Tuesday, February 20, 2024

Deterrence in Merger Review: Likely Impacts of Recent U.S. Policy Changes

Deterrence in Merger Review: Likely Impacts of Recent U.S. Policy Changes 10 Pages Posted: 21 Feb 2024 Luke M. Froeb Vanderbilt University - Owen Graduate School of Management Steven Tschantz Vanderbilt University - Department of Mathematics Gregory J. Werden Independent; George Mason University - Mercatus Center Date Written: January 30, 2024 Abstract We model deterrence in a multistage merger review process, potentially ending in a court proceeding. Potential merging parties sequentially decide whether to begin the process, and whether to proceed to the next stage, in the face of uncertainty about what the enforcement agency or court will do. The model is designed to explore the complex impacts of policy changes in a costly regulatory process subject to uncertainty, and in particular to elucidate the likely impact of policy changes by the two U.S. enforcement agencies. The model shows why those policy changes can be expected to succeed in deterring bad mergers but at the cost of deterring a greater number of good mergers. Keywords: mergers, deterrence, antitrust, regulation JEL Classification: K22, L10, L40, L50 Suggested Citation: Froeb, Luke M. and Tschantz, Steven T. and Werden, Gregory J., Deterrence in Merger Review: Likely Impacts of Recent U.S. Policy Changes (January 30, 2024). Available at SSRN: https://ssrn.com/abstract=4709897 or http://dx.doi.org/10.2139/ssrn.4709897

Deterrence in Merger Review: Likely Impacts of Recent U.S. Policy Changes

Deterrence in Merger Review: Likely Impacts of Recent U.S. Policy Changes 10 Pages Posted: 21 Feb 2024 Luke M. Froeb Vanderbilt University - Owen Graduate School of Management Steven Tschantz Vanderbilt University - Department of Mathematics Gregory J. Werden Independent; George Mason University - Mercatus Center Date Written: January 30, 2024 Abstract We model deterrence in a multistage merger review process, potentially ending in a court proceeding. Potential merging parties sequentially decide whether to begin the process, and whether to proceed to the next stage, in the face of uncertainty about what the enforcement agency or court will do. The model is designed to explore the complex impacts of policy changes in a costly regulatory process subject to uncertainty, and in particular to elucidate the likely impact of policy changes by the two U.S. enforcement agencies. The model shows why those policy changes can be expected to succeed in deterring bad mergers but at the cost of deterring a greater number of good mergers. Keywords: mergers, deterrence, antitrust, regulation JEL Classification: K22, L10, L40, L50 Suggested Citation: Froeb, Luke M. and Tschantz, Steven T. and Werden, Gregory J., Deterrence in Merger Review: Likely Impacts of Recent U.S. Policy Changes (January 30, 2024). Available at SSRN: https://ssrn.com/abstract=4709897 or http://dx.doi.org/10.2139/ssrn.4709897

Is ESG investing illegal?

For fund managers, it may violate their fiduciary responsibility (to maximize returns) to their shareholders.   Apparently, the legal risk is too big for JP Morgan, State Street, and BlackRock:  
Asset managers have been walking a fine legal line. GOP Attorneys General in 2022 warned that they might be violating their fiduciary obligations and antitrust laws. House Judiciary Committee Chairman Jim Jordan in December subpoenaed BlackRock and State Street Global Advisors for documents and communications related to their involvement in “collusive” agreements.
The climate alliance’s new rules would compound the legal and political jeopardy. In its withdrawal announcement, State Street said its rules “are not consistent with our independent approach to proxy voting and portfolio company engagement.” BlackRock said the rules “would raise legal considerations.”

Peter Theil's (successful Venture Capitalist) Harvard Talk, "The Diversity Myth"

 Wide ranging, mostly libertarian critique of political and economic trends in the US that touches on Chapter 1 (Incentive Alignment), Chapter 2 (Wealth Creation), and Chapter 3 (Benefit-Cost Analysis).  

  • Proponents of "diversity" don't define the term, which gives Diversity Workers remarkable freedom to claim that whatever they are doing furthers the goal.  
    • In-class question: how would you align the incentives of Diversity Workers with the goal of diversity?
  • Positive correlation between wealth creation and inequality in the past few decades:  Theil offers his take, but does not addresses the idea that incentive alignment creates inequality, as it rewards prescient, lucky, more productive, or harder workers.
    • In-class question: does incentive alignment cause inequality? 
  • Justification by President Obama that his increased income taxes would cause people to work harder to make up for the lost income ("income effect") rather than substituting to more leisure/less work ("substitution effect").  
    • In-class question: do higher income taxes lead to more or less work?  
    • [Comment: politically, to get a policy implemented, you have to ignore any tradeoffs that might go along with it.  Economists are trained to point these out, called "unintended consequences" or "hidden costs."]
    • In-class question: how would you align the incentives of venture capitalists with the goal of innovation?  HINT:  low probability of a big payoff.
  • Guilty Pleasure: comparison of Senator Elizabeth Warren to a fundamentalist Protestant preacher in her lack of forgiveness or redemption. 

