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Mary Azcuenaga's dissent on Boeing

  This is Mary Azcuenaga's dissent on today's decision on the Boeing merger.
  She says the merger violates the Clayton Act, and that the majority relied
  too much on self serving statements by the merging companies.  Jamie
                    in The Boeing Company, File No. 971-0051
    The Commission today announces that it will not challenge the proposed
    merger of The Boeing Company and McDonnell Douglas Corporation. I agree
    that no action is warranted against the combination of assets in the
    defense and space lines of business, which constitutes the greater
    portion of the proposed transaction, although I do not join the
    discussion of the other commissioners(1) on this point.
    I also agree with my colleagues that no action is warranted concerning
    the twenty-year exclusive arrangements for commercial aircraft that
    Boeing recently reached with three major U.S. airlines. The
    arrangements account for an estimated 11% of the market, well below any
    level that should be of concern under the laws enforced by the
    Commission. Given the state of the law and the fact that the exclusive
    arrangements apparently are unrelated to the proposed transaction, what
    is curious is that my colleagues choose to mention them at all.
    Another aspect of the proposed transaction is the combination of two of
    the three remaining manufacturers of commercial aircraft in the world.
    Boeing is the largest commercial aircraft firm in the world; McDonnell
    Douglas, through Douglas Aircraft Company ("Douglas"), is number three
    in the industry. This horizontal combination of two of the three firms
    in the market appears to present a rather straightforward case for a
    challenge by the Commission. Absent action by the Commission, the
    merger will eliminate one of three firms in a highly concentrated
    market in which entry is difficult and unlikely.
    My colleagues conclude that most airlines will not buy planes from
    Douglas, a factual conclusion with a surprising reach for a simple
    announcement of failure to prosecute and a conclusion and implication
    of competitive insignificance with which I disagree after having
    reviewed the available information. It is true that Douglas has a small
    share of the commercial aircraft market, but that does not mean that it
    exercises no competitive constraint.(2) The evidence shows that Douglas
    has added an element of competition at the stage at which commercial
    aircraft producers bid for the business of airlines, and it has
    continued to win some business.
    My colleagues rely in their statement on the so-called General
    Dynamics(3) defense, that is, that market shares based on past
    performance may overstate a firm's future competitive significance. In
    General Dynamics, the government's statistical case based on historical
    production of coal was deemed an inadequate predictor of
    anticompetitive effects in light of the acquired firm's inability to
    obtain additional coal reserves. The company could not compete for
    future sales, because its coal reserves already were committed and it
    could not acquire additional reserves. No such definitive impediment is
    present here. Douglas may need more customers for its products, but
    having won fewer customers than it might want does not make Douglas
    unable to compete for future sales.(4) One problem with accepting a
    "flailing firm" or "exiting assets" claim is that it creates an
    incentive for strategic action to avoid competitive overlaps and
    government challenge under Section 7 of the Clayton Act.(5) This is a
    dangerous precedent when we move from the realm of finite reserves of
    natural resources to the more indeterminate realm of managerial
    discretion, because of the susceptibility of the defense to
    self-serving statements, manipulation and strategic behavior.(6)
    After reviewing the available information, I conclude that the
    combination in the commercial aircraft market creates a classic case
    for challenge in accordance with the merger guidelines, and I find
    reason to believe that it would violate Section 7 of the Clayton Act.
    What is less clear on the existing information is the availability of
    an adequate remedy. On that issue, it seems to me that reasonable
    people can disagree but, on balance, I would pursue the matter further.
    1. See Statement of Chairman Robert Pitofsky and Commissioners Janet D.
    Steiger, Roscoe B. Starek, III, and Christine A. Varney in The Boeing
    Company, File No. 971-0051 (July 1, 1997).
    2. In 1996, Douglas obtained orders amounting to "4 percent of the
    total narrow-body and wide-body orders received in the commercial
    aircraft industry," and its backlog of commercial aircraft orders was
    $7 billion at the end of 1996, down from $7.2 billion at the end of
    1995. 1996 McDonnell Douglas Corporation Annual Report 30 & 34 (Jan.
    1977). Although the six months since the December 1996 announcement of
    the merger with Boeing may not be representative (because one would
    expect customers to be chary of placing orders for future delivery
    given the uncertainty about the business), Douglas has continued to
    seek aircraft business. See, e.g., "Customer Interest Is Renewed as
    First MD-95 Takes Shape, Flight International, June 18, 1997; "Jet
    Leasing Takes Off in Taiwan; McDonnell To Hold 20% Stake in Venture,"
    Int'l Herald Tribune, June 20, 1997.
    3. United States v. General Dynamics Corp., 415 U.S. 486 (1974).
    4. The stringent requirements of the failing firm defense apply to test
    whether a firm's imminent failure would, absent the proposed
    transaction, cause the firm to exit the relevant market. See 1992
    Horizontal Merger Guidelines 5. As I understand it, the parties to the
    transaction do not claim that the failing firm defense applies to this
    proposed transaction.
    5. 15 U.S.C. 18 (barring acquisitions the effect of which "may be
    substantially to lessen competition, or to tend to create a monopoly").
    6. See Azcuenaga, "New Directions in Antitrust Enforcement," remarks
    before NERA 12th Annual Antitrust & Trade Regulation Seminar 11-15
    (July 4, 1991).
  James Love | Center for Study of Responsive Law | P.O. Box 19367,
  Washington, DC 20036 | love@cptech.org | Voice 202/387-8030 | Fax
  202/234-5176 | Current Projects: Consumer Project on Technology:
  http://www.cptech.org | Antitrust: http://www.essential.org/antitrust