impending mergers from
competitors are given much more credence in Europe than in the U.S. where the impact on
2. This is the first time that a foreign regulatory body has prevented a deal involving U.S. firms only
from occurring. What do you think are the long-term implications, if any, of this precedent?
Answer: Concerns about not receiving regulatory approval may discourage firms from engaging in
3. What were the major obstacles between GE and the EU regulators? Why do you think these were
obstacles? Do you think the EU regulators were justified in their position? Why/why not?
Answer: European regulators have accepted a legal concept called “portfolio power” which
argues that a firm may achieve an unfair advantage over its competitors by bundling goods and
services. GE viewed bundling of services as a major source of future revenue, and it was
4. Do you think that competitors are using antitrust to their advantage? Explain your answer.
Answer: Since EU regulators have made it clear that protecting European firms from “unfair”
5. Do you think the EU regulators would have taken a different position if the deal had involved a
less visible firm than General Electric? Explain your answer.
Answer: Yes, the regulators may have been using GE as a signal to Washington about how they
The Lehman Brothers Meltdown
Even though regulations are needed to promote appropriate business practices, they may also produce a
false sense of security. Regulatory agencies often are coopted by those they are supposed to be regulating
due to an inherent conflict of interest. The objectivity of regulators can be skewed by the prospect of future
employment in the firms they are responsible for policing. No matter how extensive, regulations are likely
to fail to achieve their intended purpose in the absence of effective regulators.
Consider the 2008 credit crisis that shook Wall Street to its core. On September 15, 2008, Lehman
Brothers Holdings announced that it had filed for bankruptcy. Lehman's board of directors decided to opt
for court protection after attempts to find a buyer for the entire firm collapsed. With assets of $639 billion
and liabilities of $613 billion, Lehman is the largest bankruptcy in history in terms of assets. The next
biggest bankruptcies were WorldCom and Enron, with $126 billion and $81 billion in assets, respectively.
In the months leading up to Lehman’s demise, there were widespread suspicions that the book value of
the firm’s assets far exceeded their true market value and that a revaluation of these assets was needed.
However, little was known about Lehman’s aggressive use of repurchase agreements or repos. Repos are
widely used short-term financing contracts in which one party agrees to sell securities to another party (a
A Federal Judge Reprimands Hedge Funds in their Effort to Control CSX
Investors seeking to influence a firm’s decision making often try to accumulate voting shares. Such
investors may attempt to acquire shares without attracting the attention of other investors, who could bid up
the price of the shares and make it increasingly expensive to accumulate the stock. To avoid alerting other
investors, certain derivative contracts called “cash settled equity swaps” allegedly have been used to gain
access indirectly to a firm’s voting shares without having to satisfy 13(D) prenotification requirements.
Using an investment bank as a counterparty, a hedge fund could enter into a contract obligating the
investment bank to give dividends paid on and any appreciation of the stock of a target firm to the hedge
The Children’s Investment Fund (TCI), a large European hedge fund, acquired 4.1 percent of the voting
shares of CSX, the third largest U.S. railroad in 2007. In April 2008, TCI submitted its own candidates for
the CSX board of directors’ election to be held in June of that year. CSX accused TCI and another hedge
fund, 3G Capital Partners, of violating disclosure laws by coordinating their accumulation of CSX shares
through cash-financed equity swap agreements. The two hedge funds owned outright a combined 8.1
percent of CSX stock and had access to an additional 11.5 percent of CSX shares through cash-settled
equity swaps.
Discussion Questions
1. Do you agree or disagree with the federal court’s ruling? Defend your position.
2. What criteria might have been used to prove collusion between TCI and 3G in the absence of
signed agreements to coordinate their efforts to accumulate CSX voting shares?
Google Thwarted in Proposed Advertising Deal with Chief Rival Yahoo!
A proposal that gave Yahoo! an alternative to selling itself to Microsoft was killed in the face of opposition
by U.S. government antitrust regulators. The deal called for Google to place ads alongside some of
arrangement would make Yahoo! more reliant on Google's already superior search capability and reduce
Yahoo!'s efforts to invest in its own online search business. The regulators feared this would limit
Discussion Questions
1. In what way might the Justice Department's actions result in increased concentration in the online search
business in the future?
