STATEMENT OF SENATOR LEAHY RANKING MEMBER, SENATE JUDICIARY COMMITTEE HEARING ON "MERGERS AND CORPORATE CONSOLIDATION IN THE NEW ECONOMY"

June 16, 1998

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Mergers these days are coming in all shapes and sizes. We are seeing vertical mergers between suppliers and customers, such as the Occidental Petroleum merger between a pipeline company and natural gas production company; horizontal mergers between former competitors in the banking industry, the aircraft manufacturing industry and between railroads; and conglomerate mergers between companies involved primarily in different businesses, such as the Travelers Insurance Company and Citibank merger.

We are even seeing mergers involving companies that are both competitors and suppliers to each other. These may require a whole new geometric lexicon we may need new terms such as "diagonal" mergers. For example, the $11 billion merger between Lockheed Martin and Northrup Grumman involved both horizontal and vertical elements in several markets of defense contracting.

The one thing these mergers have in common is the startling number of zeros needed to value the deals, and the experts are predicting that the number and value of these merger deals will continue to inflate.

While megamergers have cut a swath across a number of industries from office supply and aircraft manufacturing to banking and trash hauling the consolidation that raises the most questions in my mind are those that involve incumbent monopolies. Specifically, the mergers among Regional Bell Operating Companies, which continue to have a virtual stranglehold on the local telephone loop, pose the greatest threat to healthy competition in the telecommunications industry.

In fact, outside of the Bell Companies and GTE, the independent phone companies still account for a paltry one percent of the total market for local phone service.

The Telecommunications Act's promise of competition was a sales pitch that has not materialized to benefit American consumers. Instead of competition, we see entrenchment, megamergers, consolidation and the divvying up of markets. Even Edward Whitacre Jr., the Chairman and Chief Executive Officer of SBC Communications, testified several weeks ago before the Antitrust Subcommittee that "The Act promised competition that has not come."

Since passage of this law, Southwestern Bell has merged with PacTel into SBC Corporation, and Bell Atlantic has merged with NYNEX. Now, SBC Corporation is seeking to purchase Ameritech. What once had been seven separate local monopolies will soon be four, with the possibility of fewer entities on the horizon. As a recent editorial in the Rutland Daily Herald commented, "It might even seem as if Ma Bell's corpse is coming back to life."

I voted against the Telecommunications Act because I did not believe it was sufficiently procompetitive. I said in my floor statement on the day the new law passed:

"Megamergers between telecommunications giants, such as the rumored merger between NYNEX and Bell Atlantic, or the gigantic network mergers now underway, raise obvious concerns about concentrating control in a few gigantic companies of both the content and means of distributing the information and entertainment American consumers receive. Competition, not concentration, is the surest way to assure lower prices and greater choices for consumers. Rigorous oversight and enforcement by our antitrust agencies is more important than ever to insure that such megamergers do not harm consumers."

Concentration of ownership in the telecommunications industry is currently proceeding faster than the growth of competition. We are seeing old monopolies getting bigger and expanding their reach. Upon completion of all the proposed mergers among the Bell companies, most of the local telephone lines in the country will be concentrated in the hands of three to four companies. This will affect not only the millions of people who depend on the companies involved for both basic telephone service and increasingly for an array of advanced telecommunications services, but also competition in the entire industry. The Consumers Union recently testified before the Judiciary Committee's Antitrust Subcommittee that the mergers between Regional Bell Operating Companies could lead to even more megamergers within this industry.

I know personally that at my farm in Vermont, I still have only one choice for dialtone and local telephone service. That "choice" is the Bell operating company, or no service at all. The current mantra of the industry seems to be "onestop shopping." But if that stop is at a monopoly that is not competing on price and service, I do not think it is the kind of "onestop shopping" consumers want.

I have been concerned that the distraction of these huge mergers serves only to complicate and delay the companies' compliance with their obligations under the Telecommunications Act to open their networks. That is not good for competition in the local loop. Consolidation is taking precedence over competition. We need to reverse that priority, and make opening up the local loop the focus of the energies of the Bell Operating Companies. Then consolidation, if it happens, would not pose the current risk of creating additional barriers to effective competition.

Big is not necessarily bad. But the Justice Department in the late 1970s worked overtime to divide up the old Ma Bell to assure more competition and provide customers with better service at lower rates. It is ironic that the Telecommunications Act, which was touted as the way to increase competition, is having the perverse effect instead of promoting consolidation among telephone companies.

Before all the pieces of Ma Bell are put together again, Congress should revisit the Telecommunications Act. To ensure competition among Bell Operating Companies and long distance and other companies, as contemplated by passage of this law, we need clearer guidelines and better incentives. Specifically, we should ensure that Bell Operating Companies do not gain more concentrated control over huge percentages of the telephone access lines of this country through mergers, but only through robust competition. As the Consumers Union recently testified, "If Congress really wants to bring broadbased competition to telecommunications markets, it must rewrite the Telecommunications Act, giving antitrust and regulatory authorities more tools to eliminate the most persistent pockets of telephone and cable monopoly power."

I plan to introduce legislation that will bar future mergers among Bell Operating Companies or GTE, unless the federal requirements for opening the local loop to competition have been satisfied in at least half of the access lines in each State. I look forward to working with my colleagues on this legislation to make the Telecommunications Act live up to its promise.

Summary of "The Antitrust Improvements Act of 1998"

Sponsored By Senator Patrick Leahy, DVt.

Gives the Attorney General and the Federal Communications Commission clear authority to block mergers of two or more RBOC's.

Affects all "large local exchange carriers" serving greater than five percent of the nation's telephone access lines.

The list of the affected companies (local exchange carriers that serve more than 5%) is:

Ameritech 11% (of access lines)

BellSouth 13%

Bell Atlantic 22.5%

GTE 11%

SBC (including SNET): 21%

USWest 9%

[Note that Sprint is at 4 percent. All 1,300, or so, other telephone companies combined only control 8 percent of the remainder of the business.]

The bill provides that a "large local telephone company" may not merge with another large local telephone company unless:

(1) the Attorney General finds that the merger will promote competition for telephone exchange services and exchange access services; and

(2) the Federal Communications Commission finds that each large local telephone company that is a party to the proposed merger, has, with respect to at least onehalf of the access lines in each State served by such carrier, of which as least onehalf are residential access lines, fully implemented the requirements of sections 251 and 252 of the Communications Act of 1934.

The bill requires that each large local telephone company that wishes to merge with another must file an application with the Attorney General and the FCC which will be reviewed within the timelimits set under the HartScottRodino Antitrust Improvements Act of 1976.

The bill also provides that: Nothing in this Act shall be construed to modify, impair, or supersede the applicability of the antitrust laws of the United States except as amended by this Act, any authority of the Federal Communications Commission, or any authority of the States with respect to mergers and acquisitions of large local telephone companies.

The bill is effective on enactment and has no retroactive affect.