Like the Phoenix, Standard Oil rises from its ashes--the Mobil and Exxon merger

by R. Morris Coats

Bayou Business Review, 12/14/98

Recently it was announced that Exxon and Mobil are planning to merge. Mergers, especially those between large firms that operate in the same market, make people worry that competition in that market will be reduced to the point that the sellers can take advantage of the buyers and raise prices substantially.

But of all the firms to plan a merger, a merger between Exxon and Mobil really conjures up images of the turn-of-the-century trusts and the so-called "Robber Barrons," such as Rockerfeller, Vanderbilt and Duke. (We should probably note that the "robber barrons" of old have much in common with Bill Gates in terms of making large charitable donations.)

The reason for the "robber barron" image is that Mobil and Exxon were both carved out of Rockerfeller's Standard Oil Trust in 1911 in the first antitrust case to make it to the Supreme Court. Mobil was Standard Oil of New York, while Exxon (former Esso for SO or Standard Oil) was Standard Oil of New Jersey.

All told, the dissolution of J. D. Rockerfeller's Standard Oil yielded 34 separate companies. Chevron was Standard Oil of California, Amoco was Standard Oil of Indiana, and Sohio was Standard Oil of Ohio. Though some of these other former Standard Oil companies have been involved in mergers, the Chevron-Gulf being the most notable, the Mobil/Exxon merger marks, I believe, the first merger between two former pieces of the original Standard Oil Trust.

The Standard Oil case still looms as one of the most important cases in antitrust law, because it began the process of clarifying perplexingly vague law, section 2 of the Sherman Antitrust Act. Section 2 states that:

The problem with this is that it is not easy to determine if someone has a monopoly, yet alone when someone has "monopolized." The active "to monopolize" is much different than the passive "to have a monopoly."

In the decision in Standard Oil, the Court came up with an important principle in determining what it meant "to monopolize." The Court reasoned that someone may have a monopoly (as Bill Gates may now) because of a better product. Surely the Sherman Act was not meant to stop such innovations. The Court came up with the principle known as the "rule of reason." This principle states that merely having a monopoly is no offence in and of itself, but must be accompanied with "unreasonable acts," acts meant to drive competitors out of business.

The author of that decision is one of the most prominent former citizens of Lafourche Parish, Edward Douglass White.

Chief Justice of the U.S. Supreme Court 1910-1921

Edward Douglass White

While the thought of Standard Oil reforming may cause one to be concerned, we should remember that things are different. First, the oil market was not a global market in 1898, but it certainly is in 1998. Second, it is a much larger market now making monopolizing much more difficult. Third, we have laws now that make mergers between or among firms in the same market with well-known (well known among merger lawyers) Justice Department guidelines for approving or denying approval for mergers before deals or made.

These laws (the Clayton Act of 1914 as amended by Celler-Kefauver in 1950) prevent mergers between firms when the effect substantially lessens competition. If the Mobil-Exxon merger violates Justice Department guidelines, it is doubtful that Mobil and Exxon would even attempt a merger, just to have it tied up in court for years.