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In reviewing PepsiCo Inc.’s acquisition of Quaker Oats Co., Federal Trade Commission member Thomas B. Leary says he ultimately could not support challenging the deal because there was no proper way to define the relevant beverage market that stood to be affected by the deal. The commissioners subsequently split 2-2 on whether to block the $13.9 billion merger, giving Pepsi permission to complete the deal. Leary’s quandary points up what critics of the antitrust establishment contend is a disquieting problem regulators face in assessing deals: the lack of objective standards, criteria or formulae to determine if a merger is beneficial. The corollary is that, in the absence of such uniform assessment tools, merging companies are exposed to different and variable regulatory judgments. “The market definition was not very helpful,” Leary said. “The case was decided much more subjectively.” Gatorade, Quaker’s popular sports drink, makes up only a tiny fraction of the soft-drink industry, Leary said at the American Bar Association annual meeting by way of illustrating his point. But he also said consumers were unlikely to switch from Coke to Diet Coke if prices rose 5 percent, which is the accepted test for determining if products are substitutes. That failure of consumers to switch raises doubts about whether there is an overall soft drink market, Leary said. The subjectivity of antitrust analysis and the inadequacy of the current merger guidelines has long been a complaint of Ky Ewing, a partner at Houston law firm Vinson & Elkins who served for the past year as chairman of the ABA antitrust section. At the ABA meeting, Ewing put on a program he hopes will eventually lead to a new system of merger analysis, one that provides the FTC with a better method to analyze the Pepsi-Quaker and other deals. Based on a paper by Harvard Business School professor Michael Porter, the new system would replace market concentration scores, which form the basis of the merger guidelines, with a model that emphasizes productivity growth. Stimulating productivity growth should be the goal of antitrust policy because it most directly enhances standards of living, he argues. “Michael Porter has developed a model that is the next step,” said Charles Weller, an antitrust lawyer in Cleveland who sat on an ABA panel that worked with Porter. “Antitrust needs to evolve a new level based on the productivity paradigm.” To evaluate if a merger supports productivity and merits government approval, Weller favors adopting Porter’s three-step approach. Part one aims at avoiding regulatory review of deals that raise no obvious concerns. Porter would exempt from scrutiny any merger that results in less than a 50 percent market share. That would apply to any potential market in which the product competes, meaning that the market for a product like Gatorade could include the sports drink market and the soft drink market. Next, for a deal that exceeds 50 percent market share in any definable sector, Weller would apply Porter’s celebrated “Five Forces.” The Five Forces, which have become a mainstay of university MBA programs and corporate planning efforts, provide a framework for evaluating a company’s competitive position. This involves considering the threat of product substitutes, the bargaining power of buyers and suppliers, the threat of new market entrants and the rivalry of existing competitors. “Five Forces analysis is based on a rich conception of competition, which is multidimensional and not based only on price,” Porter writes in the paper. It goes beyond price competition — the basis of the current guidelines — to examine the factors that shape all the competition in a market, he explains. Every industry is unique and requires analysis of its own particular characteristics, Porter states. “The Five Forces framework can been seen as an expert system; it takes the facts of a particular case and translates them into implications for competition.” Once the Five Forces analysis is complete, Porter would apply his so-called Diamond analysis, which examines the impact of a merger on the local business environment. This is intended to gauge how a given deal would hurt the standard of living in affected local communities. Under this standard, for example, regulators could block the acquisition by a foreign company of an equally large domestic company on grounds that it would damage the vitality of local suppliers. Part three of Porter’s approach involves calculating the effect of a merger on productivity growth. Regulators would ask if the deal would result in “clear and significant” productivity growth and if the benefits would be recurring or one-time only. The government would then conduct a risk-reward analysis to determine if the deal should be approved. “Clear productivity growth benefits from the merger or joint venture would be necessary to outweigh the threat to competition that the merger entailed,” Porter writes. Weller said the Porter approach is better than the existing merger guidelines because it produces more predictable outcomes. Eliminated would be fights between the government and merging companies over the definition of markets, an often contentious issue is antitrust reviews. “You don’t litigate over the relevant market,” he said. But several lawyers at the ABA convention questioned whether Porter’s system is too complex to ensure objective analysis and predictable outcomes. Others also questioned whether, by de-emphasizing the importance of hard economic evidence, it, too, would result in subjective merger analysis. Indeed, in an earlier presentation at an ABA meeting of many of these same ideas, former Treasury Secretary Larry Summers sharply criticized the Porter approach, arguing it would require use of the same market concentration calculations that it was intended to supplant. Several experts on the current ABA panel argued that Porter is merely expanding on the existing system, rather than creating a new one. “It does not blow up the box quite as much as it claims,” said Margaret E. Guerin-Calvert, an economist at Economists Inc. in Washington. “Five Forces is just a way to look at the competitive process.” For his part, Leary urged parties to antitrust cases to rely first on the existing system when presenting cases to the FTC, though he called the Porter approach intriguing. “You are always better off persuading people not to break new ground,” he said. Although Ewing said he never expects the Porter approach to supplant the current merger guidelines, he thinks it has potential to help curb government abuses of its antitrust authority. “This is to get people thinking about the present guidelines,” he said. Copyright (c)2001 TDD, LLC. All rights reserved.

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