""P-‘Mm{svmm‘iunmga3\ HI) m mam m‘m mm mans. was, me ' 1M cue-73% no“; a u. A. " mm mm: mm 1957 L I B R A R Y Michigan State University ‘ AN INTRODUCTION TO FOOD CHAIN MERGERS: MERGERS, 1956 by Donald A. Duchesneau AN ABSTRACT Submitted to the College of Business and Public Service of Michigan State University of Agriculture and Applied Science in partial fulfillment of the requirements for the degree of MASTER OF ARTS Department of General Business Curriculum in Food Distribution Approved :;jf- 4/7 - l 2 DONALD A. DUCHESNEAU ABSTRACT Although merger activity is an interesting and im- portant phase of the food chain industry, very little information on this subject is available to students and members of the industry. This thesis is an introductory exploration of this subject. This study is intended to add slightly to the limited information presently available on food chain mergers. The general nature of the presentation is intended to introduce the subject and encourage further and more detailed studies in this area. General background material on the subject of corpor— ate mergers is presented with particular attention placed up- on the application of this material to food chain mergers. This introductory material should introduce the student to the subject of corporate mergers. The material was gathered primarily from secondary sources, such as basic accounting and corporation finance texts, business services, trade publications and publications of the Federal Government. This background material is accompanied by data ob- tained through a questionnaire survey of the firms known to have undertaken food chain mergers during 1956. Data is usually presented on the basis of 60 per cent of the acquiring and 41 per cent of the merged food chains parti- cipating in mergers during 1956. Additional information 3 DONALD A. DUCHESNEAU . ABSTRACT on these and other food mergers was obtained from public statements of and personal discussions with industry leaders. The survey material obtained on food chain mergers occurring in 1956 serves the primary purpose of illustrating the basic material presented on the nature of food chain mergers. This data is also of some value in establishing the nature and characteristics of food chain mergers in 1956. The thesis is concerned with such broad subject areas as: merger terminology and classification; the procedures followed in the negotiation and completion of the food chain merger; the rights of stockholders and creditors of the merging corporation; various methods by which the merger transaction may be consummated; some methods of financing mergers; antitrust laws, proceedings and applications to the retail food industry; the personal and business moti- vations involved in the decision to merge or be merged; indices to the success of merger activity and aspects of the personnel and operating problems that may be associated with food chain mergers. As the title implies, this thesis is not intended to give intensive or inclusive coverage to each of these several broad topics, but simply to introduce and provide basic information on these subject areas. 4 DONALD A. DUCHESNEAU ABSTRACT The survey material that accompanies and illustrates this general introduction to food chain mergers should also provide some insight into the characteristics, motivations, results and operating problems involved in the surveyed 1956 food chain mergers. The Curriculum in Food Distribution at Michigan State University is under the sponsorship of the National Association of Food Chains AN INTRODUCTION TO FOOD CHAIN MERGERS: MERGERS, 1956 by Donald A. Duchesneau A THESIS Submitted to the College of Business and Public Service of Michigan State University of Agriculture and ‘ Applied Science in partial fulfillment of the requirements for the degree of MASTER OF ARTS Department of General Business Curriculum in Food Distribution 1957 1‘ .9 4/!) 9 ACKNOWLEDGAENTS Greatful appreciation is extended to Winn-Dixie Stores for the opportunity of attending Michigan State University and to the Kraft Foods Company for their generous sponsor- ship. Sincere thanks are due Dr. Edward A. Brand, Director of the Curriculum in Food Distribution at Michigan State University, at whose suggestion this thesis was undertaken. His helpful suggestions and continuous supervision have contributed greatly to the completion of this thesis. The author is indebted to the several food chains‘ which actively participated in this study; the valuable information contributed by this group made this thesis possible. To my wife, Dorothy, this thesis is affectionately dedicated. In addition to her many hours of typing and correspondence she has been a source of continual encourage- ment. TABLE OF CONTENTS CHAPTER I. INTRODUCTION. . . . . . . . . . . . Definition of the problem The purpose of the study. Procedure followed in obtaining information Adequacy of the sample Limitations of the study. II. THE NATURE OF MERGERS. Terminology The direction of mergers. III. MERGER PROCEEDINGS. Initiation of negotiations Merger negotiations Authority to merger Rights of dissenting stockholders. Rights of creditors IV. METHODS OF MERGER The asset purchase. . . . . . . The negotiated stock exchange The stock purchase. The method of finance. V. MERGERS AND THE FEDERAL LAW. The retail food industry. PAGE CHAPTER VI. VII. VIII. Interstate commerce. Section 7 . . . . . . . . . . . . Affects upon competition Tendency towards monopoly. Jurisdiction of the Federal Trade Commission Proceedings under Section 7 of the Clayton Act Informal pre-merger proceedings. NON ECONOMIC MOTIVATIONS L Definition of economic motivations. . Characteristics of major merger movements The acquiring firm . The merged firm . . . . . . . . . . Promoters Importance Of non economic motives. ECONOMIC MOTIVES OF THE ACQUIRING FIRM Critical motivations Anticipated motives. The new area Expansion in present area. . . Economies of operation. Top management . . . . . . . . Tax motives . . . . . . . . . Financial improvement . . . . . . . . ECONOMIC MOTIVES OF THE MERGED FIRM CHAPTER Attractive offer. Financial difficulties. Retirement of owner or management Economies of operation. . . . . , IX. AN EVALUATION OF MERGERS . Alternatives to merger. Profits and sales volume The success of mergers. X. PERSONNEL PROBLEMS Integration of policies and procedures Management of the merged firm The employee problems . XI. SOME OPERATING PROBLEMS Community relations. . Name change Private label merchandise. Merchandising problems. Other operating problems XII. SUMMARY. An introduction to food chain mergers. Mergers, 1956. . . . . . . . . BIBLIOGRAPHY. . . . . . . APPENDICES . APPENDIX A. Sample Letter V1. PAGE 101 102, 1C5 107 109 109 112 118 123 124 CHAPTER PAGE APPENDIX B. Questionnaire. . . . . . . . . 125 APPENDIX C. Size of Acquiring and Merged Food Com- panies in 1956 on the Basis of the Number of Retail Outlets Operated . 129 LIST OF TABLES TABLE PAGE I. Initiation of Negotiations Leading to the Merger of Fifteen Food Chains in 1956 . . . 13 II. Methods by Which Seventeen Food Chains Were Merged During 1956 . . . . . . . . . 23 III. Method of Finance Employed in the Merger of Seventeen Retail Food Chains in 1956 . . . 29 IV. Merger Motivations Stated to be "Of the Utmost Importance" to the Acquired Firm in Fifteen Mergers of Food Chains in 1956 . . . . . 54 V. The Stated Importance of Increased Sales in a New Market as a Merger Motivation Among Fifteen Firms Acquiring Food Chains in 1956 . 55 VI. The Stated Importance of Increased Sales Volume in an Area Already Served as a Merger Motivation Among Fifteen Firms Acquiring Food Chains in 1956 . . . . . . . . . 59 VII. The Stated Importance of Economies of Operation as a Merger Motivation Among Fifteen Firms Acquiring Food Chains in 1956. . . . . . 60 VIII. The Stated Importance of Drawing Top Manage- ment Personnel as a Merger Motivation Among Fifteen Firms Acquiring Food Chains in 1956 . 61 ix TABLE PAGE IX. The Stated Importance of Tax Savings as a Merger Motivation Among Fifteen Firms Acquiring Food Chains in 1956. . . . . . 6A X. The Stated Importance of Financial Improvement as a Merger Motivation Among Fifteen Firms Acquiring Food Chains in 1956. . . . . . 66 XI. Stated Motivations of Fifteen Food Chains Merged in 1956. . . . . . . . . . . 69 XII. Question: On the basis of your firm's past experience, would you personally estimate that the sales volume added by this merger could have been obtained more cheaply by building new stores?. . . . . . . . . 76 XIII. Profitability of Thirteen Food Chains in the Years Prior to and Following Their Merger. . 78 XIV. 1955 Sales Volume of Thirteen Food Chains Merged in 1956. . . . . . . . . . . 80 XV. Changes in the Sales Volume of Thirteen Food Chains in the Year Following Their Merger. . 80 XVI. Approximate Time Elapsing Between First Nego- tiations and Completion of the Merger in Fifteen Food Chains in 1956 . . . . . . 83 XVII. Evaluation of the Success of Fifteen Mergers by the Presidents of the Acquiring Firms . . 