Bust the Antitrusters
Last week a federal judge paved the way for one of the largest mergers in the history of Silicon Valley: a $7.7 billion hostile takeover bid by computer software firm Oracle for rival PeopleSoft. This court ruling overturned an injunction against the merger by the Bush administration Justice Department.
Three cheers for financial common sense prevailing over the swash-bucking tirades of overzealous trust-busting lawyers at the DOJ.
The biggest victors in this decision are the shareholders of Oracle and PeopleSoft. Both stocks surged in price after news that the merger would be approved. This court ruling is also good news for the competitiveness of U.S. industry. It will allow an American firm to compete head on and more effectively with the giant of business computer software development, SAP of Germany.
The judge in this case effectively allowed the shareholders of PeopleSoft — who, after all, are the owners of the company — to make a large profit on the sale of their stock. Throughout the past year, Oracle had been offering PeopleSoft shareholders a price that was roughly $5 above the current stock price.
This unconditional victory for shareholders calls into question why the Bush Justice Department is employing early 20th century logic to the enforcement of antitrust policy in a 21st century global economy. Isn’t the Bush DOJ allegedly in favor of free markets, shareholder rights, and enhancing U.S. competitiveness?
Many economic commentators have argued that George W. Bush is following the Reagan free-market policy model to spur faster economic growth. But when it comes to antitrust policy, the Bush administration has veered in exactly the opposite direction. In the early 1980s Ronald Reagan essentially shut down all antitrust enforcement. This led to a huge tide of mergers, takeovers, and corporate restructurings that made American firms far more efficient, increased profitability, and helped initiate the greatest stock market boom in American history. The corporate raiders at Drexel Burnham arguably did more to enhance shareholder wealth and U.S. economic growth than all the trust busters in American history.
By contrast, Hewitt Pate, the head of antitrust policy in the Bush administration, has been one of the most aggressive adversaries of mergers and acquisitions since Jimmy Carter was in the White House. Statistics indicate that the Bush trust-busters have impeded many mergers that make financial sense. For instance, the Bush team foolishly blocked a merger a year ago between Target and Dart home-appliance stores.
These are the same wise-heads at DOJ who prevented a merger between United Airlines and U.S. Air. That decision now belongs in the hall of fame of government mishaps. Instead of allowing the marketplace to create one potentially profitable large carrier, we now have two that are teetering on the verge of Chapter 11. Just a few years ago these two firms were seen as a monopoly threat to the friendly skies. They now receive billions of dollars in taxpayer subsidies to stay aloft — and may not for much longer. Instead of one big firm competing in this market, there could be none.
Why did this happen? The answer is that there is a false belief that mergers between industry rivals reduces competition and therefore raises prices for consumers. “Simple common sense,” Pate announced earlier this year, “would suggest that this merger would be bad for competition.”
That was clearly false in this particular case — which is why Oracle won in court. Oracle now controls 7 percent of the business software market. PeopleSoft roughly another 8 percent. The merger would bring Oracle’s share to 15 percent. Can a firm that commands one-seventh of a market fix prices? If so, cornflakes would cost $8 a box.
Meanwhile, other software firms, most prominently Microsoft, are now preparing to introduce their own rival business software packages — which would shrink market share even lower for this combined firm. The biggest advocate of squelching the assimilation of these two U.S. firms was German rival SAP.
On balance, and in more cases than not, the macro-impact of famous recent Justice Department antitrust actions has been economically debilitating. Companies like AT&T, Microsoft, IBM, and General Motors, businesses that were once thought by Justice Department officials to be gobbling up the marketplace like Pac Men, are today facing swarms of domestic and international competitive forces that in some cases have caused these firms to come to Washington pleading for protection. Today’s monopoly is tomorrow’s corporate-welfare recipient wielding a tin cup. The government on one hand won’t allow firms to overly achieve; on the other hand it won’t allow them to fail.
Antitrust actions may have made sense during the era of Theodore Roosevelt, when firms like Standard Oil could truly monopolize local markets. But in the 21st century, where markets are global, the idea that firms can gouge consumers on prices is as antiquated as the stage coach. Consumers are more fickle and cost-conscious than ever before. If prices get out of line in any market where there are no barriers to entry, competitors swoop in and lower costs so that monopoly rents disappear.
What’s more, antitrust is nothing more than a devious form of corporate welfare where the aggrieved who can’t compete in the open market rush to Uncle Sam for aid. For evidence of this, consider Oracle. There is a delicious irony in this latest case: The Oracle that is being damaged by the Justice Department is the same firm that cheered on the trustbusters when they sunk their fangs into Microsoft. Oracle CEO Larry Ellison was one of the instigators of the Microsoft action, which is why, as a Wall Street Journal editorial recently noted, “the company has a hard time playing the role of Damsel in Distress.”
One strange repercussion of the lawsuit against Microsoft was that even Microsoft’s competitors were injured by the case. A number of academic studies now show that the lawsuit’s plaintiffs — including Sun Microsystems and Oracle — not only depressed Microsoft share prices, but their own as well. When the technology trust-busters were on the prowl, all tech stocks took a hit, because investors realized that if a technology firm started to experience rapid growth, it might fall victim to the same witch hunt suffered by Microsoft.
In fact, scholars at the American Enterprise Institute have argued that the Microsoft antitrust action helped precipitate the market meltdown of all technology stocks that began in 1999. Can anyone imagine Japan or Germany bringing a lawsuit against one of their most successful and profitable home-grown export firms? The U.S. antitrust actions only invited the E.U. to sue Microsoft, forcing the company to pay billions of dollars in economic ransom.
Of course, not all mergers make sense. Several years ago Quaker Oats purchased Snapple for about three-times its market value. It lost billions in the process. The issue is who should regulate the advisability of merger activities: investors who put up their own money, or government lawyers? Which group is more likely to safeguard shareholder value?
Now is the time for the Bush administration to lighten the enforcement burden of antitrust law and for Congress to do what it should have done long ago: repeal the Sherman antitrust laws. These laws were meant to protect consumers from higher prices, paid as a kind of ransom to monopolies that gain enormous market share. There are few if any such industries where this concern still exists. There are no longer discreet geographical or product markets. One technology competes with scores of others for consumer and business dollars. For example, satellite dishes keep cable TV prices in check even when the cable market is technically a monopoly. These competitive forces explain why prices are stable or falling in virtually every industry except where the government has created its own legal monopoly. The U.S. Postal Service and public education are examples of this.
President Bush has announced that his goal is to create an ownership society, so Americans can own their own homes, their own businesses, and their own portfolios of stock. Consistent with this goal, the White House has advanced pro-investor tax policies that have helped boost the stock market. Yet lawyers at the Justice Department are pursuing a set of policy objectives that are intentionally depressing stock values. Now that the DOJ has lost in court it should allow the Oracle-PeopleSoft merger to proceed unimpeded. If it wants to hunt down inefficient, anti-consumer monopolies, it should focus its attention on the Postal Service and Amtrak.
Stephen Moore is president of the Club for Growth and a senior fellow in economics at the Cato Institute.
