Antitrust Lawyer Blog Commentary on Current Developments

FTC Rules That Consummated Merger Is Anticompetitive

On January 6, 2005, the Commission ruled that Chicago Bridge & Iron Company (“CB&I”) illegally acquired Pitt-Des Moines, Inc.’s (“PDM”) Engineered Construction and Water Divisions. The FTC did not initially investigate the deal when the parties filed their Hart Scott Rodino notification forms. Eight months after the HSR waiting period expired, the FTC challenged the merger administratively before an FTC Administrative Law Judge (“ALJ”). The CB&I case serves as a powerful reminder that the expiration of the HSR waiting period does not mean that the transaction has been approved by the FTC or cleared from a potential challenge.

According to Commissioner Swindle’s thorough and well-reasoned ruling, on behalf of a unanimous Commission, the acquisition provided CB&I with a monopoly or near-monopoly position in each of four relevant markets and violated Section 7 of the Clayton Act and Section 5 of the FTC Act. To restore competition as it existed prior to the merger, the Commission ordered CB&I to create two separate, stand-alone divisions capable of competing in the relevant markets and to divest one of those divisions within six months. The Commission’s goal is to restore competition as it existed prior to the merger.

Background

CB&I completed the acquisition of PDM assets on February 7, 2001. On October 25, 2001, the Commission filed a complaint challenging the acquisition. The complaint alleged, among other things, that the consummated merger significantly reduced competition in four separate markets involving the design and construction of various types of field-erected specialty and industrial storage tanks in the United States: liquefied natural gas storage tanks; liquefied petroleum gas storage tanks; liquid atmospheric gas storage tanks; and thermal vacuum chambers. On June 12, 2003, the initial decision by the ALJ held that the deal was anticompetitive and ordered CB&I to divest all assets obtained in the acquisition. Both CB&I and counsel supporting the complaint appealed the initial decision, and the case was reviewed by the full Commission. The Commission upheld the initial decision’s finding that the acquisition was illegal, but differed with that decision’s analysis and with the decision’s final relief.

At the time and prior to the 2001 transaction, CB&I and PDM competed against each other as the two leading U.S. producers of large, field-erected industrial and water storage tanks and other specialized steel-plate structures. According to the Commission’s opinion, the acquisition substantially lessened competition in four relevant product markets in the United States. The Commission held that the consummated merger significantly reduced competition in four separate markets involving the design and construction of various types of field-erected specialty and industrial storage tanks in the United States: liquefied natural gas storage tanks; liquefied petroleum gas storage tanks; liquid atmospheric gas storage tanks; and thermal vacuum chambers.

Opinion

According to the unanimous opinion of the Commission, this case involves the acquisition of a company by its closest competitor in four relevant markets in the United States. CB&I and PDM were the dominant suppliers in each of the four relevant markets prior to the acquisition. The Commission stated that the acquisition provided CB&I with a monopoly or near-monopoly position in each of the markets. It also ruled that entry into each of the relevant markets is not only difficult, but is also unlikely to happen within a timely manner to restore the competition lost from the acquisition. The Commission stated that the size of the commerce affected by an acquisition is not a factor in determining the legality of a merger. Moreover, the FTC found that the customer testimony demonstrated that customers could not constrain a price increase despite the parties’ claims that the customers were sophisticated and powerful enough to constrain prices.

As did the ALJ’s initial decision, the Commission’s order requires a divestiture to restore competition as it existed prior to the merger. The order differs from the relief proposed in the ALJ’s initial decision because the Commission believed that the relief sought in the initial decision was unlikely to restore a viable competitor to the market. Specifically, the Commission ordered CB&I to reorganize its business unit related to the relevant products into two separate, stand-alone subsidiaries, and to divest one of those subsidiaries within six months. Rather than giving the responsibility to a third party trustee, who would have to learn the business, the Commission explains that CB&I is in the best position to know how to create two viable entities from its current business.

The order also requires CB&I to divide its current customer contracts between the two newly-created subsidiaries, and to facilitate the transfer of employees so that each subsidiary has the technical expertise to complete the customer contracts assigned to it and to bid on and complete new customer contracts. In particular, CB&I must provide incentives for employees to accept offers of employment from the acquirer and remove contractual impediments that would prohibit employees from accepting such offers. The Commission appointed a monitor trustee to oversee the divestiture and, among other things, to assess the need for CB&I to provide technical assistance and administrative services to the acquirer. The Commission also reserved the right to appoint a divestiture trustee in the event that CB&I does not accomplish the divestiture in six months.

Conclusion

The decision is noteworthy for several reasons. First, it demonstrates that the expiration of the HSR waiting period should not be interpreted to mean that the Commission has approved the deal. Second, the Commission can and will challenge a consummated deal if it determines that the deal is anticompetitive. Third, the FTC has a particular interest in post-acquisition competitive effects of consummated mergers. Fourth, the FTC will seek a complete divestiture to remedy an anticompetitive merger, whether it is integrated or not. Therefore, parties to a consummated deal, particularly transactions that avoided HSR scrutiny, for whatever reason, should proceed with reasonable caution and monitor closely post-acquisition conduct.

Andre Barlow