In February 2021, Senator Amy Klobuchar (D-MN) introduced legislation designed to make it harder for corporations to engage in mergers and acquisitions. The Competition and Antitrust Law Enforcement Reform Act (CALERA) makes sweeping changes to existing antitrust law, solidifying a shift from the consumer welfare standard towards a ‘big is bad’ approach. In other words, CALERA increases the Federal Trade Commission’s (FTC’s) and the Department of Justice’s (DOJ’s) ability to punish companies that engage in what they deem are anti-competitive practices.
Senator Klobuchar, the lead Democrat on the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, has taken aim at current antitrust law for being too ineffective. In supporting CALERA, Klobuchar stated that “competition and effective antitrust enforcement are critical to protecting workers and consumers” and that “we can no longer sweep this issue under the rug and hope our existing laws are adequate.”
CALERA has sat in the Senate Judiciary Committee since February. In the meantime, Congress has moved to pass other sweeping antitrust reform bills, which has led to a revitalized interest in passing CALERA amongst proponents of stricter antitrust laws. Should the bill be enacted, existing corporations will have to worry about the government using CALERA to take an activist approach in the lawsuits it pursues.
Amongst the many proposed changes, CALERA would lower the bar for what constitutes a prohibited merger, meaning it will be harder for new mergers to be cleared by federal authorities. In addition, under CALERA, any merger that could “create an appreciable risk of materially lessening competition” would be prohibited.
Previously, the antitrust law only barred mergers that could “substantially lessen competition.” Unfortunately, this small language change opens the door wide open to the FTC and DOJ blocking most mergers, a change that will ultimately hurt consumers.
CALERA also shifts the burden of proof in enforcement action away from the government and to merging corporations. This shift will require the merging corporations to prove their merger is compliant with antitrust laws. As a result, CALERA will create a guilty until proven innocent system for corporations and creates more obstacles to mergers. This approach to antitrust would then lead to consumers losing access to the improvements in technology and services that result from mergers and acquisitions.
Mergers and acquisitions can increase a company’s efficiency and lower the cost of producing goods, which results in cheaper and improved products for consumers. For example, Amazon’s acquisition of Whole Foods led to lower prices on most Whole Foods products and helped finance their expansion, allowing more consumers to access the store’s products.
A similar result came from Facebook’s acquisition of WhatsApp. Shortly after the acquisition, Facebook removed WhatsApp’s services fees, increasing consumer welfare by saving its users money. As a result, WhatsApp subscribership more than doubled from 200 million to 500 million global users in 2014. This significant increase in subscribership was due to the lower fees and increased integration with existing Facebook services.
Mergers have also improved consumer outcomes in the airline industry. Facing a downturn in passenger numbers in the aftermath of 9/11 and the great recession, American Airlines acquired Trans World Airlines for $1.5 billion in 2001, U.S. Airways’ purchased America West for $1.5 billion in 2005, and Delta’s bought Northwest Airlines for $2.6 billion in 2006. These acquisitions increased efficiency and allowed airlines to continue servicing otherwise unprofitable routes to rural communities. Ticket prices also fell significantly after these mergers, allowing more Americans to fly on more routes.
CALERA would only reduce competition as smaller companies are unable to merge to compete with larger ones. This was the case with Sprint and T-Mobile, who struggled to find the resources to launch a 5G network that would compete with Verizon and AT&T’s networks. Through merging, Sprint and T-Mobile were able to establish their own network, which helped drive down 5G costs. As a result, the merged Sprint and T-Mobile network currently positions itself to offer the cheapest entry-level plans and the widest coverage. Under CALERA, this merger would likely have been blocked, forcing consumers to choose between limited options.
While Senator Klobuchar believes that CALERA will improve market outcomes for consumers, it will almost certainly have the opposite impact as beneficial mergers are halted. CALERA is also fundamentally unfair in the way it changes antitrust law to a guilty until proven innocent approach. CALERA will create a backward system of evaluating mergers and acquisitions that does not prioritize consumer welfare. If it is not defeated in the Senate, consumers will be worse off in the long run.