84 TABLE XVIII. XIX. XX. XXI. PAGE Rate of Change in the Operating Procedures (Policies and Work Practices) Among Fourteen Food Chains Merged in 1956. . . . 86 The Extent of Labor Turnover in Fourteen Food Chains Following Their Merger in 1956 . . . 97 Extent of Publicity Immediately Following the Merger of Fifteen Food Chains in 1956 . . . 100 The Extent to Which the Names of the Stores of Fourteen Merged Food Chains Have Been Changed to that of the Acquiring Firm. . . . . . lOl CHAPTER I INTRODUCTION Definition of the Problem Aggressive food retailers follow a pattern of contin- ual expansion. The merger has played an important role in the expansion and improvement of many food retailing firms. During 1955, a record year for food chain expansion, the merger trend broke all-time records in the number and size of mergers that took place in the retail food industry. During 1956, and to the present, the merger trend in food retailing has remained at a high level. Despite the significance of the merger in food re- tailing, a paucity of information is available to students and industry members. This lack of information is the major problem with which this thesis is concerned. The Purpose Of the Study This thesis will seek to add to the limited body of knowledge presently available on the subject Of mergers. Particular attention will be placed upon appli- cations of this subject to the retail food industry. The author hopes that the material presented will be Of some value to members of the retail food industry and to students of food distribution. In view of these objectives, general background material on the subject of corporate mergers and consoli- dations will be presented. This material will serve to introduce the student to the subject, thereby providing him with a more comprehensive understanding of the subject and this study. This background information will be accompanied by data on grocery chains making multi-unit acquisitions during 1956 and on the firms which they absorbed. Emphasis will be placed upon the characteristics of these mergers. Causes, results and Operating problems of these food chain mergers will be considered. Because of the need for basic research in the area, the thesis should be viewed as a general introduction to the subject of mergers in the retail food industry rather than a specific study of the firms included in the study. NO claim is made for the study's all inclusiveness, rather, it is hoped that the general nature Of the presentation will encourage further, and more detailed studies. Procedure Followed in Obtaining Information The introductory material was largely taken from sec- ondary sources such as basic accounting and corporation finance texts, trade journals and publications Of the Federal Government. 3 The writer's industry survey provided the bulk of the data from which this thesis was developed. According to the Supermarket News, thirty-four multi-unit food retailing firms were absorbed in 1956 by twenty—five acquiring com— panies.1 Research of financial chronicles revealed two mergers which had been omitted by this study. After se- lecting these firms as a sample, a questionnaire was developed through a study of secondary materials, personal contacts with industry leaders and the helpful advice of several faculty members. 2 and a covering letter3 were mailed This questionnaire to the presidents of the twenty-five firms acquiring food chains during 1956. Respondents were requested to check applicable choices or to fill in their own replies for each of the questions. The questions were listed under the categories of (1) pre- merger information, (2) terms of the merger, and (3) Oper- ations since the merger. Respondents were encouraged to comment freely and space was provided for comments and discussion of each question. Since seven firms had acquired more than one multi- unit firm during the year, each respondent was requested to l"Multi-Unit Mergers in 1956," Supermarket News, January 7, 1957, p. 1- 2A copy of the questionnaire appears in Appendix A. 3A sample letter appears in Appendix B. reply to all questions in the frame of reference of one specific merger. The returned questionnaires were edited and tabulated for use as a basis of discussion throughout the study. The questionnaire was designed to follow the outline of this thesis. Sixteen employees and store-level management in three of the acquired firms were personally interviewed by the author. This was done in an attempt to gain some insight into the reactions of personnel and personnel problems associated with the food chain merger. Adequacy of the Sample The 25 firms undertaking multi—unit mergers in 1956 were included in the survey. Information was sought on these firms and the companies which they acquired. Fifteen completed questionnaires were returned. Three others were returned with the explanation that the information re- quested was too "personal" or "controversial" for release. Consequently, data was received on 60 per cent of the acquiring firms and upon 41 per cent of the food chains which were absorbed during 1956. At times, information from substantiated sources such as personal interviews or published financial information increased the size of the sample used on certain aspects of the mergers. In other cases, incompleted questionnaires yielded slightly smaller samples. The interviews of store-level personnel were not intended to constitute a representative sample. Limitations of the Study Technical differences between the various types of external expansion will be hastily observed at a later point, however, the term "merger" will be used in an in— clusive context to refer to any combinations of previously independent companies rather than in any restrictive legal or technical sense. The term "chain” will be used to refer to any company composed of two or more retail outlets. "questionnaire" is given When the'"survey" of the mention, reference is made to the contact made by the author with the presidents Of twenty-five grocery chains. Data will usually be presented on the basis of fifteen completed questionnaires. This study is concerned with the multi—unit horizontal acquisitions of food chains. Our discussion will generally be limited to mergers of competitive-type units of food chains. Although federal regulation of mergers will be dis- cussed at a later point, no attempt has been made to eval- uate the effects of these particular mergers upon competition. Merger activity is a somewhat controversial subject in the retail food industry and the validity of the survey findings may be questioned on that basis. The writer hopes that the anonymity of the questionnaire has minimized this factor. The fairly adequate rate of respondence and the outright frankness of many replies has tended to substan- tiate this hope. A further limitation on the survey results stems from the "forced choice" methodology which was employed through- out the questionnaire. This technique was necessary in order to gain a high rate of respondence. This high rate was essential in view of the relatively small population. In the hope of increasing the validity of these results, respondents were encouraged to express themselves freely on each question. Extra space was allowed for this purpose. The replies and remarks Obtained were of great value to this presentation. CHAPTER II THE NATURE OF MERGERS Terminology Technical distinctions are ordinarily observed between different types or methods of external expansion. The ter— minology in use may be of some value in distinguishing between various kinds of transactions. From legal and accounting viewpoints, important distinctions are drawn between such terms as ”merger," ”consolidation," "purchase," ”amalgamation," "acquisition," etc. Although there are probably no definitions which will prove to be universally acceptable, this differentiation does have some descriptive value. A concept which requires definition at the outset is the use of the term "merger" in the title and throughout the text. This term refers inclusively to any combination Of previously independent companies. The term "merger" is used because of its general popularity, but will be used interchangeably with other terms whenever this practice seems appropriate or necessary. Federal tax laws recognize the combination of corpor- ations by consolidation or by merger. A "merger" is said tO take place when one of the corporations retains its corporate existence and absorbs the other or others which thereby lose their corporate existence. A "consolidation" occurs when a new corporation is created to take the place Of the constituent firms which are themselves dissolved in the process.1 Therefore, if companies A and B combine to form C, they consolidate; if one of the two old companies loses its identity by combination with the other, they merge. Using the federal tax laws definition of these terms, the survey revealed that only two of the fifteen responding firms undertook consolidations rather than mergers. This result might be expected in view of the fact that the ac- quiring firm was typically much larger than the merged company.2 Consolidations occurred in cases where smaller firms joined forces. The Federal Trade Commission differentiates between the terms "acquisition" and "merger." This agency states that the term merger is suggestive of a combination of companies of a similar size, whereas dissimilarity in size is suggested by the term acquisition.3 Under the definitions Of the Commission, probably very few of the food chain 1Prentice-Hall, Inc., Prentice-Hall Federal Taxes, 11 (Englewood Cliffs, New Jersey: IPrenticeiHall, Inc., 1957), D. 9805. 