Sunday, February 18, 2024

Don't define the problem as the lack of your solution (gun control)

The latest example comes from NPR's coverage of the shooting at the Kansas City Super bowl Parade.
That the characterization of this incident as being reflective of “weak gun laws” is ridiculous. ...Every single thing that happened here was already illegal. It is illegal for juveniles to possess handguns. It is illegal for them to carry those handguns. It is illegal for them to shoot at each other in a public place. ...
... its coverage of gun-related crime, ... is invariably marked out by a fanatical obsession with gun-control and a total lack of interest in anything else.

Don't define the problem as the lack of your solution because it locks you into a particular solution, without the careful analysis that benefit-cost analysis requires.  

Related:

Saturday, February 17, 2024

Four Myths about Price Discrimination

In an earlier post, Soda Prices are Too Low for the FTC, the Biden Administration seems to be trying to turn back the clock to a time when price discrimination was viewed as bad.  Lest we repeat the mistakes of the past, it is worthwhile to remember its lessons.   

 See this 2003 talk by some middling FTC economists. Here the conclusions:  

 

BOTTOM LINE:  Determining the role that price discrimination plays in antitrust enforcement typically requires the kind of difficult and time consuming economic analysis the Biden administration is trying to avoid.
Cooper, James C. and Froeb, Luke M. and O'Brien, Daniel P. and Tschantz, Steven T., Does Price Discrimination Intensify Competition? Implications for Antitrust (2005). Antitrust Law Journal, Vol. 72, No. 2, pp. 327-373, 2005, George Mason Law & Economics Research Paper No. 14-30, Available at SSRN: https://ssrn.com/abstract=2470135
Werden, Gregory J. and Froeb, Luke M., Can the FTC Turn Back the Clock? (August 15, 2021). Antitrust Magazine Online, Oct. 2021, Available at SSRN: https://ssrn.com/abstract=3909851

Thursday, February 15, 2024

The Hidden Costs of Streaking the Super Bowl

Two "streakers" interrupted the 2024 Super Bowl to attract social media followers. For the most part, this would be considered a harmless stunt.But what are the hidden costs? Most of these would be the costs to those of us watching. Only those in the stadium actually saw the stunt. TV viewers might have been more affected. Suppose it delayed the game some 5 seconds. With viewership of 123.7 million, this represents almost 20 person-years lost or, perhaps, $0.5 million in value of time lost. Perhaps we are not doing enough to deter disruptions.



Soda Prices are Too Low for the FTC

The FTC is investigating Coke and Pepsi for price discriminating. It has invoked the Robinson-Patman Act, otherwise known as the "Mom & Pop Protectionism Act." Most economists consider the act itself to stifle competition and innovation by restricting supply chain decisions. The legal profession also came around to this view such that the number of cases dwindled to zero. But, evidently, it is not dead yet.

The law, known as the Robinson-Patman Act, bars manufacturers from charging different prices to competing resellers of their products if the practice threatens to harm competition. The law is highly technical and hasn’t been enforced by the FTC in decades (emphasis added).

I can hear Dr. Frankenstein yelling, "It's alive! It's ALIVE!!!"


Wednesday, February 14, 2024

Demand for electric cars crashed last summer, supply is slow to adjust


  From WSJ:  
The wave of early EV adopters willing to splurge had receded, and the next round of potential customers was proving more hesitant. They had more questions about how far a car could go on a single charge, and the life expectancy of batteries. They worried about charging times, repair costs, and not having enough places to plug in, according to dealers and surveys.

With excess supply (measured as months of supply, one would expect the price to keep falling, until (Quantity Demanded)=(Quantity Supplied).

Tuesday, February 13, 2024

California and Washington commit the Hidden-Cost Fallacy

From MarginalRevolution: the increase in California's income tax "increased total tax revenue for California — but not nearly as much as intended. Due to departures, the state lost more than 45% of its windfall tax revenues from the policy change, and within two years the state lost more than 60% of those same revenues."

This illustrates the main idea of Chapter Three: 

Consider all costs and benefits that vary with the consequence of a decision [if you miss some that is the hidden-cost fallacy]; but only costs and benefits that vary with the consequence of a decision [if you consider irrelevant ones that is the sunk-cost fallacy].
It looks as if Washington State is making the same mistake: In 2022 they imposed a new, 7% capital gains tax on sales of stocks or bonds of more than $250,000. Soon thereafter, the state's richest man moved to Florida. 

 BOTTOM LINE: People respond to incentives [Chapter One], so make sure your state legislators read Chapter Three.

Monday, February 12, 2024

Are stocks over-valued?

 DISCLAIMER:  If I really knew, I would not be teaching school.