2. What are the arguments for and against regulators permitting "natural monopolies"?
BHP Billiton and Rio Tinto Blocked by Regulators in an International Iron Ore Joint Venture
The revival in demand for raw materials in many emerging economies fueled interest in takeovers and joint
ventures in the global mining and energy sectors in 2009 and 2010. BHP Billiton (BHP) and Rio Tinto
(Rio), two global mining powerhouses, had hoped to reap huge cost savings by combining their Australian
iron ore mining operations when they announced their JV in mid-2009. However, after more than a year of
regulatory review, BHP and Rio announced in late 2010 that they would withdraw their plans to form an
iron ore JV corporation valued at $116 billion after regulators in a number of countries indicated that they
Discussion Questions:
1. A “remedy” to antitrust regulators is any measure that would limit the ability of parties in a
business combination from achieving what is viewed as excessive market or pricing power. What
remedies do you believe could have been put in place by the regulators that might have been
acceptable to both Rio and BHP? Be specific.
2. Why do you believe the antitrust regulators were successful in this instance but so unsuccessful
limiting the powers of cartels such as the Organization of Petroleum Exporting Countries (OPEC),
which currently controls more than 40 percent of the world’s oil production?
Justice Department Approves Maytag/Whirlpool Combination
Despite Resulting Increase in Concentration
When announced in late 2005, many analysts believed that the $1.7 billion transaction would face heated
anti-trust regulatory opposition. The proposed bid was approved despite the combined firms' dominant
market share of the U.S. major appliance market. The combined companies would control an estimated 72
percent of the washer market, 81 percent of the gas dryer market, 74 percent of electric dryers, and 31
percent of refrigerators. Analysts believed that the combined firms would be required to divest certain
Maytag product lines to receive approval. Recognizing the potential difficulty in getting regulatory
Discussion Questions:
1. What is anti-trust policy and why is it important?
Answer: Anti-trust policy is a government policy intended to prevent firms from achieving
excessively pricing power, i.e., the ability to raise prices to levels much higher than could
2. What factors other than market share should be considered in determining whether a potential
merger might result in an increased pricing power?
Answer: Other factors include the availability of substitute products and services, ease of
entering the market, customer price sensitivity, the impact on employment, and the potential
FCC Uses Its Power to Stimulate Competition in the Telecommunications Market
Oh, So Many Hurdles
Having received approval from the Justice Department and the Federal Trade Commission, Ameritech and
SBC Communications received permission from the Federal Communications Commission to combine to
form the nation’s largest local telephone company. The FCC gave its approval of the $74 billion
transaction, subject to conditions requiring that the companies open their markets to rivals and enter new
markets to compete with established local phone companies.
Satisfying the FCC’s Concerns
SBC, which operates under Southwestern Bell, Pacific Bell, SNET, Nevada Bell, and Cellular One
brands, has 52 million phone lines in its territory. It also has 8.3 million wireless customers across the
United States. Ameritech, which serves Illinois, Indiana, Michigan, Ohio, and Wisconsin, has more than 12
million phone customers. It also provides wireless service to 3.2 million individuals and businesses.
The combined business would control 57 million, or one-third, of the nation’s local phone lines in 13
states. The FCC adopted 30 conditions to ensure that the deal would serve the public interest. The new SBC
must enter 30 new markets within 30 months to compete with established local phone companies. In the
A Costly Remedy for SBC
SBC has had considerable difficulty in complying with its agreement with the FCC. Between December
2000 and July 2001, SBC paid the U.S. government $38.5 million for failing to provide adequately rivals
with access to its network. The government noted that SBC failed repeatedly to make available its network
in a timely manner, to meet installation deadlines, and to notify competitors when their orders were filled.
Discussion Questions:
1. Comment on the fairness and effectiveness of using the imposition of heavy fines to promote
social policy.
Answer: The use of fines to achieve social objectives assumes that the government can provide a
better solution than the free market. In general, the imposed solution will be less efficient that
as voice over internet and wireless telephony.
2. Under what circumstances, if any, do you believe the government should relax the imposition of
such fines in the SBC case?
Exxon and Mobil Merger—The Market Share Conundrum
Following a review of the proposed $81 billion merger in late 1998, the FTC decided to challenge the
Exxon–Mobil transaction on anticompetitive grounds. Options available to Exxon and Mobil were to
challenge the FTC’s rulings in court, negotiate a settlement, or withdraw the merger plans. Before the
merger, Exxon was the largest oil producer in the United States and Mobil was the next largest firm. The
combined companies would create the world’s biggest oil company in terms of revenues. Top executives
from Exxon Corporation and Mobil Corporation argued that they needed to implement their proposed
merger because of the increasingly competitive world oil market. Falling oil prices during much of the late
1990s put a squeeze on oil industry profits. Moreover, giant state-owned oil companies are posing a
competitive threat because of their access to huge amounts of capital. To offset these factors, Exxon and
Mobil argued that they had to combine to achieve substantial cost savings.