2For a comparison of the size of the acquiring and Inerged food chains included in the survey see Appendix C. 3Federal Trade Commission, Report on Corporate Mergers jflgd Acquisitions(Washington: U.S. Government PrintingIOf- ifice, 1955), pf—AO. combinations taking place in 1956 could be classified as mergers. This concept of "merger” will not be used, but the Commission's use of the term ”acquisition" is of some descriptive value. The term "purchase" is also in common usage. This term may be more correctly used when an outright sale of stock or assets is made to the acquiring firm. This term would aptly describe many of the food chain combinations occurring in 1956. Several respondents were quick to note that their company did not "merge" with the smaller acquired firm. The President of one major chain stated: I would like to point out that our company did not merge. . . . We simply purchased stores for a cash consideration on the basis of solid asset values. Further distinctions may be drawn between the holding company transaction and merger. The holding company arrange- ment is usually accomplished by the purchase of a control- ling interest in the stock of one corporation by another. The purchasing corporation is known as the parent or holding company and the company whose stock is acquired is called the subsidiary. The holding company arrangement constitutes a "merger" when it is undertaken for operating reasons as Opposed to mere financial control. As a notable illustration of the latter, on Novem- ber 25, 1955 it was announced that W. Garfield Weston and ‘ u"Multi-Unit Mergers in 1956:" ORL_El£-’ p. 34' lO Associates purchased controlling interest (23 per cent of the outstanding common stock) in the National Tea Company.5 The terms "combination" and "amalgamation" commonly include any business arrangements by which the ownership and management of independently operated properties are brought under the control of a single management. These terms are more or less synonymous with "merger" as this term has been defined. The Direction of Mergers Mergers may take place in widely different directions which have been traditionally designated as horizontal, vertical and circular or conglomerate.6 The first two are common to food retailing whereas the latter is generally not, being found most commonly among the widely-diversified manufacturing firms. This paper is primarily concerned with horizontal- type mergers. In the horizontal merger, competitive-type units are joined. Both the acquiring and the merged firm are engaged in similar operations, for our purposes food retailing. With two exceptions, the thirty-six merged firms included in the sample represented horizontal additions to k 5National Association of Retail Grocers, The Merger ngement in Retail Food and Grocery Distribution (Chicago: National Association of Retail Grocers, 19567, p. 6. 6H. A. Toulmin, Jr., Millions in Meggers (New York: QB. C. Forbes Publishing Company, 1929), p. 96. 11 the acquiring firms. Horizontal mergers are by far the most significant and dominant in food retailing. Vertical mergers are those in which the merger repre— sents a movement forward towards the end product stages of distribution or, as is more common among food retailers, backwards towards the functions of wholesaling and pro- duction of food products. The forward-vertical merger is well illustrated by the 1956 acquisition of the Piggly-Wiggly Midwest Company and Klein Supermarkets, Incorporated, by the Consolidated Foods Corporation. The acquiring firm conducts a general wholesale grocery business and engages in canning and processing of a wide line of food products. The Piggly- Wiggly and Klein mergers represented the firm's first entry into the retailing field.7 Backwards vertical mergers have been undertaken by food chains which felt that it would be advantageous to acquire wholesaling operations or to process as well as distribute food products. The facilities required for these purposes need not be acquired through merger but are Often built to the required specifications. Productive facilities are more widespread among the larger food chains, and in a horizontal merger of two large 7Moody's Investor Service, Moody's Industrials (New Ybrk: P. B. McCruder, Publisher, 1956), p. 2319. 12 firms, a vertical acquisition would be likely to emerge. None of the firms surveyed reported vertical acquisition of properties. In addition to retail stores, only trans- portation equipment and warehousing facilities were acquired. The absence Of vertical acquisitions among the responding firms is attributed to the relatively small size of the firms which were absorbed in 1956. Only four of the thirty- six transactions were concerned with twenty-five stores or more and twenty-five of the transactions involved ten or less units. As an example of backward-vertical merger activity by a retail food chain, Safeway Stores, Incorporated, has acquired firms in a wide range of food processing fields including meat packing, butter, cheese and other Operationsg Circular or conglomerate mergers are those in which no readily discernible relation exists between the nature of the business of the acquiring and the acquired firm. For example, American Home Products Company has followed a policy of expansion through diversified mergers that have provided the firm with such seemingly dis-allied interests as pharmaceuticals, house paints and Chef Boy-Ar-Dee Spaghetti.9 8Federal Trade Commission,Report of the Federal Trade memission on the Merger Movement (Washington: U. S. Government Printing Office, 19H8), pp. 52-54. 9 Ibid., pp. 62-64. CHAPTER III MERGER PROCEEDINGS Initiation of Negotiations The first step leading to a merger is the discovery by some party that an opportunity exists whereby an appar- ent advantage may be gained if one firm joins with or acquires all or part of another. Negotiations originated by this party may eventually lead to the consummation of the merger. Merger negotiations may be initiated by (l) the ac- quiring firm; (2) the acquired firm; (3) both, jointly; (A) by an outside promoter, or (5) by a divesting firm. TABLE I INITIATION OF NEGOTIATIONS LEADING TO THE MERGER OF FIFTEEN FOOD CHAINS IN 1956 Initiating Party Number of Mergers Management of the merged firm Management of the acquiring firm An outside promoter n>ovq Total 15 .4... _k _—‘ 1A According to the Federal Trade Commission, promotions by the acquiring firm are the most common.1 When the merger is regarded as a tool of expansion, initiatitwtby the ac- quiring firm seems logical. Promotion by the merged firm is said to be common when smaller companies wish to sell out to other firms.2 Apparently this desire was predomi- nant among several of the firms surveyed. [See Table I.] The top management of large food chains insist that the small companies seek them out. The President of American Stores comments: Virtually all of our acquisitions have been made through approaches to us.3 The top management Of National Tea agrees: We seldom had to go out and scout acquisitions. Generally, word gets around that we‘re interested in consolidating or expanding into an area and the acquisitions seek us out. Initial joint negotiations are not common, Occurring usually where the firms have been working together and con- sider it mutually advantageous to operate as one organization. A notable jointly-promoted merger was that of several small food chains in the Washington, D. C., area. The Food-Town 1Federal Trade Commission, Report on Corporate Mergers and Acquisitions, Op. cit., p. 2Ibid. 3Len Kanter, Mergers U.S.A. (New York: Food Publi- cations, Inc., 1957), p. 9. “Ibid. 15 firms originally banded together for joint warehousing and purchasing. Later the members decided upon a complete integration of their independent operations.5 Mergers are initiated by professional promoters in anticipation of personal gains. Various methods are em- ployed in compensating the promoter. A common practice is to pay him a cash retainer to cover his immediate expenses and to assign him a block of stock if the merger is consum— 6 mated. Operating executives of the firms surveyed were responsible for the initiation of most mergers. The manage- ments of two acquiring firms used outside promoters. Negotiations may be initiated by a divesting firm disposing of a portion of its assets as, for example, when a firm desires or is forced to sell a part of its property or business. Merger Negotiations Negotiations are usually originated on an informal level. The most practical procedure is to seek the cooper- ation and the consent of the key interests of the firm to be merged. If this obstacle is hurdled, the chances of over— coming any opposition of dissenting stockholders are much better. 