The Exxon-Mobil Merger: The Lessons of History
The proposed Exxon-Mobil merger, the largest merger ever undertaken, has set nervous tongues wagging. Much of the concern stems from the perceived lessons of antitrust history. For instance, Richard Blumenthal, the head of the antitrust section of the National Association of Attorneys General, has criticized the merger, arguing that "Exxon and Mobil were created as part of the breakup of the Standard Oil monopoly, the very reason we have today’s antitrust laws."2
Skeptics like Blumenthal, however, misinterpret what history tells us about business and competition.
Big Can Be Good. First, a shift to bigness often provides firms with needed economies of scale, which means lower prices for consumers and a stronger competitive edge for the United States. In 1870, when John D. Rockefeller founded Standard Oil, kerosene was selling for 30 cents a gallon. Twenty years later, Rockefeller had almost a 90 percent market share and kerosene sold for only eight cents a gallon. Customers were the real winners here, because Rockefeller’s size allowed him to cut costs, optimize use of oil by-products and improve his marketing and distribution around the world.
This need for greater efficiency is also the key impetus in the current merger of Exxon and Mobil, two parts of the old Standard Oil Company. Executives at Exxon and Mobil say that the merger will allow the new, more efficient company to close down outdated refineries, slash seven percent of their workforce and provide consumers with a better and cheaper product. Similarly, given that much of the easy-to-get oil has been recovered, other petroleum companies such as Amoco and British Petroleum are finding that in today's environment of heavy competition and lower prices, merging can be a rational way to cover today's higher costs of research, exploration and recovery.
What Restraint of Trade? Second, because of the dynamic nature of markets, monopolization is hard to achieve. For instance, the first antitrust case (in 1895) involved a merger that gave American Sugar Refining a whopping 98 percent of the sugar market. 3 However, the courts ruled that such a merger passed muster because there were still competitors in the field and no barrier to others who might want to enter the market. What happened next was instructive: in a free and open market, American Sugar Refining steadily lost ground to newcomers, and thirty years after the merger it held only 25 percent of the market for refined sugar.4
Big Can Also Be Clumsy. This tendency of the big not to remain so is a recurring lesson of history. While mergers can be crucial to achieving necessary economies of scale, they are often overrated as a tool for creating large and efficient companies that stay that way. Market forces and a never-ending torrent of entrepreneurs have tended to whittle away at large companies over the years in industry after industry.
U. S. Steel, for example, was created in 1901 when eleven companies came together to form the first billion-dollar holding company. This new behemoth controlled almost 62 percent of America’s steel market, and journalists throughout the land clucked hysterically about the dangers of monopoly. What happened next was that U. S. Steel relied too heavily on making rails for railroads and overlooked opportunities created by mounting needs for structural steel. Bethlehem Steel innovated in the new market for steel for skyscrapers and bridges and by the early 1920s, U. S. Steel’s market share had dropped below 40 percent. A similar market share decline occurred when International Harvester was created in a 1902 merger—its share of the harvester market fell from 85 to 64 percent by 1918.
The Standard Oil story. Standard Oil, in fact, was going through a similar decline when the Justice Department came along and broke it up anyway in 1911. Why? Because, as dominant as Standard Oil was, it failed to invest in the crucial Texas oil fields in the early 1900s.
Even while the government was prosecuting Standard Oil for allegedly restraining trade, one of Standard’s new competitors, Gulf Oil, built pipelines from Texas to Oklahoma, experimented with offshore drilling and developed the corner service station. "Thus even before the breakup of the combination," historians Ralph and Muriel Hidy observe, "the process of whittling Standard Oil down to reasonable size within the industry was already far advanced."5
How, then, should we react to an Exxon-Mobil merger? History tells us to do so with our index fingers in our ears—those gigantic corporations make such a loud crash when they fall.
1Burton Folsom, Jr., a historian, is senior fellow with the Mackinac Center for Public Policy in Midland, Michigan and author of The Myth of the Robber Barons: A New Look at the Rise of Big Business in America (Young America’s Foundation, 1991) and the new book Empire Builders: How Michigan Entrepeneurs Helped Make America Great (Rhodes & Easton, 1998). 2 Stephen Labaton, "Few Legal Hurdles Seen for Exxon-Mobil Merger," Midland Daily News, December 2, 1998, p. A5. 3 Exxon and Mobil, by contrast, account for only 28 percent of the total revenue of the 25 largest oil companies. Midland Daily News, op. cit. 4 D.T. Armentano, The Myths Of Antitrust (Arlington House, 1972), p. 57. 5 Donald J. Boudreaux and Burton W. Folsom, "It Just Ain’t So!" The Freeman, September, 1988; 516-17; and Ralph W. and Muriel E. Hidy, Pioneering In Big Business, 1882-1911 (Harper and Brothers, 1955).