Case study:the hp-compaq deal

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Case study 1:

The Spring Pond Beavers

The Wall Street Journal, March 30, 1998, A18:1

Now that the Academy Awards have been handed out, we are proud to present the Award for Environmental Lunacy to the obscure Michigan bureaucrat who sent the following (abridged) letter to a landowner last December:

"It has come to the attention of the Department of Environmental Quality that there has been recent unauthorized activity on the above referenced parcel of property.

You have been certified as the legal landowner and/or contractor who did the following unauthorized activity: Construction and maintenance of two wood debris dams across the outlet stream of Spring Pond. A permit must be issued prior to the start if this type of activity....The Department has been informed that one or both of the dams partially failed during a recent rain event, causing debris dams and flooding at downstream locations.

We find that dams of this nature are inherently hazardous and cannot be permitted....Failure to comply with this request, or any further unauthorized activity on the site, may result in this case being referred for elevated enforcement action.

The landowner's response (also abridged) just about says it all:

"[A] couple of beavers are in the (State unauthorized) process of constructing and maintaining two wood "debris" dams across the outlet stream of my Spring Pond. While I did not pay for, nor authorize the dam project, I think they would be highly offended that you call their skillful use of natural building materials "debris".... As to your dam request the beavers first must fill out a dam permit prior to the start of this type of dam activity, my first dam question to you is: are you trying to discriminate against my Spring Pond Beavers or do you require all dam beavers throughout this State to conform to said dam request? If you are not discriminating against these particular beavers, please send me completed copies of all those other applicable dam permits....I seriously hope you are not selectively enforcing this dam policy--or once gain both I and the Spring Pond Beavers will scream prejudice!"

The Michigan Department of Environmental Quality informs us that the case has been closed.

1. Why did The Wall Street Journal include the editorial about the Spring Pond beavers in its newspaper?
2. What significant information is missing from the editorial?
3. What ethical norm does the editorial writer prefer?
4. Why is a state agency involved in environmental quality? Why isn't this a matter for a federal agency?
5. Why did the Michigan agency send a letter in the first place?

Case study 2:

Really Big Deal

The Wall Street Journal, April 7, 1998, A18:1

Big.

That's the word splashed all over the merger announced Monday between Citicorp and Travelers Group--the biggest merger in corporate history, maybe any kind of history. Citigroup, as the new combo is to be known, will be worth some $140 billion, providing banking, insurance and brokerage services to more than 100 million customers in some 100 countries.

But what's truly flashy about this merger is hardly that it happens to dwarf, say, last October's record-breaking $42 billion Worldcom bid for MCI. What's really big here is that for the first time a financial securities company has been created that reflects the true scope and versatility of the modern, global marketplace.

Conjoined, Citicorp and Travelers hope to reach customers just about anywhere money is passing between hands on the planet, and offer them easier access to the vast net of financial instruments that criss-cross the globe. This lets people tailor the management of their money in ways best suited to individual needs. And that is a sales formula not just for enhancing shareholder wealth at Citicorp and Travelers (both stocks soared Monday morning on the news of the merger). It is by trundling down avenues such as this that the whole world now creates wealth, and on a scale that in fact makes even this mammoth merger look like small change.

Consider. Last year alone, world markets created more than $25 trillion in new wealth, up from some $19 trillion in 1986. That's more than 50 times the size of the pretax income of the entire global financial services industry, estimated at some $500 billion world-wide. And, to put this in further perspective, that same $500 billion financial

services business is some 66 times the size of last year's combined operating income of the now mega-merged Citicorp and Travelers, which totaled some $7.6 billion. Small wonder, given the fast-rising yeast plumping the new world economy, that mergers of record-breaking size are becoming routine on the economic landscape. Plenty of what's best in the financial future will surely look big, compared with the past.

"Big," however, is a word that still triggers arrhythmia among the codgers of various legislatures and government regulatory agencies. So expect critics to pile on once the news starts to sink in.

