When teaching antitrust as I am this fall, a time always comes during the semester when I need to give my students an example of a merger whose implications for competition are so obviously adverse that the antitrust authorities would surely seek an injunction against the merger under Section 7 of the Clayton Act. My favorite example of this type of transaction has always been a completely unrealistic and therefore highly instructive hypothetical merger between the two leading U.S. automakers, Ford and GM.
With today’s reports that each of the two firms is discussing a potential collaboration with Nissan and Renault and that a three-way alliance is also being considered, I’ll now have to rethink my hypo.
Analysts have been quick to emphasize that a full-blown merger between GM and Ford is not in the cards and that the only thing being considered is some type of joint venture whose antitrust implications are being analyzed carefully. But why not think about a straightforward merger?
Sure, each firm has a substantial (if declining) share of the U.S. market (GM has about 25% and Ford has about 18%) such that a merger between the two firms would result in a more than sufficiently large increase in the industry HHI to create a presumption of illegality under the U.S. Merger Guidelines. But perhaps the firms could realistically offer a number of arguments to rebut that presumption.
First, GM’s many difficulties in the past year could plausibly justify treating GM as a “failing firm” for purposes of applying the Merger Guidelines, which subject the acquisition of such firms to less scrutiny than the same transaction would receive in better times. If there’s anything to the claim that analysts have been making over past year that GM is facing serious insolvency risks, then the failing firm strategy might really be worth a try.
An additional way to cast the merger in a more favorable light would be to argue that the relevant geographic market for cars in this day and age is not the U.S. or even North America but rather the world. Other products such as computer software are thought of in this way. And while cars (and car parts for local assembly) are more costly than software to transport intercontinentally, the principle is the same: firms in both industries compete with each other all over the world. GM and Ford have much lower shares of the world market than of the U.S. and North American markets. So if the world market were considered the relevant one, the merger would seem less threatening to competition.
A final point perhaps worth emphasizing is industry trends. It matters more for competition where market shares are likely to be in the future than where they are today. And both firms’ market shares have been in steady, long-term decline over the last few decades (albeit with an occasional uptick every now and then). The popular cars of even the near-term future are likely to be those that are hybrid or that do not rely on gasoline at all. And in these markets, Ford and GM are not major players–both take a back seat to Toyota and Honda. That being the case, Ford and GM might argue from a dynamic perspective that a merger between them, while no doubt resulting in some consolidation in old technology markets, would nevertheless enhance rather than harm competition in hybrid and electric cars — the innovation markets of the future. Current market share data thus may not express accurately the true underlying competitive reality.
It should be noted that all of these arguments could also potentially be made in support of a more limited proposed joint venture between the two firms. And of course, depending on how the venture proposal is structured, additional arguments might also be available.
All of this analysis is really beginning to make me worry about the future utility of that old GM/Ford hypo. Who knows? Perhaps I had better switch to Coke and Pepsi!