5Annete C. Ward, "3 Chains 'Force‘ Food Town into Washington, D.C. Merger," Supermarket News, November 12, 1956, p. 1. 6Federal Trade Commission, Report on Corporate Mergers End Acquisitions, op. cit., p. 89. 16 The evaluation of the firm to be merged is a vital area in the merger negotiations. Before negotiations on this matter begin, the acquiring firm will have thoroughly investigated the properties and the records of the firm to be merged.7 Professional assistants such as accountants, lawyers and engineers will be employed in this investigation. The price of the assets or shares is largely based upon informal bargaining. At times this bargaining may be competitive. Contacts with industry leaders revealed that it is not uncommon for a food chain seeking merger to have several bids or offers. On the other hand, the merging firm may be in a poor bargaining position when financial difficulties or estate taxes press a rapid liquidation. Some considerations involved in the evaluation of the firm to be merged are (l) the book value of the firm, (2) the market value of its securities, (3) the appraised value of the firm, and (A) the earning power of the firm. Seldom, if ever, will the price of the firm be based upon the book value of the firm. This value fails to register current or replacement prices and is deficient because of the nonuniformity of the accounting methods of the firms . The market value of a corporation will quite often EPIDroximate the current market price of its securities. H 7For a discussion of the details involved, see: George H1311_is Newlove, Consolidated Statements (New York: D. C. eéii:h and Company, 1948), pp. 4-12. 17 This is not applicable to small, cloSely-held firms since their stock has little negotiable value. A study of several mergers revealed that the exchange ratio of common stocks rather closely conformed to the market value of the re— spective securities.8 If an appraisal of the firm's holdings is made, the property is ordinarily broken down into its component parts for the purpose of detailed examination. The appraisal value is not a complete answer to the valuation problem since the results will not usually be universally acceptable. It is axiomatic that an enterprise is only worth what it can earn. The firm will not be merged unless the anti- cipated earnings or savings will support the investment. Therefore, the dollar sales and the operating profit of the firm are all-important valuation considerations. When an agreement has been reached through informal proceedings, the participants will draw up a memorandum embodying, in plain business language, a statement of the 9 proposed terms. If this meets with the approval of key interests, a formal agreement is drawn up concerning such vital factors as the price of the assets or shares or the 8William H. Husband and James c. Dockeray, Modern §2§¥§9ration Finance (Chicago: Richard D. Irwin, Inc., ), p. 535. 9John C. Best, "How to Buy A Company," Dun‘s Review EEELJflodern Industry, March, 1955, p. 107. 18 exchange ratio of securities, rights of stockholders and creditors, names of the company officers and directors, maintenance of the merged firm's name and a complete de- scription of the firm's new capitalization.lO If the securities of the acquiring firm are listed on a national exchange then the merger must clear with the 11 Under the provisions of Securities Exchange Commission. a newly-passed federal law, the Premerger Notification Act, the Department of Justice will require sixty days advance notice if the combined assets of the firms exceeds $10 million. If both firms are engaged in interstate commerce, their legal counsel may secure an opinion from the Federal Trade Commission on the antitrust implications of the pro- posed consolidation. Authority to Merger The authority to merge is conferred by the state either in the charter of the corporation or by state law. 'Phe acquiring firm will usually not require the consent of tflfieir stockholders when undertaking a merger. Unless other- vwlse stated in the corporate charter or state laws, a merger mEMY be effected merely by the action of the directors of 10Prentice—Hall, Inc., Prentice-Hall Corporation .Egggggg (New York: Prentice-Hall, Inc., 1955), p. 2416. 11Best, op. cit., p. 107. 19 12 In some states the merger will the acquiring firm. require a unanimous vote of stockholders if the merger would enter the company into a new line of business.13 If additional stock must be issued as consideration for the merger, the consent of a majority of stockholders will usually be required.lu Six of the fifteen acquiring firms responding to the survey noted that the approval of their stockholders was required before the merger was consummated. At common law a corporation could not undergo merger unless the unanimous consent of the stockholders was ob- tained. The consent of the stockholders of the merged firm is always required. Most state laws permit a merger to take place after approval of a specified majority of stockholders. However, the merger of a firm in financial distress will usually require the approval of only a simple majority of the stockholders.15 Proceedings followed in merger negotiations will vary 16 according to the method of merger. The cost and complexity 12Prentice-Hall, Inc., Prentice-Hall Corporation Guide, 0E). cit., p. 2416. 13Husband, op. cit., p. 5A5. lLLNewlove, op. cit., p. 3. 15Ibid. 16A discussion of several different methods of merger appears in Chapter IV. 20 of merger proceedings are likely to be much greater when a new company is formed than when one firm merely absorbs the other. In the former case it is necessary to float new securities, liquidate the old firm and transfer the assets. Rights of Dissenting Stockholders A sufficient number of dissenting stockholders may prevent the completion of merger proceedings. A minority group insufficient to halt merger proceedings by ballot may be able to do so by seeking an injunction against the assenting stockholders and officers. An injunction may prohibit the transaction on the grounds that the corporation has not the legal authority to merge or that the move has been taken in bad faith.17 If the merger does obtain the required vote, the stockholders may refuse to sell their shares or make the required exchange. State laws which permit mergers to take place with less than the unanimous consent of the stock- holders of the merged firm will generally make provision IYDr paying the dissatisfied stockholders the appraised 18 VaJJJe of their shares at the time of the merger. Stock- hOlders dissenting to the merger have a certain specified tinue to file a demand upon the corporation for the payment 8 17Prentice-Hall, Inc., Prentice-Hall Corporation el?‘fice (Englewood Cliffs, New Jersey: ‘Prentice-Hall, Inc., WVOL 1, p. 2921. 18Ibid., Vol. 1, p. 2u19. 21 of the fair value of their stock. The method of appointing appraisers varys from state to state as do the proceedings involved in seeking this payment. Even when completed, a merger may be enjoined by action at law on the grounds that the merger was undertaken fraudulently or in bad faith. Minority stockholders are also protected by courts of equity against fraud or oppres— sion. Stockholders proving damages are entitled to redress from assenting stockholders.19 Preferred stockholders are not bound to take stock in the new corporation. After the merger, the continuing corporation is liable to the preferred stockholders re- garding stock dividends.20 These shares may be called in if a redemption clause exists. An attractive exchange ratio may be offered for common stock or bonds of the acquiring firm. Rights of Creditors Generally, the merger will not require the consent <>f the creditors of the firm to be merged. In the event of fruiud creditors may, however, halt merger proceedings. The merger transaction may not impair the rights of thf? creditors. Legally, the liabilities of the merged firm 19Flode.Burtchettand Clifford M. Hicks, Corporation gillauumb(New York: Harper and Brothers Publishers, 19H8), - 557 . 20Newlove, op. cit., p. A. 22 are assumed by the acquiring firm only if the merger con— tract specifies.21 As a practical matter, when the merged firm is dissolved, the liabilities become attached to the acquiring firm. When the merger preserves the corporate entity of the merged firm, the creditor's position requires no adjust- ment aside from the fact that the credit rating of the firm is likely to be influenced by the transaction. The laws of some states specifically provide that the merged firm may not be dissolved, but must continue for the purpose of ad- justing its liabiiities.22 Whether the liabilities are retained by the merged firm or assumed by the acquiring corporation, the debts of the firm are legally enforceable. Unsecured creditors have no claim against the assets of the acquiring firm but may enforce their claims through legal proceedings. Since the acquiring firm cannot receive better title than the merged firm possessed, secured leins are not af- fkected by the merger.23 Upon default, the secured creditor rrlayeither bring an action at equity to follow the assets Of‘ the merged firm or he may bring an action at law to erlfbrce the liabilities of the company. \ 21Ibid. X 22Prentice-Hall, Inc., Prentice-Hall Corporation Ser- d&’ 0p. Cite, V01. 