The Anticompetitive Effect of Passive Investment
There are many cases in which a firm passively invests in its competitor. For example, Microsoft passively invested in $150 million worth of the nonvoting stock of Apple, its historic rival in the operating systems market. Also, in November 1998, Northwest Airlines, the nation’s fourth-largest airline, purchased 14% of the common stock of Continental Airlines Inc., the nation’s fifth-largest (and fastest growing) airline. Northwest competes with Continental on seven routes, serving 3.6 million passengers per year. In another example, TCI, the nation’s largest cable operator, became a passive investor with a 9% stake (which can be increased, under the terms of a settlement with the Federal Trade Commission, to a 14.99% stake) in Time Warner, the nation’s second-largest cable operator. Gillette, the international and U.S. leader in the wet-shaving razor blade market acquired, as a passive investment, 22.9% of the nonvoting stock and approximately 13.6% of the debt of Wilkinson Sword, one of its largest competitors. There are also several cases in which one firm’s controlling shareholder invests in the firm’s competitor. A striking example existed, for several years, in the car rental industry: National Car Rental’s controller, General Motors (“GM”), acquired a 25% stake of Avis, National’s competitor. In the very same industry, Hertz’s controller, Ford, had acquired $324 million worth of Budget’s nonvoting stock. Surely if Microsoft were to merge with Apple, Northwest with Continental, TCI with Time Warner, Gillette with Wilkinson Sword, National Rent-a-Car with Avis, or Hertz with Budget, antitrust courts and agencies would acknowledge that such mergers may substantially lessen competition. But how should we treat the seemingly different situation where Microsoft is merely a passive investor in Apple, where Northwest merely holds a passive stake in Continental, where TCI merely holds a passive stake in Time Warner, where all Gillette does is passively invest in Wilkinson Sword, where GM (National’s controller) merely purchases Avis stock as a passive investor, or where Hertz’s controller (Ford) passively invests in Budget? Recent cases of passive investment in a competitor have gone unchallenged by antitrust agencies. Moreover, this Article shows that the leading antitrust decisions grant a de facto exemption from antitrust liability for passive investment, by interpreting expansively the “solely for investment” exception in section 7 of the Clayton Act, the antitrust merger provision.