Editorial

Don't Let This Merger Take Off

The proposed merger between Boeing and McDonnell Douglas signals that Corporate America believes U.S. antitrust laws are dead letter.

The Boeing-McDonnell Douglas merger would join the only two competitors in the U.S. commercial jet market. It would limit international competition in the industry to two firms, Boeing and the European Airbus. Industry analysts predict the Boeing-McDonnell merger will foreclose new entrance into the market for next 15 to 20 years.

If this merger does not violate the Clayton Act's proscription against mergers and acquisitions where "the effect of such acquisition may be substantially to lessen competition or to tend to create a monopoly," then the antitrust laws have no meaning.

Permitting the merger would also blow the Justice Department's guidelines for review of mergers out of the water. The Justice Department measures the effects of merger by something called the Herfindahl-Hirschman Index, which measures market concentration before and after a proposed merger (by squaring each competitor's market share). Assuming Boeing has a 60 percent share of the commercial jet market, Airbus 35 percent and McDonnell Douglas 5 percent, market concentration would be 4,850 before the merger and 5,450 afterwards. Under the Justice Department guidelines, any market with an Index above 1,800 is considered highly concentrated. The Boeing merger would increase the Index by 600, six times the threshold of 100 which the Justice Department guidelines say are "presumed [to] ... create or enhance market power or facilitate its exercise."

Boeing and McDonnell Douglas executives cannot even invoke the standard "efficiency" argument to justify the merger. Boeing is already operating at above capacity with a several-year-long backlog of orders, and it already subcontracts to McDonnell Douglas.

The merger would create an economic powerhouse with enhanced ability to block new competitors from entering the market, fix prices, block technological innovation and bully airlines and other jet purchasers.

The merger would vault Boeing into the number two position at the Pentagon corporate feeding trough, behind Lockheed Martin, the largest military contractor. The Defense Department's policy to actually encourage mergers means Boeing can expect a Pentagon subsidy for the merger, if the Federal Trade Commission (FTC) decides to permit it.

The merger would also increase the political power of Boeing, already one of the more politically active large corporations. As one of two or three major defense companies, Boeing would have undue influence in shaping weapons acquisition policy at the Pentagon, as well as on broader defense policy questions. As the only U.S. commercial jet manufacturer, Boeing would have enormous leverage over safety and other airplane industry regulations. With especially widespread manufacturing operations, Boeing would be positioned to exert strong influence over a range of industrial policy issues. And with its existing status as the largest U.S. exporter enhanced by the merger, Boeing would be positioned to improperly shape U.S. foreign policy on issues relating to China and international trade, among others.

A couple of decades ago, antitrust enforcers would have laughed at Boeing's proposed merger. Indeed, a couple of decades ago, Boeing never would have made the merger proposal.

Now, however, virtually all analysts expect the FTC to approve the deal.

The FTC's action in March and April to stop a proposed Staples-Office Depot office supply superstore merger offers some hope that the analysts are wrong. Acting on overwhelming evidence that superstore prices rise in direct correlation with a decrease in competition, the FTC announced it would file for a preliminary injunction to block the merger, even after Staples said it would sell off some stores to competitor OfficeMax.

Denouncing the FTC in scathing terms for daring to enforce the antitrust laws at all, Staples and Office Depot said that they will challenge the FTC determination in court. Given the federal judiciary's profound disdain for the antitrust laws, there is no guarantee the FTC will prevail in court.

Those who believe in decentralizing political and economic power can only hope that the FTC action in the Staples case was a sign that the U.S. antitrust enforcers are regaining life.

Although the Boeing merger is at least as easy a call on the merits as Staples, stopping the Boeing merger will require much more backbone. Boeing, a major manufacturer and exporter, is far more politically influential than Staples, a specialty retailer. If the FTC allows the Boeing-McDonnell Douglas merger to proceed, the message will be clear: The Staples action was an aberration; when the truly powerful wish to combine, there are no limits.