For this merger to stick, the Federal Reserve must over the next few years approve various aspects of the new Citigroup's operations. Congress, for its part, has failed 11 times over the past dozen years--most recently, last week--to output a bill reforming the antique known as Glass-Steagall, whose mirrors allow regulators to see the financial world as divided into the neat nooks of investment banking and commercial banking.

These bills keep dying in committee, not so much on ideological grounds but partly because the whole exercise is a turf war. Laws separating the functions of banks, insurance companies and brokerage firms have left each of these industries with its own patch to defend. Regulatory authority split between Treasury and the Fed has made for fights between Fed Chairman Alan Greenspan, who favors financial reform, and Treasury Secretary Rubin, who does not. As with telecom reform, the Members twiddle so long as the combatants keep hoisting PAC contributions at them.

Well, the world woke up yesterday morning and discovered that the market had given birth to something called Citigroup. Change happens. Governments ought to figure out a way to be part of it.

1. What issue does the editorial present?
2. What is the editorial's conclusion?
3. What are the author's main reasons?
4. Which ethical norm does the author prefer?
5. What significant information would we need to know before we decided whether to accept or reject the author's conclusion?
6. Does the author prefer the Harvard or Chicago school view on antitrust policy? How do you know?
7. Which law in this chapter is most relevant to the Citigroup merger?

Case study 3:

Judge Posner's Brief

The Wall Street Journal, November 23, 1999

In his book on "Aging and Old Age," Chicago judge and polymath Richard Posner observes that as people age, they become less dependent on "transacting with others" and thus have less incentive to "conceal their obnoxious traits." In this respect as in so many,
Bill Gates has been a model of precocity, since he seems to have been unwilling to conceal his obnoxious traits from an early age. More than anything else, this may explain the latest remarkable development in the Microsoft case.

In choosing Richard Posner as a mediator, Judge Thomas P. Jackson has appointed a freethinker and economic literate who is less likely to sympathize with the government's antitrust case against Microsoft than with the plight of Judge Jackson's court. A brilliant scholar of the Chicago school, Mr. Posner has been skeptical of antitrust remedies, except in cases like AT&T, where an unnatural monopoly was fostered by politicians and regulators. But as a judge, he can see the problem that developed in the courtroom.

The problem has been Microsoft's reliance on semantic diffusion, as opposed to a forthright defense of its own business practices. Judge Posner, chief judge of the U.S. Court of Appeals in Chicago, is said to be acting in a purely "private capacity." But it might not be too much to see him as a de facto court-appointed attorney for Microsoft, one whom Judge Jackson hopes will do better a job for the company than the company's own lawyers have done.

One can nit-pick, but it was hard to find much wrong with Judge Jackson's rendition of the "facts." The problem was the interpretation of the facts. But if he was stuck relying on the government's reading of events, whose fault was that? Microsoft's defense came down to denying even the plain meaning of its own e-mails. And since no one doubts who calls the shots at Microsoft, Mr. Gates has to bear some of the responsibility for the fact that the dog has now caught the bus.

It's too late to alter Microsoft's defense, and Microsoft may well be wise to persevere to the appellate level. If the company has any inclination to settle, Judge Jackson has extended a golden invitation. Not that we're sure what a settlement could consist of at this point. Antitrust Chief Joel Klein seems to have ruled out a fine, though a fine would be one way of recognizing that the dilemmas raised by Microsoft's "monopoly" exist mostly in the past. We guess the company could agree to publish the application interfaces to Windows in a nondiscriminatory manner. This comes closest to addressing a real "competitive" problem, since control of the APIs gives Microsoft an inside track on developing applications to run atop Windows. But this was hardly the pith and moment of the Justice Department's complaint, which seeks to tie Microsoft's hands in responding to the challenge of Web-based computing.

This is one place where Judge Posner, aided by last year's DC Circuit decision allowing Microsoft to ship Windows with the browser incorporated, could help the government see reason. In the one false note in Judge Jackson's "finding of fact," he accuses the company of stifling innovation. But how much innovation can we survive? The Microsoft achievement has been to keep the computer age from descending into chaos. Everyone aims a few choice words at Windows now and then, but right-click on the NT Task Manager when you're running a full load of applications and contemplate the feat of engineering. If Boeing had flown the 747 in 1959 instead of 1969, we might have been as impressed.

