America faces up to the big corporate issue

IN THE defence industry, these are 'Darwinian times', Norman Augustine has proclaimed. The respected chairman of Martin Marietta Corp was commenting on the proposed dollars 23bn ( pounds 15bn) merger with Lockheed Corp, which would create the world's largest space and defence company. However, his view that failure to change results in failure to survive is not confined to the defence industry. The era of mega-mergers is upon us.

The main problems faced by policy makers are over competition. As companies and industries position themselves to be global players in global markets, traditional anti-trust enforcement is out of its depth. Even in cases like the US defence industry, the rules are very murky.

For example, the newly merged Lockheed Martin would do about 60 per cent of its business with the US government. The Pentagon, as its largest customer, would be dependent on the merged companies as sole suppliers of important satellites and space-related manufacturing technologies. Inevitably, questions of price, competition and unchecked monopoly power must be raised.

Senator Howard Metzenbaum, chairman of the Antitrust Subcommittee, did just that in letters to the Justice Department and the Federal Trade Commission. 'I believe that further consolidation in this industry is likely to damage competiton and eventually transform this industry into an oligopoly capable of dictating prices.'

The government responded with the promise of a full-scale, unprecedented review that would launch a new policy on defence restructurings. For the first time, a special Pentagon unit would sit with traditional anti-trust enforcers at the FTC and the Justice Department to review the merger.

Robert Pitofsky, who headed a special review of anti-trust enforcement for the Clinton administration, said his panel concluded that defence-related enforcement should be flexible, given post- Cold War conditions. Thus, the consensus is that if the Pentagon wants this merger to go through, it will.

Meanwhile, there are similar concerns over mega- mergers in other industries. SmithKline Beecham's announcement recently of a dollars 2.93bn deal to acquire the over-the-counter drug business of Eastman Kodak highlighted the recent trend in pharmaceuticals. Consolidation is rife: American Cyanamid recently agreed to be acquired by American Home Products for dollars 9.7bn; Ivax Corp said it would buy Zenith Laboratories for dollars 600m; the trend goes on.

Again, anti-trust enforcers face a policy dilemma. They agree that bigness is not necessarily bad, particularly if it reduces the huge risks and research costs associated with the launch of new drug products. But they worry that the consolidations will result in a few enormous global companies with power to set prices for good or ill. .

There is fierce debate over jurisdiction. Aggressive anti-trust enforcement at the US level, which has been noticeably lacking over the past decade, could place American companies at a big disadvantage if their European and Japanese counterparts are less fettered. Indeed, the nationality of today's global companies is also very murky. Thus there are new proposals to harmonise national competition policies, by bringing them under the jurisdiction of the new World Trade Organisation that will succeed Gatt. On this point, too, there are bound to be battles over national sovereignty.

In telecommunications, huge mergers, in response not to declining business but to technological breakthroughs, are reshaping the world of communications. These uncharted waters present even greater challeges to policy makers. Questions arise not only over such traditional concerns as monopoly power and costs, but also over emotional issues such as content.

Some countries, France and Canada included, use domestic regulatory authority to limit foreign content within their borders. Traditional questions of price competition arise in other cases.

Talks between MCI and Nextel Communications broke down last week over a dollars 1.3bn deal that was MCI's bid to become a leading player in this market. Meanwhile its arch-rival AT&T is close to completing its dollars 12.6bn acquisition of McCaw Cellular Communication, the biggest US company in this field. This could result in AT&T becoming the dominant player.

However, regulators at the US Federal Communications Commission and other agencies would be unlikely to act on traditional anti-trust grounds. Officials admit that they are at a disadvantage. It is too early to assess the real cost / benefit trade-offs of this fast-moving technology.