1, p. 20150 23Husband, op. cit., p. 547. CHAPTER IV METHODS OF MERGER To say that there are a few well defined and estab- lished approaches to consolidation would be incorrect, since each transaction has unique provisions. But it will be possible to distinguish between a few rather clearly defined avenues of operation through which mergers may be arranged. The problems of finance involved with each method will be discussed briefly. Merger of the properties of an acquired firm may take place through:' (1) a direct purchase of the assets of the merged firm; (2) a negotiated exchange of the stocks of the acquiring and the merged firm; (3) a direct purchase of the stock of the merged firm, or (A) through some combination of these. In every case it may be said that a sale of the assets of‘the merged firm is involved for some consideration.1 This (nansideration may be in the form of cash or securities. TTlis is not to imply that every sale of assets constitutes a merger. The method of merger employed by the surveyed food Chains is indicated in Table II. 5 \ V’ 1Prentice-Hall, Inc., Corporation Service, op. cit., 01. 1, p. 2400. TABLE II METHODS BY WHICH SEVENTEEN FOOD CHAINS WERE MERGED DURING 1956 Number of Times Method Employed Mentioned Purchase of assets 8 Stock exchange 7 Stock purchase, from concentrated stock- holders 3 O Stock purchase, on the open market Total 18* *One respondent noted that a combination had been used. The Asset Purchase The simplest way to bring about a consolidation in the average corporation is to arrange through the officers and directors of the company for a purchase of its assets.2 In the asset purchase merger, the acquiring firm will purchase, for a cash consideration, such assets as the land, buildings, inventory, accounts receivable, patent rights, etc. of the merged firm. All or only a portion of the This transaction is a "sale” in assets may be purchased. tflde true sense of the word. Of the eight food chains noting tkuat the asset purchase method had been used, two stated théit they had not purchased all of the properties of the mel"ged firm. 2Burtchett, op. cit., p. 565. 25 The fundamental limitation of the asset purchase method is the large capital requirements which will nec- essarily be involved. Generally,the acquiring firm will favor a purchase of assets over a purchase of stock.3 Because the asset pur- chase transaction gives the acquiring firm a larger tax basis, it is likely to reduce the taxable income in subse- quent years.u Prior to the 1950 Amendment of the Clayton Act, the asset purchase method enjoyed great popularity among acquiring firms because its use exempted them from the antitrust proceedings of the Federal Trade Commission.5 The Negotiated Stock Exchange Under the negotiated exchange method, representatives of the acquiring and the merged firm meet and negotiate for an exchange of their common stocks. The exchange ratio agreed upon represents, in effect, the price of the merged firm. Among active securities, the ratio of exchange is likely to approximate the market value of the stocks.6 ‘ 3J. Kieth Butters, John Litner, William L. Cary, and Powell Niland, Effects of Taxation on Corporate Mergers ((3ambridge: The Riverside Press, 1951), p. 317. uIbid. 5See Chapter V, ”Mergers and the Federal Lawf]p.34- 6Husband, op. cit., p. 535. 26 The negotiated exchange offers the distinct advantage of low capital requirements. When this method is used, the firm‘s expansion is less dependent upon the availability of capital to the firm. Small food chains are said to have great difficulty in raising funds required for expansion 7 purposes. The stock exchange may represent a further division of the present shares outstanding or the exchange may be accompanied by an increase in the capital stock of the acquiring firm. One respondent noted that such an increase had been made. A limitation of the stock exchange method is that the control of the acquiring firm may be threatened through its use. Large, or continual mergers on the basis of stock ex- changes will be likely to weaken the relative position of key interests. This will affect their ability to control the management and the policies of the firm. The stock exchange method is well illustrated by the rnerger of Piggly-Wiggly Midwest Company, Incorporated, in .1956. In this transaction involving thirty-four retail food fStores, the Consolidated Foods Corporation exchanged all of 1Diggly-Wiggly's outstanding stock for 211,603 common shares 0I7 Consolidated. Further provision was made for the sub- S€3quent issuance of up to 200,000 more shares dependent uFNJn the future earnings of Piggly-Wiggly. \ 7National Association of Retail Grocers, op.cit.,p.l7. 8Moody's Investor Service, op. cit., p. 2419. The Stock Purchase Historically, the customary and prevailing method of absorbing companies was through the purchase of the firm's outstanding common stock. Although now less important, stock purchase mergers are still of some significance. The shares of the merged firm may be obtained through direct negotiations with the officers and directors of the firm, through dealings with key stockholders and, if the stock is widely held, through the purchase of the stock on the open market. Three of the responding firms noted that their mergers had been effected through a purchase of the stock of the merged firm. In these cases, the stock was purchased solely from concentrated interests. The stock of the merged firms was, in all likelihood, very closely held. The merged firms were very small, none possessed more than ten stores. Purchase of stock on the open market is open to severe limitations. The price of shares will rise sharply as soon as the rumor of a possible merger is afloat or, at any rate, as soon as the floating supply of shares is 1 Eibsorbed. The risk of failure is also present and control- Jaing interest may not be obtained. For this reason, a stock Pharchase merger is not likely to be undertaken unless the Eitockholders are relatively few and in favor of the sale. The stock purchase merger is open to the same objection 3‘3 the asset purchase method. Namely, the extensive capital IViquired to complete the merger transaction. 28 The Method of Finance The questionnaire choices concerning the method of finance involved in the merger were: (1) stock exchange; (2) retained earnings (internally financed); (3) bank loan; (4) issue of additional common stock; (5) issue of addi- tional preferred stock; (6) floated new bond issue; (7) funds borrowed from company officers; and (8) funds borrowed from an insurance company. Each respondent checked at least one of these methods. No other methods were noted in the provided space although some explanations were made for purposes of clarification. The stock exchange method probably presented the least financial problems to the acquiring firms, being at once a method of merger and a method of financing the merger. Since stock of the acquiring firm represents the consideration required for the purchase, further capital needs will be minimal. One of the firms undertaking a stock exchange Inerger noted that the outstanding common stock had been increased. Other than this, no further means of finance ‘were employed by the seven firms using the stock exchange me thod. Both the stock and asset purchase methods require tflat capital be obtained from some internal or external SCTurce. The methods of finance employed by the responding f1dr‘ms are summarized in Table III. 29 TABLE III METHOD OF FINANCE EMPLOYED IN THE MERGER OF SEVENTEEN RETAIL FOOD CHAINS IN 1956‘ N Method of Finance ufigfigiggegimes Retained earnings Stock exchange Bank loan Floated new bond issue Issued additional common stock Issued additional preferred stock Borrowed funds from officers of the firm Insurance company loan ksewen1m txlfl Total R) U1 * *Several respondents noted that a combination of methods had been used. The methods by which the acquiring firms raised the capital necessary for their stock purchase or asset purchase acquisition seemed to be related to the size of the acquiring firm. Larger firms probably had easier access to the required funds. In general, the largest responding firms tended to note that they had financed their acquisition solely from one source. Only the largest firms financed their acqui— Sitions from retained earnings alone. Two of the larger firms floated bond issues to cover the costs of the acquired Eissets. Stock exchange mergers were utilized by firms of all Sizes . 