Yet now the class-action tort parasites are after the company, as if the personal computer revolution has been a public nuisance all along. A "monopoly" finding, if confirmed in a final verdict, would expose Microsoft to treble damages. Not that the tort sharks would really attack the company's behavior; they attack its stock price, hoping to extort go-away money. No doubt they have in mind one of those "coupon" settlements where the supposedly aggrieved consumers get a piece of paper and the lawyers get all the money. This must give even the Justice Department pause, unless its secret mission is the wholesale discrediting of the legal system.

Certainly Judge Jackson has no such mission, and we suspect Mr. Posner is his way of demonstrating his sympathy for the better case Microsoft might have made. Mr. Gates should at least recognize this gesture, and opportunity, for what it is.

1. What issue does the editorial present?
2. What are the author's main reasons and conclusion?
3. What ethical norm is fundamental to the author's reasoning?
4. Is there relevant missing information?
5. Why might a mediator be particularly helpful in this situation?

Case study 4:

Let It Be

The Wall Street Journal, August 14, 2001

Not too long ago conventional wisdom was that Napster, regardless of the dubious morality and legality of "sharing" intellectual property, had at least performed the valuable service of waking the record companies up to the fact that they needed to find a way to distribute their music online. But now that the major labels are about to launch two new services to do just that, the lawyers and politicians seem all too eager to jump in the way.

This month the Justice Department announced preliminary antitrust investigations into MusicNet, a joint venture of AOL Time Warner, Bertelsmann and EMI, and pressplay, a joint venture between Sony and Vivendi. Meanwhile, Reps. Rick Boucher (D., Va.) and Chris Cannon (R., Utah) introduced legislation in the House of Representatives intended to prevent the two companies from turning Internet music distribution into a "vertically integrated duopoly." European Competition Commissioner Mario Monti, fresh from slaying the GE-Honeywell dragon, had already launched his own investigation. Whatever comes of all this, we can't help suspecting the reflex to regulate the development of this new market is not a healthy one.

The sticking point seems to be the question of whether the record labels behind these services will offer their content to nonpartner distributors on equal terms, something the Cannon-Boucher bill would require. They and Commissioner Monti seem to think the government has a critical role to play in ensuring a "diversity of service providers."

Though this sounds unobjectionable at first, it's probably impossible to define what "equal" means in a distribution deal, where marketing and promotional arrangements can be just as important as price. Music, moreover, is a rather different kind of good from those that have traditionally been the subject of antitrust concerns. It is not a commodity like bread, where a monopoly in the distribution chain could indeed do real harm to consumers. Any given piece of music is, rather, a natural monopoly of the record label that owns it, which can set its prices regardless of how many distributors there are.

This music monopoly tends to work out just fine for consumers. Since the marginal cost of producing the next copy of a song is near zero, record labels have every incentive to set prices at levels most consumers can afford - never mind the threat they face of bootlegging to tape, CD and MP3 if prices go too high.

This demand for a "diversity of service providers," therefore, seems little more than the old canard about needing to protect the middlemen in an industry undergoing rapid change, as the vociferous complaints from the likes of Tower Records make clear.

Rep. Boucher may or may not be right that without government meddling we will one day see a world in which there's "no competition in music distribution." We're just not so sure that would be a bad thing. It may not make sense to keep running the music distribution business separate from the record business, especially since the labels can set prices anyway. Why not knock out an unnecessary layer in the supply chain? Why not, before any harm is proven, let the market figure out if that's the right thing to do? Unfortunately, it looks as if the lawyers and legislators are once again set to let their conception of the best become the enemy of the good.

Technology like the Internet changes the way industries are organized, usually for the better. And if the thought of businessmen conspiring against consumers may sometimes be cause for alarm, the thought of innovators and entrepreneurs having to pass every new idea through regulators should be as well. As the Bush Justice Department scrutinizes the new business models of the Internet age -- be it Orbitz, the online ticket sales partnership of the major airlines, or the new combinations in telecommunications that may be needed to finally get broadband to people's homes -- let's hope it does so fully aware of the fact that overreaching and ignorant government can do just as much harm to consumers as greedy capitalists

1. What issue does the editorial present?
2. What are the author's main reasons and conclusion?
3. Which ethical norm is fundamental to the author's reasoning?
4. From a critical thinking perspective, evaluate the editorial's last sentence.

