The Frito-Lay and Pepsi-Cola merger and its market implications

¶ … AT&T & T-Mobile merger.

In order to analyze this move properly, we will compare this merger with a case study of the merger of Frito-lay and Pepsi to create PepsiCo. At that time, the federal government of the United States was much more supportive of corporate mergers than currently. Without such hostility at the time to hinder it, the PepsiCo company has grown into a very competitive, innovative and healthy company that is indicative of letting the market do what it does best, select the survivors. As in nature, the financial and human stakeholders are healthier for it.

In the pursuit of developing corporate growth, alliances help stakeholders by promoting organizational efficiency and resource sharing through the medium of horizontal integration. The market determines optimal business size and organization based upon such factors as technological innovation. Governments should respect this natural selection and allow the market to choose via competition. If that competition leads to mergers and monopoly or oligopoly, this in the long-run will be the best result for the vast majority of stakeholders.

Analysis -- the PespsiCo Precedent

The snack chip market is a very competitive economic sector. The new-product failure rate is very high for the snack chip industry. Potato chip competitors usually rely heavily upon electronic and print media advertising, trade allowances and consumer promotions to stimulate sales. The manufacturers rely on price deals to attract new consumers. The innovative technology used to produce potato chips allows manufacturers to react very quickly to new products introduced by their competitors. Extensive sales as well as distribution systems that are employed by national brand competitors allows them to monitor their new product and promotion activities and then to place competing products quickly into the supermarkets. In February 1965, the boards of directors for Frito-lay, Inc. And Pepsi-Cola all announced a plan for a merger. On June 8, 1965, this merger of Frito-Lay and Pepsi-Cola Company was approved by shareholders. A new company called PepsiCo, Inc. was created. At merger tiem Frito-Lay owned some 46 manufacturing plants nationwide and also had more than 150 distribution centers across the United States ("fundinguniverse.com").

There were a larger number of forces that drove the two companies into each other's arms. The 1960s were a time of consolidation. A number of food and beverage firms were bought up by larger entities. Pepsi-Cola was at the time was considered a takeover target because it ran a distant second in the soft drink industry to Coca-Cola Company and also because little of the company's stock was in the hands of the management. Secondly, a force behind the merger was Frito-Lay's desire to more aggressively pursue ventures into overseas markets. The corporation's sales had been largely restricted to the U.S. And Canada. After this, it could take advantage of Pepsi's strong international operations. These channels were responsible for the sale of Pepsi products were in 108 countries. Thirdly, there was a perceived synergy between salty snacks and soft drinks. As Frito-Lay's CEO told Forbes in 1968, "Potato chips make you thirsty; Pepsi satisfies thirst." The plan to jointly market PepsiCo's snacks and soft drinks gave Pepsi a potential advantage in its battle with Coke. Unfortunately, these plans were scuttled by the resolution of a Federal Trade Commission antitrust suit against Frito-Lay in 1963. The FTC then ruled in late 1968 that PepsiCo could not create business tie-ins between Frito-Lay and Pepsi-Cola products in most of its advertising (an interesting infringement of free speech). PepsiCo was further barred from acquiring any soft drink or snack food maker for a period of ten years after that (ibid).

Analysis of the ATT and T-Mobile Merger

It is ironic that the Obama administration is in the process of attacking businesses such as ATT and T-Mobile in their efforts to maximize organizational efficiency while they provide government bailouts and subsidies to other businesses such as speculative banking houses like Goldman Sachs. In the area of banking, the administration is all for consolidation, but not in the area of telecommunications.

The pertinent legal framework must be considered first of all before we proceed. The present antitrust legislation is largely a product of the Clayton Antitrust Act of 1914. The law was passed to plug loopholes in the Sherman Antitrust Act. It is much more restrictive than the Sherman Act was because it only requires that a violation of the act can be proved even if it would have only a probable adverse effect on competition rather than to actually have to prove that would be an actual adverse effect (the standard under the old Sherman Act). Government or private parties can therefore bring an injunction to stop a merger with a very low threshold of proof (Emerson, 522).