30 With the exception of those undertaking stock exchange mergers, smaller firms tended to use multiple sources of funds. Bank loans, insurance company loans and loans from company officers were used only by small firms. Of the firms noting that these methods had been employed, none had as many as twenty stores, three had less than ten. CHAPTER V MERGERS AND THE FEDERAL LAW Merger activity has played an important role in shaping federal law. Mergers have occurred in waves during prosperous eras, and major waves have contributed to the enactment of such laws as the Sherman Antitrust Act, the Federal Trade Commission Act, the Clayton Act, the Public Utilities Holding Company Act, the Securities Exchange Act and, more recently, the Anti-Merger Act. The Clayton Act of 1914, as amended by the Anti4Merger Act of 1950 and enforced through the provisions of the Federal Trade Commission Act of 1914, provides the primary legal means for the regulation of mergers of firms engaged in interstate commerce. The inclusiveness of this federal law largely precludes prosecution under the old Sherman Act.1 Several mergers which were declared legal under the :Sherman Antitrust Act would probably not have been allowed ‘under the Amended Clayton Act.2 1Federal Trade Commission, Report on Corporate Mergers amid Acquisitions, op. cit., pp. 156-160. 2Irwin M. Stelzer, Selected Antitrust Cases (Homewood, Illinois: Richard D. Irwin, 19557, p. 711‘. 32 The Retail Food Industry At the outset it should be noted that in no instance have formal proceedings been taken against any food re- tailing chain under the anti-merger provisions of the Clayton Act.3 However, a legal advisor of the Federal Trade Commission has stated that a number of mergers currently under consideration by the Commission do involve food chains.“ Also, a public statement by a representative of the Commission warned that proceedings may be initiated against offending retail food chains in the future.5 Interstate Commerce For a merger to come within the jurisdiction of the federal law, both the acquiring and the merged firms must be engaged in interstate commerce. Some interests hold that this point constitutes a loophole in the law since “. it has the effect of allowing acquiSitionS Of local food distributors by large interstate concerns that would .!16 otherwise violate the Clayton Act. Unlike other federal laws, the Clayton Act's merger provisions apply only to ¥ 3From personal correspondence with Frank C. Hale, ILegal Advisor, Federal Trade Commission, May 22, 1957. “Ibis. 5Marvin Chaplin, "FTC is Studying Recent Mergers by lwkajor Supermarket Chains," Supermarket News, October, 1956, IRE). l, 22. ED 6National Association of Retail Grocers, op. cit., . 20. 33 transactions "in" interstate commerce and not to merger activity which merely ”affect" interstate commerce.7 Merger transactions not subject to the federal law will necessarily be governed by applicable state laws. These statutes vary widely, some are exact duplicates of the Clayton Act whereas others are at great variance with it.8 Specific provisions which deal with the lawfulness of mergers in interstate commerce are Sections 7 and 11 of the Clayton Act. The first is concerned with a statement of the federal regulation while the latter makes provision for the enforcement of the law. Section 7 This section was originally written to take action against mergers effected through stock purchase, this being the prevailing method of absorbing firms at the time. This wording constituted a serious loophole in the law and was continually evaded by companies who confined their mergers to the purchase of the assets of the acquired firm. The Federal Trade Commission lacked the authority to take action against mergers which did not involve the purchase of stock. IFor example, the Consolidated Grocers Corporation successfully ‘ 7Commerce Clearing House, Trade Regulation Repprter (Iflew York: Commerce Clearing House, Inc., 1956), II, p. il0,033. 8For a brief summary of state laws comparable to the Eanti-merger provisions of the Clayton Act, see: Morris IDOrkosch, Antitrust and the Consumer (Buffalo, New York: IDennis and Co.,IInc., 1956), pp. 428-432. 34 pleaded this defense in 1947.9 The law now covers all mergers of interstate firms regardless of the manner in which they are undertaken. The amended section reads as follows: . . . no corporation engaged in (interstate) commerce shall acquire, directly or indirectly,the whole or any part of the stock or other share capital and no corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another corporation engaged also in commerce, where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition or to tend to create a monopoly. The terms "substantially to lessen competition" and “tend to create a monopoly" have offered problems of judical ” interpretation. These topics will be considered separately for convenience in discussion. EffectsflUpon Competition The type of information which the Commission considers in determining whether a merger is restrictive upon competi- tion are: (1) information concerning the sales volume of the acquiring and the merged firm, (2) information concerning the share of sales controlled by the acquiring and the A— 9Federal Trade Commission, Report of the Federal Trade Cpmmission on the Merger Movementffop. cit., p. 4. 0Federal Trade Commission, Rules of Practice, Pro- cedure, Organization and Acts (Washington: U. S. Government Printing Office, 1955), p. 14. 35 merged firm,and (3) particular facts concerning subsequent changes in competition in the market affected.ll Under the Clayton Act, a merger need not have actual or immediate effects upon competition since the law applies to the probable future effects of the transaction. The law, as amended in 1950, can be applied whenever it appears that competition may be adversely affected, and no actual evi- dence need be presented. Furthermore, any particular merger need not "substantially" affect competition if it is one of a series of mergers which, if taken as a whole, would have a "substantial" effect.12 A merger which brings a food retailing firm into a new area would not seem to affect competition inasmuch as the number of competitors in the market remains unchanged. One writer made this comment: The Federal Trade Commission is looking into recent mergers involving large super market chains for possible violations of antitrust laws. Many major mergers have $2.113:Zii‘iifipitsififiainié’vé‘ié’.ifieas’ a... hard” lessening In a personal conversation with the author, the legal counsel for a major food chain expressed general agreement 11For a discussion of the Federal Trade Commission's interpretation of these criteria, see: Federal Trade Com— mission, Report on Corporate Mergers and Acquisitions, pp. 213., pp. 173-210. 12Ibid., p. 157. l3Godfrey M. Lebhar, Chain Stores in America (New York: Chain Store Publishing Corporation, Inc., l952),p.29. 36 with this statement but was quick to add that the as—yet- untested law applies to "any line of commerce in any section " and not "in any section or community" as of the country, stated in the Clayton Act prior to the 1950 Amendment. The acquisition of a food chain in an area which is already served would seem more apt to "affect competition" than entry into a new area. Vertical mergers may also be held to adversely affect competition. For example, when a food chain purchases a wholesaling operation, competition may be weakened because independent food companies must either find a new source of supply or purchase indirectly from 14 their competition. Discrimination may occur during supply shortages. Tendency Towards Monopoly Prosecution may be undertaken on the grounds that a particular merger'"tends to create a monopoly." The state- ment is frequently made that the major cause of indus- trial concentration or "big business" in the United States is the growth of large firms through merger.15 This was undoubtably true of the extensive merger activity which took place around the turn of the century. However, recent 1”National Association of Retail Grocers, op. cit., p. 11. 15J. Fred Weston, The Role of Mergers in the Growth of Large Firms (Los Angeles: University of California Press, 1953): p. 101. 37 studies indicate that this is not a true picture of recent merger activity. In a study of seventy-eight firms in highly-concentrated industries, Weston concludes that ". external growth is a relatively minor fraction of the total growth of most of the firms."16 Litner and Butters claim that in the mergers occurring between 1940-1947, the " reduced relative concentration of the industries was as a result of the acquisitions of these companies over the eight year period."17 This reduction in concentration re- sulted from the strengthening of smaller and middle-Sized firms which detracted from the dominance of the largest firms. The recent case of Uw38cottPaper Company is illus- trative of federal proceedings undertaken to prevent over- concentration in a particular industry. In June, 1956 the Federal Trade Commission filed a complaint charging that Scotfls acquisitions of Soundview Pulp Company, Hollings- worth and Whitney Company, and Detroit Sulphate Pulp and Paper Company were contrary to the Anti4Merger Act. The Commission made no claim that any competition exisced be- tween Scott and the acquired companies, but, rather, stated that the company had become the dominant firm in the l6Ibid., pp. 101—102. 