Case study 5:

The HP-Compaq Deal

The Wall Street Journal, September 6, 2001

Electing a new President is not the same thing as electing a new bureaucracy. That's the lesson we take away from White House economic adviser Larry Lindsey's serendipitously timed comments on technology mergers, reported yesterday along with news of the headline-grabbing Compaq-Hewlett Packard deal.

"At this stage in a cycle, a good portion of the source of financing has to do with consolidation," he opined as a general matter. "It's what markets are looking for." We can think of worse words to engrave on a tablet to be placed outside the FTC and Justice. If one factor has prolonged and deepened the tech slump, all now agree it was the torturing of deals aimed at consolidating the technology industries and speeding the delivery of broadband. Beltway myopics rejoiced in antitrust chief Joel Klein's shooting down of the Sprint-Worldcom merger as one of his greatest triumphs, but the myopics never followed what happened next, with the telecom sector in ruins and collateral damage spreading to the PC, semiconductor and software industries. Investors can decide for themselves, but certainly an argument for the HP-Compaq deal is that it would eliminate one player in an oversupplied PC marketplace. Let us hope this message penetrates the antitrust shops, which are bound to make much of the misleading statistic that HP-Compaq would "control" 81% of sales through computer stores. One of the most damaging legacies of the Clinton era was the idea that trustbusters don't need more than some ginned-up numbers to go riding roughshod over the rights of shareholders. Because companies couldn't afford to be tied up in court, a lawsuit filed was tantamount to a merger blocked.

The sad upshot today is that Compaq and HP shareholders must spend much of the coming weeks handicapping the deal's antitrust odds when they should be thinking about whether it would maximize the value of their businesses. If the Bush Administration wants to turn this around -- and it should, for economic revival depends on letting the capital markets call the shots over restructuring the tech industries -- the job is going to require more than just unleashing Mr. Lindsey's mouth.

For one thing, a confrontation with the Europeans is probably inevitable.

Carly Fiorina, Michael Capellas and the Bushies might want to get together and review the experience of Fujitsu and Siemens two years ago, whose joint venture was an exact precedent for the HP-Compaq deal. Both were unprofitable also-rans in the European market (still led by Compaq today), but a numbers game made it seem they would hold a commanding No. 2 position. That was enough to inspire chief European trustbuster Mario Monti to put the companies on the rack and finally order Siemens to sell off its Nixdorf line of financial workstations.

The result, predictably, was one more industrial disaster. Only now is Siemens Fujitsu beginning to arrest a steep drop in market share (which properly measured is about fifth) and starting to sniff profitability. And don't be comforted by the fact that their primary business was in Europe. The Justice Department's coup de grace to Sprint-Worldcom was aimed at avoiding a confrontation with Mr. Monti, who was preparing to veto a deal between two principally U.S. companies.

The threat here has not yet fully registered with American business, but we're in danger of becoming hostage to a Euroland style of merger regulation, where antitrust bleeds into industrial policy, dictated by lobbying. Anyone who thinks the trouble ended with the shootdown of GE-Honeywell isn't smelling the espresso.

At the very beginning U.S. antitrust was handled by the courts because we realized that companies and their owners have rights, and these should not be interfered with lightly or without due process. That inhibition does not exist in the European trustbusting mind, and barely existed in the minds of the Clinton trustbusters. This is a mental trend that needs to be reversed.

In job creation and innovation, the U.S. left its industrial allies in the dust long ago by allowing companies and their owners to make their own decisions. Now Mr. Bush would like to get the economy moving again sometime before the 2004 election. His antitrusters  should make it clear they're not looking for excuses to get in the way

1. What issue does the editorial raise?

2. What is the author's conclusion?

3. What ethical norm does the author prefer?

4. Is relevant information missing from the editorial? If so, what?

Reference no: EM13656

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