The anatomy of the deal itself must be considered. The announced agreement would have ATT would acquire T-Mobile for in th neighborhood of $39 billion. What is very interesting about the legal injunction against the merger, the court acknowledges the November 29, 2011 release of the FCC report its effects upon the deal in terms of making arbitration a moot issue, causing the court to deny ATT's countersuit for arbitration ("LEAGLE"). In the opinion of this author, the fact that the federal court is very much against ATT and the company will not have much chance unless it goes to a higher venue, possibly even to the United States Supreme Court.

Unfortunately, for ATT and T-Mobile, this may spell the demise of the merger deal. What is rather unusual about this situation is that the Federal Communication Commission did is extremely unusual, something that even the Department of Justice did not expect it to do: it rejected the deal outright. For ATT, this could be devastating as it could also cost them $4 billion dollars outright in accounting charges incurred in the merger quest as well. Certainly, to be honest, ATT's and T-Mobile's claim that they would create domestic jobs with the merger is doubtful. Most of the time, mergers cost jobs as the two merging corporations shake of excess fat in order to economize and become more efficient. It also claims improvements in 3G (third generation) technology performance and quicker progression into the 4G (fourth generation) realm (Ulanoff).

The reactions of the FCC and the federal court have needless to say had a chilling effect upon the budding merger agreement between ATT and T-Mobile with the filing of the antitrust lawsuit in August, 2011. Without a doubt, if the merger went through, then the telecommunications landscape would be dominated by the ATT/T-Mobile combination and by Verizon ("CNN"). We will review this articles information later when we look at the possible outcomes of the present deadlock in the ATT/T-Mobile merger quest.

The merger that was announced in March has unfortunately been in trouble since the summer when the DOJ sued ATT to block the merger deal with T-mobile. To make the deal more palatable to the FCC, ATT has now considering divesting as up to 40% of T-Mobile's. For ATT, their best hope to is to win the regulatory approval from the Department of Justice in an appeal. If it can strike a deal with the DOJ, it would then be able re-apply for the spectrum transfer license to the FCC again. AT&T says it did so in order to focus its legal attention on the DOJ's suit. The FCC, meanwhile, won't start its hearing until the DOJ suit is concluded. So it makes sense for AT&T to direct its efforts on resolving the antitrust concerns with the DOJ first. ATT critics in advocacy groups such as th ePublic Knowledge and the Media Access Project also charge that the company is withdrawing the merger application so that it can win a favorable court ruling (Reardon).

Then they could pressure the FCC publicly to approve the merger. The advocacy groups requested that the FCC release the proposed order that would have brought about the administrative-court review in order to pre-empt ATT. When ATT concluded the deal with T-Mobile, it promised to pay the parent company Deutsche Telekom $3 billion in cash if the merger deal did not get the regulatory approval. ATT also agreed to hand over another $3 billion to $4 billion in company assets if the deal falls through. ATT' $4 billion charge means that it is likely that the deal will not go through right away. While ATT claimed that it initially had planned to conclude the deal in the first quarter of the year 2012. However, earlier in the month of November, the company said that it expected to close the deal now in the first half of 2012. It has about a 50/50 chance of approval and will get lbe pushed out further if it does get approved (Ibid).

Essentially, the point of the spear in ATT's continued quest for the merger deal with T-Mobile will be through the U.S. Department of Justice. The fight that the companies have expended in the merger effort over the last eight months and competitors such as Verizon have become stronger (Goldman). Therefore, in effect, the FCC has been indirectly (although possibly inadvertently) favoring competitors such as Verizon over ATT and T-Mobile. Certainly, no one who is familiar with the market can be in the dark about the potential effects of a delay upon the two companies, in particular ATT. Even if the deal is approved, the delay will cost ATT billions and will negatively affect the company's bottomline. Verizon has expanded continued to expand its market-leading 4G-LTE network to cover about 200 million subscribers in the United States. This gives it largely the biggest next-generation network 4 G. network. Sprint is now ahead of schedule in the effort to bring its 4G network online and it has even begun selling an iPhone. C Spire is also gaining by selling Apple's smartphone that was exclusively only ATT's nine months before. Technical analysts see big trouble for T-Mobile with the merger because it is essentially mired in 3G technology and was counting on the merger to pull it into the present (Goldman). To this author, it would therefore seem that the FCC's criticism that there would be job losses in the case of the consolidation would be correct, but not for the reasons it states. If T-Mobile does not upgrade to 4G, it will be in trouble and will have to shed jobs anyway in its own restructuring. Truly, the FCC and DOJ are not being technologically savvy in their deliberations.

