The Cost of Merger Delay in Restructuring Industries
On June 23, The Heartland Institute released Heartland Policy Study #90, "The Cost of Merger Delay in Restructuring Industries," by Auburn University economists Robert Ekelund Jr. and Mark Thornton.
On June 23, The Heartland Institute released Heartland Policy Study #90, "The Cost of Merger Delay in Restructuring Industries," by Auburn University economists Robert Ekelund Jr. and Mark Thornton. The 36-page report is available from The Heartland Institute for $10. It is also available on the World Wide Web at www.heartland.org.
Regulatory review of proposed mergers causes an average delay of 94 days in nonregulated industries and an additional 92 days in regulated industries. These delays are caused by a multiplicity of government agencies with review authority, the political nature of antitrust law enforcement, and the motives of competitors and firms being acquired. Because most mergers are efficient and socially beneficial, these delays cause social harms. The authors calculate that merger delays cost society over $12 billion in 1996.
1. Merger approval in regulated industries takes too long.
Analysis of a random sample of 553 mergers with values exceeding $150 million that occurred between January 1990 and December 1998, reveals that approval of mergers in regulated industries took an average of 92 days longer than mergers of comparable value in unregulated industries. This is 92 days in addition to an average delay for unregulated industries of 94 days, for a total average delay of some 186 days.
These delays are costly to consumers, workers, and investors. The direct costs of regulatory delay--in the form of compliance costs, lobbying, public relations, etc.--are substantial. Because they produce no useful goods or services, those expenditures are a pure deadweight loss to society. The indirect costs of regulatory delay--lost products, innovations, and efficiencies that would have come about had mergers been completed rather than crippled by premature publicity or canceled due to the threat or cost of regulatory interference--are much larger, but those costs are largely invisible.
The duration of merger delays is positively related to industry concentration and the size of the mergers, though neither factor had much effect on the length of review. Communications mergers are neither shorter nor longer than mergers in other regulated industries.
2. Delays are caused by the aggressive application of antitrust law, multiple jurisdictions with review authority, and "rent seeking."
Antitrust has undergone a century-long evolution from reactive moves against isolated cases of suspected monopoly abuse to a proactive policy that scrutinizes all corporate activity. State and municipal governments, which traditionally have not been parties to antitrust proceedings, have taken to using merger reviews to address consumer complaints regarding tree trimming, payphone charges, and even the choice of channels available on cable television.
When a merger depends on the approval of multiple regulatory bodies, costs and delays may be staggering. AT&T, for example, had to obtain about 1,000 approvals from local regulators following its merger with MCI, the cable network. As of February 1999, there were 28 municipal holdouts.
Delays may be more common in restructured industries because rivals in those industries have lower costs for engaging in activities that delay and sabotage competitive mergers due to their legal, legislative, and lobbying expertise. This sort of conduct, called "rent seeking" by economists, does not produce any social value, but merely shifts the benefits of a merger from the public to private interests.
3. Enforcement of antitrust laws is unlikely to benefit consumers.
The historical record shows that antitrust policy originated to subvert competition and protect inefficient incumbent suppliers. This was true of the Sherman Antitrust Act of 1890, state-level antitrust laws passed before Sherman, and the Clayton Act of 1914. The view that antitrust law is a policy to protect the public interest and promote competition has lost credibility among experts and practitioners.
Public choice theory--the application of economics to collective decision-making--explains how antitrust policy is based on individual self-interest and that policies originate and are driven by interest-group politics. Once established, the interests of the antitrust bureaucracy--including the legislative, executive, and judicial branches of government--all influence antitrust policy.
Empirical data show that most complaints against mergers are filed by competitors of the merger partners, not public interest groups. When complaints were filed and legal action announced, the stock prices of those rivals increased, demonstrating that the proposed merger would have been competitive. While researchers have not ruled out the possibility that antitrust enforcement may have deterred some anti-competitive mergers, their results clearly indicate the more common outcome was protection of rival producers from increased competition due to efficient mergers.
4. Most mergers are efficient and create social benefits.
Mergers are an efficient response to the expansion of free trade and spread of market institutions worldwide following the collapse of communism. In the U.S., deregulation of domestic public utilities has created new national markets where only strictly regulated regional markets existed previously. And new technologies such as the Internet are creating new profit opportunities for firms able to capitalize on the convergence of communications, computer, and entertainment enterprises.
Mergers and acquisitions are particularly valuable in restructured markets such as airlines, banking, radio, telephone, television, natural gas, and electric power. Mergers can create new corporate entities large enough to enter new markets and compete with local and regional monopolies. The SBC/Ameritech merger, for example, would permit SBC to enter 30 markets beyond its traditional 13-state region, enabling it to offer local, long-distance, Internet, and high-speed data services to some 180 million people.
The domination of a market or industry by a small number of large firms is more often due to the relative efficiency of large firms compared to small firms, and not the result of collusion. Empirical tests of this statement have repeatedly shown that the profits of small firms do not rise with concentration, whereas the profits of large firms do rise. Even when competition appears to be missing, the potential of new firms entering the market often prevents firms from exercising their market power.
5. The cost of merger delay in restructuring industries is over $12 billion a year.
Since most mergers are economically efficient, merger delay imposes unnecessary costs on society. Since delays are longer in regulated industries, where the need for and benefits of mergers are greatest, the social costs of merger delay are likely to be considerable.
The premium paid by acquiring firms for the stock of target companies gives us a window through which to see the social cost of delayed mergers. Regulatory delays drive up such premiums by giving competitors the opportunity to bid for target firms, a practice the target firm may encourage. At the same time, delays reduce the likelihood that a merger will produce the value that investors and managers predicted by allowing competitors to get a head start on restructuring and other counter-tactics.
Ordinarily, the premiums paid by acquiring firms would be a good estimate of the social value created by mergers. Since regulatory delay increases the premium while diminishing the actual value created, measuring the difference in premiums paid for mergers between firms in regulated markets versus mergers in unregulated markets results in a measurement of the cost of delay to investors. If the merger is efficient, that cost will equal social cost.
The average premium paid for mergers in regulated industries in 1996 was 35.68 percent while the average premium for all mergers was 26.2 percent, a 9.48 percentage point difference. Using the value of mergers actually closed in 1996, the estimated cost due to the additional delay in regulated industries is $5.06 billion. Using the value offered in new merger announcements (this figure includes mergers that will subsequently be canceled), the estimated cost is $18.97 billion. If we average these two estimates, the cost of additional merger delay in regulated industries in 1996 was over $12 billion.
6. Several reforms would expedite the regulatory review process and benefit consumers, workers, and investors.
Our findings suggest the need for policy reform. Adoption of the following suggestions would reduce merger delays and the social costs they impose:
- Free small firms from the burden of filing merger notifications and having to lobby for permission to proceed by adjusting the reporting threshold for changes in stock market indexes.
- Raise to 50 percent of the national market the concentration level that triggers premerger review of multi-billion dollar mergers.
- Eliminate merger review authority for federal, state, and local regulatory bureaucracies other than the Federal Trade Commission and the Department of Justice.
- Establish clear and objective guidelines for merger review so that proposals can be written to meet those guidelines in advance of regulatory review.
- Establish a firm deadline for merger review that is less than 30 days, and require concurrent reviews by multiple jurisdictions so they are completed within the time period allowed.
- Hold annual Congressional hearings on the problem of merger delay to draw attention to its cost and to the interest-group politics that often lay behind such delays.