Discussion Questions:
1. How does the FTC define market share?
Answer: The market is generally defined by the regulators as a product or group of products
offered in a specific geographic area. Market participants are those currently producing and
2. Why might it be important to distinguish between a global and a regional oil and gas market?
Answer: The value chain for a fully integrated oil and gas company consists of the following
segments: exploration, production, transmission, refining, and distribution. Oil and gas
3. Why are the Exxon and Mobil executives emphasizing efficiencies as a justification for this
merger?
4. Should the size of the combined companies be an important consideration in the regulators’
analysis of the proposed merger?
5. How do the divestitures address perceived anti-competitive problems?
Answer: Requiring one or both of the parties to the merger to sell assets, such as refineries or gas
FTC Prevents Staples from Acquiring Office Depot
As the leading competitor in the office supplies superstore market, Staples’ proposed $3.3 billion
acquisition of Office Depot received close scrutiny from the FTC immediately after its announcement in
September 1996. The acquisition would create a huge company with annual sales of $10.7 billion.
Following the acquisition, only one competitor, OfficeMax with sales of $3.3 billion, would remain.
Staples pointed out that the combined companies would comprise only about 5% of the total office supply
market. However, the FTC considered the superstore market as a separate segment within the total office
supply market. Using the narrow definition of “market,” the FTC concluded that the combination of Staples
Discussion Questions:
1. How important is properly defining the market segment in which the acquirer and target
companies compete to determining the potential increased market power if the two are
permitted to combine? Explain your answer.
Answer: Whether a company is able to engage in anticompetitive practices is heavily dependent
on how the market is defined. If the market is defined narrowly to include superstores only, the
Herfindahl index calculation will show a much higher level of concentration than if the market is
2. Do you believe the FTC was being reasonable in not approving the merger even though?
Staples agreed to divest 63 stores in markets where market concentration would be the greatest
following the merger? Explain your answer.
Answer: While the FTC study did provide support for the notion that pricing power was higher in
areas not having another superstore, the results may have been skewed in that areas without
competing superstores tend to rural. Their small size does not justify multiple stores. Since these
Justice Department Blocks Microsoft’s Acquisition of Intuit
In 1994, Bill Gates saw dominance of the personal financial software market as a means of becoming a
central player in the global financial system. Critics argued that, by dominating the point of access (the
individual personal computer) to online banking, Microsoft believed that it may be possible to receive a
small share of the value of each of the billions of future personal banking transactions once online banking
became the norm. With a similar goal in mind, Intuit was trying to have its widely used financial software
package, Quicken, incorporated into the financial standards of the global banking system. In 1994, Intuit
had acquired the National Payment Clearinghouse Inc., an electronic bill payments system integrator, to
help the company develop a sophisticated payments system. By 1995, Intuit had sold more than 7 million
Discussion Questions:
1. Explain how Microsoft’s acquisition of Intuit might limit the entry of new competitors into the
financial software market.
Answer: The proliferation of the use of online financial software creates links between the vendor
and the home/small business user. These links constitute distribution channels through which
financial services vendors can sell users additional services. The cost of switching from one type
2. How might the proliferation of Internet usage in the twenty-first century change your answer
to question 1?
3. Do you believe that the FTC might approve of Microsoft acquiring Intuit today? Why or why
not?
Answer: It is doubtful the transaction would be approved today despite the increase in
How the Microsoft Case Could Define Antitrust Law in the “New Economy”
The Microsoft case was about more than just the software giant’s misbehavior. Antitrust law was also on
trial. When the Justice Department sued Microsoft in 1998, it argued that the century old Sherman Antitrust
Act could be applied to police high tech monopolies. This now looks doubtful. As the digital economy
evolves, it is likely to be full of natural monopolies (i.e., those in which only one producer can survive, in
hardware, software, and communications), since consumers are motivated to prefer products compatible
with ubiquitous standards. Under such circumstances, monopolies emerge. Companies whose products set
the standards will be able to bundle other products with their primary offering, just like Microsoft has done
with its operating system. What type of software can and cannot be bundled continues to be a thorny issue
for antitrust policy.
Although the proposed remedy did not stand on appeal, the Microsoft case had precedent value because
of the perceived importance of innovation in the information-based, technology-driven “new economy.”
This case illustrates how “trust busters” are increasingly viewing innovation as a central issue in
Discussion Questions:
1. Comment on whether antitrust policy can be used as an effective means of encouraging
innovation.