WSJ summarizes five valuation methodologies:

  • Price/Earnings Ratio:  "Analysts are more optimistic about the profit picture for this year and project that earnings among the companies in the S&P 500 will rise roughly 11%. That could offer stocks more room to run."
  • Price-to-book Ratio: "Akin to the price/earnings ratio, the price-to-book ratio divides a company’s stock price by its book value, a measure of total assets minus liabilities. ... It is less useful for tech companies because their growth prospects often aren’t captured on company balance sheets...The S&P 500 is trading at a forward price-to-book ratio of 4.15, above its 10-year average of 3.26 and its 20-year average of 2.76. In comparison, Nvidia’s price-to-book ratio is 22.48."
  • Equity Risk Premium: "Comparing the trailing earnings yield with the 10-year Treasury yield shows that the S&P 500’s equity risk premium is at 0.7 percentage point, near the lowest level in about two decades. (The lower the ratio is, the more expensive stocks are.)"
  • Price/Earnings Growth Ratio: "The PEG ratio is the market’s valuation of a company relative to its earnings prospects. To calculate it, divide a company’s price/earnings ratio over the past 12 months by its projected annual future earnings growth. A PEG of 1 indicates the stock’s price is in line with its growth expectations. ... The S&P 500’s current PEG ratio is 1.48, below its 10-year average of 1.49 and above its 20-year average of 1.35. Nvidia’s ratio of 0.78 makes it look cheap in comparison."
  • CAPE: "At 33.4, the S&P 500’s CAPE ratio is higher than it has been more than 96% of the time since 1881, but it is still well below the prior peaks seen in the late 1990s and 2021."

We knew rent control was bad, but ...

 did not know that it could cause a financial crisis:

..what worries investors more is the NYCB’s $37 billion multi-family housing portfolio, about half of which are comprised of New York rent-regulated units.
...Why have these loans become toxic?
Blame Democrats in Albany, who in 2019 restricted landlords’ ability to raise rents to pay for renovations and “de-regulate” rent-stabilized units. ... One result is that landlords have removed rent-regulated apartments from the market and are leaving them vacant rather than spend on maintenance and improvements that they can’t recoup .... Lower anticipated future rents have also slashed property values. ... NYCB’s rent-regulated portfolio could be a ticking time bomb.

And ironically, 

Tighter supply [in the rent controlled market] has pushed up rents in the non-regulated market—one reason Manhattan’s average market-rate monthly rent has surged 30% over the last two years. 

Thursday, February 8, 2024

Podcast about my Favorite Book

I was interviewed about the book on the Million Dollar Stories Podcast. It was a lot of fun but, even though I made a few mistakes (sorry Brian "Shor" McCann and my favorite word appears to be "uh").



Wednesday, February 7, 2024

Can Millennials Afford Houses?

I see commentary every so often about younger generations not being able to afford the houses like their parents, or grandparents, bought decades ago. These often have a generational warfare tinge to them - "Boomers destroyed the economy and now I have to live in a shack." Even after adjusting for inflation, house prices doubled between 1970 and 2020. But there have been plenty of improvements in the quality of the housing stock making new homes not comparable to parents' houses.

By today's standards Boomers' houses sucked. In 1970, one-in-six US houses had no plumbing and did not have access to public water supply, most of these relied on adjacent well water. Waste water for one-in-four houses was not connected to municipal sewage but used a septic tank or a cesspool. Heating for over a quarter was from room heaters or stoves. Three-quarters had no air conditioning. Washers were in 60% but dryers were in only 40%. These are the measures that the US Census tracked. But we also know from updated building codes that they could not handle as many electric appliances and could not withstand extreme weather as well. 

The clearest sign of progress is how crowded they were. Over the fifty years from 1970 to 2020 square footage increased 70% while the number of people living in the house fell 20%. The available data allow us to track the cost per square foot per person.

Real housing prices double (green line) but so does area per person (blue line) resulting in a nearly constant cost per area per person (red line). I infer that housing costs have not risen but housing amenities have. You could afford your grandparents' house but you probably could not find it anymore, and you probably would not want to live in it.

Monday, February 5, 2024

Apocryphal management story

When the CEO left the company, he gave his successor three envelopes to open when she encountered challenging problems.

When she ran into trouble the first time, she opened the first envelope and it said to “blame your predecessor.” She did, and the trouble passed.

When she ran into trouble again, she opened the second envelope and it said “Reorganize.” She did, and the trouble passed.

When it happened once again, she opened the last envelope and it said “Prepare three new envelopes.” 

Saturday, February 3, 2024

Why restrict US exports of natural gas?

 The answer, of course, is politics:

To stop the war in Ukraine from disrupting energy markets, [Biden's] administration has overseen a big expansion in domestic fossil-fuel output. As well as being the world’s top LNG [liquified natural gas] exporter, America continues to be the biggest oil producer. That angers the climate-anxious left wing of Mr Biden’s Democratic Party. ...
But US restrictions wont help:
...the impact of the pause on global markets—and thus on global emissions, which is what matters to the climate—will be minimal. Forgone American exports will be offset by fresh supplies from Qatar, Australia and elsewhere. “I think there is an opportunity,” declared Jonathan Wilkinson, Canada’s energy minister, on January 30th.
BOTTOM LINE: President Biden's virtue signaling is worse than empty, as it is harming US producers by shifting US production to Qatar, Australia, and Canada.