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Celler-Kefauver Act

An Act to Amend an Act Entitled "An Act To Supplement Existing Laws Against Unlawful Restraints and Monopolies, and for Other Purposes"

What is the Celler-Kefauver Act?

The United States Congress passed the Celler-Kefauver Act in 1950 with the goal of strengthening the provisions of the Clayton Antitrust Act of 1914. Specifically, the act was enacted to seal a loophole in the Clayton Act regarding certain forms of mergers and acquisitions. While the Clayton Act outlawed horizontal mergers planned to reduce competition, it was silent on vertical mergers where a company acquires its vendor company.

 

Celler-Kefauver Act

 

The Celler-Kefauver Act focused on vertical mergers that were designed to disadvantage other competitors by acquiring their suppliers. It also outlawed other forms of illegal holdings, mergers, and acquisitions.

 

History of the Celler-Kefauver Act

One of the earliest antitrust laws to be passed by the US Congress was the Sherman Antitrust Act of 1890. The Sherman Act marked one of the initial actions to regulate competition among US enterprises. It was introduced at a time when the US economy was growing rapidly, which led to the growth of both new and existing companies.

Large companies took advantage of the economic boom to acquire and merge with their smaller competitors, as a way of dominating specific industries and geographical locations. The public argued that the conglomerates amassed too much power, and they called for increased regulation by the government to allow a level playing field for all enterprises. US legislators responded by passing the Sherman Antitrust Act.

Although the Sherman Act marked the beginning of trade regulation, it contained too many loopholes that allowed businesses to continue with their anti-competitive business practices. The law was amended in 1914 with the enactment of the Clayton Antitrust Act. The Clayton Act attempted to clarify the vague language and inconsistencies in the preceding act by broadening the scope of business practices that were outlawed.

Some of the practices that the Clayton Act focused on included price discrimination, monopolization, mergers and acquisitions that reduced competition, etc. The US Congress passed the Celler-Kefauver Act in 1950 to strengthen the power of the Clayton Act to regulate mergers and acquisitions that lessen competition. Specifically, the Celler-Kefauver Act prevents vertical and conglomerate mergers that can reduce competition.

 

Impact of the Celler-Kefauver Act

The Celler-Kefauver Act greatly strengthened provisions of the Clayton Act by prohibiting some of the practices that were left loose in the act. For example, the Clayton Act mainly focused on horizontal mergers, where companies operating in the industry merge to form a single entity. It gives the consolidating companies greater synergies and market share.

The act did not prevent companies from merging vertically along the different stages of the supply chain, leaving space for the act to be abused by unscrupulous businessmen. The Celler-Kefauver Act was enacted to address the loophole by outlawing vertical and conglomerate mergers that were planned to reduce competition.

When public companies are planning a vertical merger or acquisition, it must first write to the Department of Justice and the Federal Trade Commission. The government agencies reserve the right to reject or approve such a transaction, depending on its findings.

If the government finds that such a merger is intended to prevent fair access to competitors offering similar products and create barriers to entry, the merger cannot be approved. However, if the government finds that an intended vertical merger will not limit access to other companies selling similar products, the merger will not be rejected.

 

Vertical Mergers vs. Conglomerate Mergers

Vertical mergers occur when a company merges or acquires its vendor company. The merger gives the combined company greater control of the supply chain process, as well as increased productivity and efficiency. Vertical mergers can be an antitrust problem if the intended merger is intended to reduce market competition.

For example, if a cement manufacturer acquires its competitor’s supplier of raw materials, such a form of acquisition is intended to disadvantage other enterprises that depend on the acquired entity for important raw materials. Through the acquisition of suppliers, the cement manufacturer will exert greater control over the market supply and prices of cement, which destroys fair competition.

On the other hand, a conglomerate merger is a merger between companies operating in totally different business activities or geographical areas. The union gives the combined company an opportunity to extend is territory, as well as increase its range of product offerings. It also gives the combined company greater market share and synergy.

The Celler-Kefauver Act argues that, when two or more companies merge to create a conglomerate, they are using their resources and money from different markets to create a monopoly in another market. If allowed, conglomerate mergers prevent fair consumer access to identical products offered by competitor firms and also create barriers to entry for small enterprises that want to venture in the market.

 

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Glass Steagall Act
  • M&A Considerations and Implications
  • Types of Mergers
  • Vertical Integration

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