The flaws of antitrust laws

The ready mixed and precast concrete supply chain shows nothing out of line with vendors holding low, middle or higher double-digit national market share, as material or equipment category leaders like BASF Admixture Systems, Holcim (US) Inc., Mack Trucks Inc., McNeilus Cos. and Command Alkon Inc. illustrate.  The proposed Martin Marietta Materials–Vulcan Materials merger (page 12) sets the stage for an operator with about 15 percent of the aggregates market, based on 2010 U.S. Geological Survey figures. In a normal economy, Vulcan shipments in Florida, Arizona and California—states hit hard by the housing bubble and recession—stand to add a few market share points.

The initial proposal envisions an entity with a 58/42 ownership split between Vulcan and Martin Marietta shareholders. The latter group would see their prior investment—nearly a pure aggregate play, with sparse integrated concrete and asphalt production—diversified in a portfolio including a top-five position in ready mixed, plus strong, regional concrete block and asphalt market stakes.

A map accompanying Martin Marietta’s proposal shows the strong national presence of a merged company. Questions of local market share, however, are central to a lawsuit, Vulcan Materials Company v. Martin Marietta Materials, Inc., in U.S. District Court for the Northern District of Alabama. Vulcan filed a tersely worded complaint days before announcing board members’ unanimous rejection of the merger proposal. Amid bitter observations weaved into a 2010-2011 timeline of confidential Vulcan and Martin Marietta executive actions, the complaint cites concerns over the sale of quarry assets, at possibly “fire sale” prices, regulators could require for a deal to be consummated.

The Department of Justice Antitrust Division might order a merged Martin Marietta-Vulcan to unload certain sites in markets across Texas, Virginia, Wisconsin and 10 Southeast states where the producers’ sand & gravel and crushed stone operations overlap. Justice officials gauge mergers’ impact with the Herfindahl-Hirschman Index, the sum of the squares of key producers’ market shares (i.e., 30² + 30² + 20² + 20² = 2,600). Mergers raising the HHI by 100 points in Moderately Concentrated Markets (1,500–2,500 HHI) and 100–200 points in Highly Concentrated Markets (HHI>2,500) hit department radar. Claims in Vulcan Materials v. Martin Marietta indicate both parties have done their HHI math and mapping of quarries the feds might pinpoint for disposal.

The plaintiff’s claim of potential “fire sale” pricing is questionable considering the pool of credit-worthy, prospective buyers for quarry assets of Martin Marietta or Vulcan heritage—Aggregate Industries/Holcim (US), Lehigh Hanson, MDU Resources, Oldcastle Materials, and Summit Materials, to name a few.

Antitrust law critics would rightly question any Justice Department role in Martin Marietta–Vulcan proceedings. Robert A. Levy, for one, shreds the premises for federal government merger oversight in “Antitrust: The Case for Repeal.” When government enforces antitrust laws, he contends, it too often transforms a company’s private property into something that effectively belongs to the public. “Antitrust is based on a static view of the market,” writes Levy, chairman of the Cato Institute, a Washington, D.C., think tank. “In real markets, sellers seek to carve out mini-monopolies. Profits from market power are the engine that propels the economy … Consumers rule, not producers, and can unseat any product and any company no matter how powerful and entrenched.”

Translation for regulators wise to HHI calculations, but less so to the aggregate market: The largest group of sand & gravel and crushed stone consumers—state, county and municipal agencies—have significant leverage (think pavement and road base specification changes, environmental monitoring, permitting, truck weight inspections) to keep a supplier operating on fair market terms. The financial gains Martin Marietta projects in its Vulcan merger proposal rest on operating efficiencies, not monopolizing a few markets.