For the above reason, the deal may not be dead. It is perhaps possible that the FCC and the DOJ have woken up to reality and that the technological details and the possible demise of T-Mobile have sunk in. While some analysts believe the deal is dead, patience may pay off in the end, giving the companies time to arrange for raising capital to continue the merger and simply wait out until the Obama administration changes its mind or there is a change of administration (ibid).

The rightous indignation against the merger of ATT and T-Mobile is a bit melodramatic. The Sprint Nextel chief executive Dan Hesse publicly spoke to block the merger during a the CTIA convention in San Diego. He said the proposed merger would eliminate the competition and further jokingly compared AT&T Mobility chief executive Ralph de la Vega to John Wilkes Booth, President Lincoln's assassin. It is certain that the differences between right and wrong are not so clear cut. The president of Verizon, Dan Mead spoke out against government regulations and said that they would slow down the dynamic growth of the mobile industry (Kang, and Tsukayama). The fact that significant competitors of ATT and T-Mobile are against the government regulation would seem to indicate that competitors that are relying upon the federal government to bail them out of their misery are those like Sprint who are doing badly because they can not compete.

ATT and T-mobile has decided to continue with the merger by appealing with the Department of Justice, despite the almost incredibly abnormal reaction of the FCC. While the FCC has denied mergers in the past, it did react unusually by releasing the report on the merger application by making public a controversial internal report that claimed tremendous potential harm to consumers if the deal were to be approved. The FCC almost never does in the case of merger requests that are not approved (Lincoln).

An American Strength Undermined -- the Dynamic of Company Destruction and Creation

George Friedman of Stratfor presents what he feels is the objective bottomline about American power and economic dominance is the ability of U.S. capitalism to destroy or modify old industries and remake its economy on the fly. This has given and will continue to give America an edge over competitors (especially in Europe where they delight in prophesying the decline of the U.S.). What is very interesting is that he says that destructive and creative capitalism go hand in hand and that Europe holds onto the moribund old-style industries and organizations (Friedman). This type of "trust" activity is exactly the type of actions that the great American robber barons were accused of such as the classic horizontal integration of the oil industry under Standard Oil. For instance, John D. Rockefeller's Standard Oil had acquired some 40 refineries ("Quick MBA"). Needless to say in commentary, many of these were inefficient and lacking in the ability to compete. Their equipment was replaced with the state of the art and the U.S. was able to meet its energy needs at that time. No one criticized Standard Oil when it came time during World War One to rely on those capabilities to beat Germany. Instead, all we read about in the history books is how bad and uncompetitive Standard Oil was. This is a bit like intervening in a heavy-weight boxing match after the other contender has been knocked out. This is punishing a company for doing exactly what capitalism demands. The present antitrust environment represents nothing other than an intrusive government coming to tax the winner like crazy to take away the winnings.

The question for us as a nation, especially in these trying economic times, is to see if we can keep these creative juices flowing and innovating. It is difficult for this author to see how this is possible given the current regulative federal regime that seems to think it knows better on how to develop technologies than the companies who are in the thick of it. Over the course of time since 1914 when the Clayton Antitrust Act was passed, the level of federal regulation has varied widely. When there is less regulation, companies do better at innovating when there is less government intervention and do not do as well when they have to look over their shoulders and constantly wonder whether or not their innovation will result in sniping by a weaker competitor. The ATT/T-Mobile merger should be allowed to go ahead immediately to recreate and innovate telecommunications so that the U.S. Can regain its edge in this area.

Conclusion

In this essay, the author has presented a position that is in favor of the AT&T & T-Mobile merger. In order to analyze this move properly, we will compared this merger with a case study of the merger of Frito-lay and Pepsi to create PepsiCo. It was the author's position that market forces should be allowed to have their sway and provide merger opportunities if necessary. The market then produces healthy companies such as PepsiCo that have great track records on all sides, making money for investors and providing superior and innovative products and services. While the merger between ATT and T-Mobile may go through just as the Google and ITA merger did, it only did so after months of bureaucratic observation of the company that added billions onto the acquisition and slowed the process, costing money and precious time in the process. This slows innovation and change, especially in the quickly developing technology fields where a few months is an eternity that can cut the competitive edge off a company's ability to compete.