Answer: Regulation almost always is reactive rather than proactive. Efforts to promote
innovation through regulation may be particularly inappropriate in that the conditions that give
rise to innovation are not well understood. For example, efforts to establish product standards
2. Was Microsoft a good antitrust case in which to test the effectiveness of antitrust policy on
promoting innovation? Why or why not?
Answer: No. While there may be merit in the notion that most innovative ideas emerge from
smaller, more nimble companies, there is little empirical evidence that punishing larger firms that
Anthem-Well Point Merger Hits Regulatory Snag
In mid-2004, a California insurance regulator refused to approve Anthem Inc’s (“Anthem”) $20 billion
acquisition of WellPoint Health NetWorks Incorporated (“WellPoint”). If allowed, the proposed merger
would result in the nation’s largest health insurer, with 28 million members. After months of regulatory
review, the deal had already received approval from 10 state regulators, the Justice Department, and 97% of
the shares outstanding of both firms. Nonetheless, California Insurance Commissioner, John Garamendi,
denounced the proposed transaction as unreasonably enriching the corporate officers of the firms without
improving the availability or quality of healthcare. Earlier the same day, Lucinda Ehnes, Director of the
Department of Managed Healthcare in California approved the transaction. The Managed Healthcare
Agency has regulatory authority over Blue Cross of California, a managed healthcare company that is by
far the largest and most important WellPoint operation in the state. Mr. Garamendi’s department has
regulatory authority over about 4% of WellPoint’s California business through its BC Life & Health
Insurance Company subsidiary (“BC”). Interestingly, Ms. Ehnes is an appointee of California’s Republican
governor, Arnold Schwarzenegger, while Mr. Garamendi, a Democrat, is an elected official who had
previously run unsuccessfully for governor. Moreover, two week’s earlier he announced that he will be a
candidate for lieutenant governor in 2006.
Discussion Questions:
1. If you were the Anthem CEO, would you withdraw from the deal, initiate a court battle, drop the
Blue Cross subsidiary from the transaction, agree to regulators’ demands, or adopt some other
course of action? Explain your answer.
Answer: While Anthem was ultimately successful, it was able to do so only after agreeing to a
2. What are the risks to Anthem and WellPoint of delaying the closing date? Be specific.
Answer: The risks of delay are significant and can be measured in terms of loss of key employees
3. To what extent should regulators use their powers to promote social policy?
Answer: The answer to this question depends on whether one believes that competitive market
forces will provide both the most efficient as well as the fairest outcome. The fact that the merger
was allowed suggests that regulators did not find any compelling potential for anticompetitive
activities. Therefore, regulators presumably believed that improved efficiency would outweigh
The Bear Stearns Saga—When Failure Is Not an Option
Prodded by the Fed and the U.S. Treasury Department, J.P. Morgan Chase (JPM), the nation's third largest
bank, announced, on March 17, 2008, that it had reached an agreement to buy 100 percent of Bear Stearns's
outstanding equity for $2 per share. As one of the nation's larger investment banks, Bear Stearns had a
reputation for being aggressive in the financial derivatives markets. Hammered out in two days, the
agreement called for the Fed to guarantee up to $30 billion of Bear Stearns's "less liquid" assets. In an
effort to avoid what was characterized as a "systemic meltdown," regulatory approval was obtained at a
breakneck pace. The Office of the Comptroller of Currency and Fed approvals were in place at the time of
the announcement. The SEC elected not to review the deal. Federal and state antitrust regulatory approvals
were obtained in record time.
With investors fleeing mortgage-backed securities, the Fed was hoping to prevent any further
deterioration in the value of such investments. The fear was that the financial crisis that beset Bear Stearns
could spread to other companies and ultimately test the Fed's resources after it had said publicly that it
would lend up to $200 billion to banks in exchange for their holdings of mortgages.
Discussion Questions:
1 Why do you believe government regulators encouraged a private firm (J.P. Morgan Chase) to acquire
Bear Stearns rather than have the government take control? Do you believe this was the appropriate
course of action? Explain your answer.
Answer: In a free market economy, the government is often ill-suited to managing
businesses deemed too big to fail by their tendency to make decisions based on politics rather than on
sound economics. Moreover, the government rarely has the talent available to manage complex
2 By facilitating the merger, the Fed sent a message to Wall Street that certain financial institutions are
"too big to fail." What effect do you think the merger will have on the future investment activities of
investment banks? Be specific.
Answer: The facilitation of the merger communicates to other investment banks that the government
stands ready to take over institutions deemed too big to fail. While the Dodd-Frank bill purports to
discourage this type of behavior by establishing a mechanism for liquidating failing institutions, it is
