Merger mania: legal and strategic response options for small business.

Author:Geiger, Joseph
Position:Statistical data
 
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ABSTRACT

Merger mania is once again gripping our nation. The merger trend is slated to continue because of a combination of emerging information technologies, deregulation, privatization, and lowered trade barriers. The implication for small business is significant: when competitors consolidate, the small business is more vulnerable to the strong arm tactics available to these larger competitors. Some of those tactics are illegal, but large competitors might violate the law, either willfully or unknowingly. It is the responsibility of small business to be vigilant in knowing its rights in this area and enforcing them.

This paper will present the legal and strategic response options of a small business when faced with a merger that will create a new dominant firm. The history and rules of merger law will be described; legal response options, then strategic response options will be discussed; finally a recent case in which a small business was confronted by this problem will be reported and used to illustrate various response options.

INTRODUCTION

Imagine that you are a small business owner. After years of hard work you have achieved a market share of 20% of your niche market. One day, as you read your monthly trade journal, you learn that your two largest competitors have announced a merger. The new firm will become dominant in the market, with about 70% of sales. Past aggressive business tactics of the merging firms raises your concern that the newly dominant firm will throw its weight around. Will you be able to compete effectively in the new environment? Is the merger legal? What can you do to challenge its legality or respond strategically to this new threat? This paper will address these concerns.

LEGAL HISTORY

As long ago as 1911, President William Howard Taft recognized that monopolies and concentrated industries are a threat not only to the public, but to small business as well (Schnitzer, 1978). The antitrust laws were enacted to counter that threat. The first federal antitrust statute was the Sherman Act of 1890. It made it a federal crime for a firm to either monopolize an industry or to act in concert with other firms to restrain trade. However, federal prosecutors found it difficult to enforce this act, and in 1914 Congress attempted to strengthen enforcement by enacting the Clayton Act. This act made certain specific actions, like price fixing, automatic violations of the Sherman Act. It also make it illegal for firms to merge if there was a reasonable likelihood that the merger would result in less competition. This was an important change, because the Clayton Act's anti-merger provision did not require proof of actual harm, only proof that harm "may" result. This lighter burden of proof made it easier for federal regulators to prevent a proposed merger, compared with attempting to break up an existing monopoly (Cheeseman, 1998).

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