17John Litner and J. Kieth Butters,'"Effects of Merger on Industrial Concentration," The Review of Economics and Statistics, XXXII (February, 1950), 101. 38 manufacture and sale of paper products and that any sub- stantial acquisition by a dominant firm violates the Clayton Act. Although competition was not injured, the Commission felt that the transactions tended towards monopoly.18 An outstanding characteristic of the food retailing field is the absence of any single concern which has the power to exert a controlling influence. In terms of units operated, independent operators (those with ten stores or less) operate 94 or 95 per cent of the total number of grocery stores.19 The estimated 437 retail food stores absorbed in food chain mergers in 1956 amounted to a very small percentage of the estimated 310,000 food stores in operation.20 Assuredly, the sales volume of these units was of much more significance than this comparison reveals. Many very small operations are included in this larger figure. This example does, however, dramatize the lack of industry-wide concentration. Also of significance is the fact that the firms acquiring foOd chains in recent years 21 have been the smaller and middle-sized firms. In the 1956 food chain mergers, the very largest firms were 18Annual Repprt, theEkxufirPaper Company, 1956, p. 7. 19National Association of Retail Grocers, op. cit., p. 4. 20R. w. Mueller, "Facts in Grocery Distribution," Progressive Grocer, April, 1957, p. 56. 21Kanter, op. cit., p. 6. 39 inactive. Many of the larger regional and national chains were very active in this merger movement. Jurisdiction of the Federal Trade Commission Section 11 of the Clayton Act gives the Federal Trade Commission the authority to enforce compliance upon all firms subject to its jurisdiction. The jurisdiction of the Commission is specifically stated in the Federal Trade Com- mission Act of 1914 and includes authority over all fields of business with the exceptions of banks, common and air carriers and firms subject to the Packers and Stockyards Act of 1921.22 Exempted firms are under the jurisdiction of other governmental agencies. Interstate food chains are ordinarily subject to the jurisdiction of the Federal Trade Commission. However, the exemption of firms subject to the Packers and Stockyards Act is currently posing an interesting legal problem. This law defines a meat packer as: . any business in whatever primary field, connected. in any way, or operating to any degree, in meat packing? Food Fair Stores, Incorporated, has temporarily avoided the jurisdiction of the Federal Trade Commission on an al- 1eged violation of Section 2 of the Clayton Act because the firm owns and operates a meat-packing plant.24 Until this 22Federal Trade Commission, Rules of Practice, Pro— cedure, Organization and Acts, op. cit., p. 3. 23Art Garel, "Food Fair Ruled FTC Exempt; Others Packing Meat Affected," Supermarket News, April 22,1957, p.l. 24Ibid. 40 law is changed or clarified, mergers undertaken by any of fourteen food chains, wholesalers, manufacturers or other businesses operating meat packing facilities would appear to be exempt from the Clayton Act.25 These firms do, how- ever, come under the jurisdiction of the United States De- Ipartment of Agriculture. This situation will probably be resolved in the near future. Hearings have already been suggested which would transfer antitrust and discriminatory practices of all meat packers to the Federal Trade Com- 26 mission. Proceedings Under Section 7 of the Clayton Act An inquiry or investigation of an interstate merger may be undertaken by the Federal Trade Commission upon the request of the President, Congress, other governmental agencies or the Attorney General or upon referrals by the Courts or the complaint of a consumer, businessman or con- cern aggrieved by the merger.2-7 The Commission will usually initiate an inquiry or investigation into a particular merger 25Ibid. 26Art Garel, "Meat Packing Ruling Called Blow to FTC Usefullness," Supermarket News, April 29, 1957, p. 4. 27Federal Trade Commission, Rules of Practicep Pro- cedure, Organization and Acts, op. cit., p. 7. 41 on its own motion to do so. At the present time, each merger of which the Commission has knowledge is "considered for the purpose of determining its probable future effects upon competition."28 Section 7 may be directly enforced by either the De- partment of Justice or the Federal Trade Commission or indirectly enforced by any injured party through a private suit. Occasionally business concerns have undertaken legal action for damages under the Clayton Act, but suits by in— dividual persons are very rare.29 Legal action is not generally feasible since the injured person must not only. prove a violation of the Act, but actual damages as well. Moreover, the costs of carrying on such a suit are very high.30 Usually the inquiry or investigation will be under— taken by the Federal Trade Commission. This agency has the power to gather and compile evidence for the investigation of any merger of firms engaged in interstate commerce. In obtaining information, the Commission may require firms to file annual or special reports or answers to specific ques- tions concerning their organization, business practices, 28Hale, loc. cit. 2 9Forkosch, op. cit., p. 293. 3OIbid., p. 292. 42 management, etc. The Commission is authorized to subpoena witnesses and conduct investigational hearings through the Federal Courts in order to produce documentary evidence. The agency also obtains a great deal of its information from financial periodicals, trade journals and other busi- ness publications.31 To improve the effectiveness of the Commission in Obtaining information, the Premerger Notification Bill has been passed very recently.‘ This Act requires firms in- tending to merger to give sixty-day advance notice to the Justice Department if their combined assets exceed $10 mil- lion.32 This will allow the Federal Trade Commission time to halt undesirable mergers before they can be completed. Prior to the passage of this law, co-mingling of the assets of the acquiring andnmrgrd.firms greatly complicated divest- ment proceedings. Upon the request of the Federal Trade Commission or other prosecuting party,the Attorney General serves a complaint stating the offence to the firm whose merger is alleged to be illegal. A hearing is held in a Federal Court within thirty days of the formal complaint. The accused 31National Association of Retail Grocers, op. cit., p. 21. 32U.S. House of Representatives, Committee on the Judiciary, Premerger Notification, Hearings before Subcom- mittee, 5th Cong., 1st Sess., on H.R. 264 and H.R. 2143, March 6-21, 1957 (Washington: Government Printing Office, 1957). pp. 2-4. 243 firm must Show why the merger was not unlawful. The Federal Trade Commission, upon reaching an opinion that the Act has been violated, may issue a cease and desist order upOn the acquiring firm, ordering it to divest itself of its illegally acquired property or stock. If the firm refuses to comply with the order, the Federal Trade Commission may appeal to the United States Court of Appeals. Private parties are not allowed to re- ceive damages on the basis of a cease and desist order but only after court litigation.33 The decision of the Federal Court is not final but is subject to review at the request of the firm under pros- ecution. However, when the firm is issued a final decree, it will be ordered to divest itself of the stock or the assets of the acquired firm.34 Violation of the Clayton Act is a crime punishable by a maximum penalty of $5,000 fine and one year‘s imprison- ment. If the suit has been carried on by an individual or a firm, triple damages will be awarded on the basis of the 35 actual damages sustained and proven. 33Arthur T. Dietz, An Introduction to the Antitrust Laws (New York: Bookman Associates, Inc., 1951), p. 44. 34Commerce Clearing House, op. cit., Vol. 1, p. 4204. 35Ibid., Vol. 2, p. 9011. 44 Informal Pre—Merger Proceedings The Federal Trade Commission recommends that firms contemplating merger avoid the possibility of future liti- gation by meeting with representatives of the Commission and discussing the motives, terms and properties involved in the proposed merger. This service is entirely voluntary on the part of merger participants and the proceedings are highly confidential.36 This service is particularly helpful because partici- pants might otherwise unknowingly violate the federal law. Under the Amended Clayton Act, the intention of the parties is not considered in determining the legality of the 37 merger. 