The Celler-Kefauver Act is an anti-merger act that seeks to block mergers and acquisitions, reducing the competition in the market. Specifically, it was introduced to plug the loopholes and strengthen the Clayton Antitrust Act of 1914.
The Clayton Antitrust Act prevents horizontal mergers that aim to lower the competition. However, it didn’t say anything about vertical mergers, which involve a firm taking over the supplier. Thus, the Celler-Kefauver Act broadens the Clayton Antitrust Act’s reach to cover more types of acquisitions.
The Celler-Kefauver Act specifically focuses on two types of mergers – vertical mergers and conglomerate mergers. In vertical mergers, firms in different stages of the supply chain come together. On the other hand, in conglomerate mergers, two or more firms operating in different industries or geography come together to extend their territory or product portfolio.
In both these cases, there could be a situation when the merger or acquisition acts as a barrier to entry or reduce competition. At the same time, it gives a cost advantage to the acquiring company. A point to note is that the Celler-Kefauver Act does not directly ban vertical and conglomerate mergers unless they lower the competition.
Also Read: Conglomerate Merger
Celler-Kefauver Act – What’s the Need?
The U.S. economy was witnessing heavy growth around the 1890s. This helped the companies – both new and old – grow. To benefit from the booming economy, bigger firms undertook mergers and acquisitions of smaller firms. The public and investors did not like the companies amassing too much power and getting a sort of monopoly power. As we all know, the monopoly-like situation has its own disadvantages and vices.
Thus, there were demands for the government to intervene with regulations. The authorities then came up with the Sherman Antitrust Act of 1890. It was among the first regulations targeting mergers and acquisitions in the U.S. However, though it was one step ahead in controlling this menace; still, it had too many loopholes.
In 1914 the U.S. Congress made changes to the Sherman Antitrust Act of 1890 by introducing the Clayton Antitrust Act. This new act was an attempt to clarify the hazy wordings and plug the earlier act’s loopholes.
This new act primarily focused on price discrimination, monopoly, and the takeovers that lower the competition. However, this act also had some loopholes (discussed above). Thus, to plug these loopholes, the U.S Congress came up with another Act, the Celler-Kefauver Act.
Also Read: Classification / Types of Mergers
Celler-Kefauver Act – How it helps?
As said above, this act was introduced to plug the loopholes of the Clayton Antitrust Act specifically. The Clayton Antitrust Act was able to make laws and stop horizontal mergers and consequent menace. However, it did not have any provision, or it completely ignored the issues of vertical mergers. It gave importance only to the horizontal mergers in which firms in the same sector or making the same product go for acquisition or merger. This loophole encouraged businesses to go for vertical mergers to get a monopoly-like power in terms of cost and control of resources.
Such thinking, however, was against the free market as it reduces competition. Thus, the U.S Congress came up with the Celler-Kefauver Act to plug the loophole by expanding the Clayton AntitrAct’s scope Act to include vertical and conglomerate mergers.
This new act made it mandatory for the public companies to inform the DOJ (Department of Justice) and FTC (Federal Trade Commission) when going for a vertical merger or acquisition. The authorities will have the power to accept or reject the merger or acquisition on a case-by-case basis.
If the authorities conclude that a particular merger or acquisition would reduce competition and result in barriers, they can reject it. And, if the merger or acquisition does not pose any danger to free-market dynamics, then the authorities approve it.
Also, the earlier antitrust laws had legislations in place for certain types of mergers and acquisitions. Also, they prevented mergers and acquisitions by limiting the sale and purchase of shares. The companies circumvent these rules by purchasing the assets of another firm. The Celler-Kefauver Act took care of this as well by plugging this loophole.
Vertical Mergers vs. Conglomerate Mergers
A company tries to grow vertically in a vertical merger by merging or acquiring the vendor company. Such a merger gives the acquiring company more control over the supply chain. These mergers, however, may prove an entry barrier to new firms and reduce competition as well.
For instance, if Company A, a mobile maker, acquires Company B, a major display maker, then it could make it hard for other mobile makers to get displays. This way, Company A would get cost advantage and drive the competitors out.
In a conglomerate merger, two different entities that either operate in different segments or geography come together. Such a merger allows companies to expand the market or the product range.
The Celler-Kefauver Act notes that the two firms use resources from two other markets to form a monopoly in another market in case of a conglomerate merger. This form becomes an entry barrier for smaller companies firms and is unfair to the consumers because the consumers’ options and right to buy alternate products get substantially affected.