36Federal Trade Commission, Rules of Practice, Pro- cedure, Organization and Acts, op. cit., p. 18. 37Federal Trade Commission, Report on Corporate Mergers and Acquisitions, op. cit., p. 159. CHAPTER VI NON ECONOMIC MOTIVATIONS Mergers do not simply occur, but are the end result of long hours of planning, negotiation and work. Rather than being conceived as ends in themselves, mergers should be regarded as means of accomplishing the objectives of firms and individuals. Definition of Economic Motivations Both the acquiring and the merged firm seek to gain specific advantages through the merger transaction. These objectives will vary but are, in themselves, steps towards the expansion or the improvement of their firms. Economic motivations are those objectives which seek to improve the business conditions of the firms involved in a merger. Such factors may act to increase sales, to decrease or eliminate costs or otherwise improve the effi- ciency and the profitability of the firm's operations. Sound economics must underlie the successful merger. The economic motivations of the surveyed acquiring and merged food chains will be discussed in Chapters VII and VIII. Although food chain mergers are undertaken or, at the very least, justified in terms of economic motives, it is important to realize that human motives are involved in A6 every decision to merge or be merged. Such motives may operate at both the conscious and subconscious levels. Characteristics of Major Mepger Movements Each of the major movements in this country have had outstanding characteristics. The classical era of consolidation took place from 1898-1903 and was by far the largest and most significant of the merger movements.1 This movement was not based upon sound business motivations but, rather, it was characterized by individuals who were building personal empires.2 The second major movement took place in the 1920's and was of less significance than the first.3 Rather than being characterized by rational managerial decisions, this movement was largely based upon speculative motives. These mergers were initiated and carried out by financial inter- ests rather than by the management Of the firms involved.“ 1A. D. H. Kaplin, "The Current Merger Movement Analyzed," The Harvard Business Review, 33 (May-June, 1955), 92. 2Edward F. Howry, "An Outlook on Mergers, Review and Modern Industry, October, 1955, p. 45. 3M. A. Adelman, "An Economic Analysis of the Current Wave of Mergers," Legal, Financial and Tax Aspects of Mergers Dun's and Acquisitions, ed. Elizabeth Marting, Financial—Manage- ment Series, No. 114 (New York: American Management Association, 1957), p. 85. A Kaplin, op. cit., p. 94. 47 Modern-day mergers are far less significant than either of these major movements and are based largely upon sound business judgment.5 In general, these combinations are initiated by management and there is a definite empha— sis on the managerial problems of the firms involved.6 Personal motives are probably of minor importance in most modern-day mergers. However, it should not be assumed that personal motives are nonexistent. Some writers take the view that personal motives are the most significant factors in mOSt mergers.7 Without sharing this extreme viewpoint, it would seem worthwhile to consider some examples of its possible implications. The Acquiring Firm Expansion is not likely to be undertaken in the absence of an enthusiastic and hopeful management. This point is well expressed in the following statement: All business enterprises are the creatures of human beings. . . a business does not expand of itself; it expands because of éhe motives,passions and hopes of men who operate it. 5Ade1man, op. cit., p. 85. 6Kaplin, op. cit., p. 95. 7Arthur Stone Dewing, The Financial Policy of Corp- other ( or details) W O I O 0 manufacturing facilities for private label br 0.... an O I C d What was the approximate sales volume 6? the acquire units in the year ending 1955? o e e e e e e e e e e e e 0‘ AAA AAAAAA VVVVV VVVVV VVVVVV 7. 1. 2. 3. S. 1. 2. 3. 127' What general subjects did the merger terms cover: (a.) financial terms of the merger. . . . . . . . . . (b.) maintenance of the acquired firms name . . . . . (c.) placement of executives of the acquired firm . . (d.) rights of stockholders of the acquired finm . . (e.) rights of secured creditors upon assets of your firms.00000000000000.0000. (f.) other yjlist briefly) A AAA“ v vvvv III. 5perationsI§ince Berger Did the acquired firm operate profitably during 1955? (a.) Yes a o o o o ( ) (be) no 0-0 I 0 o o ( ) Has the'dcquired firm operated at a profit during the past year? (a.) yes . . . . . ( ) (b.) no . . . . . . ( ) On the basis of your firms past experience would you personally estimate that the sales volume added by this merger could have Been more chea l obtained.by building new stores? 1a., yes, building would have been "cheaper". . . . . (b.) no, building would have been more expensive. . Since the merger, has the sales volume of the acquired units: (a.) remained about the same. . . . . . . . . . . (b.) shown a slight or "normal" increase. . . . . . . (c.) shown a substantial increase . . . . . . . . . . (d.) Shown a Slight decrease. o o o o a o I o o o o o How many of the acquired units have since been closed: (a O ) none 0 O O C C O O C C C C O O O O O C O O O O C (be) one. o o o o o o o o o o 4 o o o o o o a o o o o (0.) two or three . . . . . . . . . . . . . . . . . . (d.) four or five 0 o o o o a o o e o o o o o o o o o (e.) more than five (specify) Why were these units closed: (a.) volume of store was too small. . . . . . . . . o (b.) replaced by new stores . . . . . . . . . . . . . (c.) duplication of area served by the acquired unit and one Of your own unitS. o o o o s o o e o o o (d.) other IV. Operating Problems In the area served by the acquired firm, was the merger immediately followed by: A AA AAAAA “AAA AA V VV VVVVV VVVV vv (a.) wide publicity through an intensive program. . . ( ) (b.) a good deal of publicity . . . . . . . . . .‘. . ( ) (0.) just a little publicity at this time . . . . . . ( ) (d.) no publicity at this time. . . . . . . . . . . . ( ) was the merger met with some local resentment? (a.) yes . . . . . ( ) (b.) no . . . . . . ( ) If so, what was done about this situation? T3 date, have the names 6T_the acquired units: (a.) all been Changed o o o o o o o o o o o a O o o o ( ) (b.) a majority have been changed . . . . . . . . . . ( ) (c.) some have been changed . . . . . . . . . . . . . ( ) (d.) none have been changed . . . . . . . . . . . . . ( ) Do you plan to evenually change the names of all these units? (a.) yes . . . . . ( ) (b.) no . . . . . . ( ) If so, within how many years would you estimate this will be done? In units which have undergone a "name change", how”was this publicized? (a.) radio or television spots. . . . . . . . . . . . ( ) (b.) newspaper, in regular food ad. . . . . . . . . . ( ) (c.) newspaper, in special ad or notice . . . . . . . ( ) (d.) other So H [‘3 Q3 8. Did the acquired firm have a "stamp" or "tape" plan? (a.)YBS......() (bo)nooccoaoo() If so, has this plan: . . . . . . . . . . . . . . . . . . . . . ( ) (a.)}x:CIlk€pt0uccoco-cocoa...ooooo() (b.) dropped and your own (if any) introduced . . . . . ( ) (c.) urdropped and no new one introduced. . . . . . . . . ( ) If not, has wstamp plan (if any) been introduced? (a. yes . . . . . . ( ) (b. ) no . . . . . . . ( ) 9. Did a duplication of private labels take place on any item(s)? (a.)yeS......() (bo)noococcoo() If so, was this felt to be a serious prdblem? (a. ) yes . . . . . . ( ) (b. ) no . . . . . . . ( ) What was done to remedy this situation: (check all that apply) (a.) introduced our labels, dropped theirs. . . . . . . ( ) (b.) introduced our labels, kept theirs as well . . . . ( ) (c.) kept their labels, did not introduce ours. . . . . ( ) (d. ) developed a new label to replace both labels . . . ( ) (e. ) other 10. Does the President of_the acquired firm—hold a position in your‘firm? (a.)yCS......() (b.)n00000000( If so, what is his present position? (job title) If not, has he been retained in an advisory capacity. (ac)yesooooco() (b.)n00000000() 11. 'Were employees given notification of the merger before it took place? (a.) yes . . . . . . ( ) (b.) no . . . . . . . ( ) If so, how long before the merger was notice given? 12. At what level was labor turnover following the merger: (a. ) excessively high . . . . . . . . . . . . . . . . . ( ) (b. ) higher than "normal", but not excessive. . . . . . ) (c. ) "normal", not noticably higher or lower. . . . . . ( ) (d. ) other 13. What was done to retain the employees of;the acquired—firm? 1h. Have "fringe" Benefits of the acquiredfirm been replaced with your own? (ac)yeSoocooc() (bo)n°ccooooo() 15. In general, have the operational procedures of the acquired firms (such as work procedures, personnel policies, etc.) (a.) remained relatively unchanged. . . . . . . . . . . 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