Federal Trade Commission Protecting America's Consumers

DKT/CASE NO.:P951201

TITLE: HEARINGS ON GLOBAL AND INNOVATION-BASED COMPETITION

PLACE: Washington, D.C.

DATE: October 17, 1995

PAGES: 158 through 258

C O R R E C T E D C O P Y

Meeting Before the Commission

Date: October 17, 1995

Docket No.: P951201

I N D E X

Presentation by: Page:

Benjamin W. Heineman, Jr.

General Electric Company 161

Dr. William Coyne

3M Corporation 198

Thomas B. Leary

Hogan & Hartson 226

FEDERAL TRADE COMMISSION

In the Matter of: )

) Docket No.: P951201

HEARINGS ON GLOBAL AND )

INNOVATION-BASED COMPETITION )

Tuesday,

October 17, 1995

Federal Trade Commission

Sixth and Pennsylvania Avenue

Room 432

Washington, D.C.

The above-entitled matter came on for hearing,

pursuant to notice, at 1:10 p.m.

PARTICIPANTS

FEDERAL TRADE COMMISSION:

ROBERT PITOFSKY

Chairman

MARY AZCUENAGA

Commissioner

ROSCOE B. STAREK, III

Commissioner

CHRISTINE A. VARNEY

Commissioner

SUSAN S. DE SANTI

Director, Policy Planning

DEBRA A. VALENTINE

Deputy Director, Policy Planning

SPEAKERS:

BENJAMIN W. HEINEMAN, JR.

Senior Vice President, General Counsel

Secretary

General Electric company

DR. WILLIAM COYNE

Vice President, Research and Development

3M Corporation

THOMAS B. LEARY

Hogan & Hartson

P R O C E E D I N G S

CHAIRMAN PITOFSKY: Good afternoon, everyone. I'm Bob Pitofsky, and I want to welcome you to this second session of our hearings on the changing nature of competition in the world and our examination of whether antitrust policy needs to be adjusted to take those changes into account.

Our first speaker this afternoon is someone who I have heard before on this subject and I must say is one of the keenest commentators on the questions that we'll address.

Ben Heineman is Senior Vice President, General Counsel, and Secretary of the General Electric Company.

Before joining GE, he was managing partner of the Washington office of Sidley & Austin, and from 1977 to 1980, he served as an Assistant Secretary for Planning and Evaluation at HEW.

Mr. Heineman is graduated from Harvard College, Oxford University, Yale Law School, is a former Rhodes Scholar and law clerk to Justice Potter Stewart.

It's a great pleasure to welcome him here for these proceedings.

MR. HEINEMAN: Thank you very much, Mr. Chairman.

I want to begin this afternoon by commending the Chairman and the Commission for devoting the resources, energy and time to put together this extensive set of hearings. It's an important undertaking.

The importance of the issues that are being addressed in these hearings, whether and if so, how the antitrust laws and their enforcement should be modified to adapt to the changing competitive environment is apparent from my vantage point as the General Counsel of a large U.S.-based multinational corporation that participates in a number of technology-driven industries.

I applaud the Commission for undertaking this re-examination, and for seeking a wide range of views.

I'm here today not as an antitrust expert, but as a member of General Electric's senior management team with responsibility for advising the company on the broader arrays of legal issues arising from its global business initiatives.

From my generalist perspective, I hope first to provide the Commission with a sense of the dramatic and increasingly rapid globalization of major industries.

Second, I would like to identify several substantive and process issues that I believe are implicated by changes in the competitive environment that GE and many other U.S.-based companies confront.

My hope is that with the help of the impressive array of antitrust speakers that are scheduled to participate during the course of these hearings, the Commission will be able to identify the changes in the antitrust laws, or the manner in which they are interpreted that will best address these issues.

First let me talk a little bit about GE. Today it ranks as one of the largest companies.

In 1994, we had revenues of approximately 60 billion and earnings from continuing operations of 6 billion.

According to a recent Wall Street Journal survey, GE's market value of 100 billion placed it third among the world's public companies behind Nippon Telegraph and Telephone of Japan and Royal Dutch Shell of the Netherlands.

GE is also one of the most diversified companies in the world. It is comprised of 12 separate businesses, almost all of which standing alone would be Fortune 500 companies, and five of which would be in the Fortune 100 industrial companies.

These businesses span a broad range of industries--major appliances, lighting, engineering materials, aircraft engines, power systems equipment, medical diagnostic imaging machines, broadcasting and financial services.

There are several ways to illustrate the transformation of GE over the past 25 years from a U.S. company participating primarily in a North American economy into today's U.S.-based multinational company operating in an increasingly competitive global business environment.

Statistics alone tell a dramatic story. In 1970, GE's international sales totaled 1.4 billion--about 16 percent of totals sales.

By 1985, international sales had grown to 7.1 billion, roughly 25 percent of total sales, and over the past decade, international revenues almost tripled to $20 billion and accounted for one third of GE's total 1994 revenues from continuing operations.

A look at the two main components of GE's international revenues--exports from the U.S. to external customers, and sales by non-U.S. operations--bring GE's globalization story into clear focus.

In both 1970 and 1985, exports from the U.S. to external customers represented half of GE's international revenues, but over the last decade, while exports from the U.S. to external customers doubled to more than $6 billion, there has been a marked increase in sales by GE's operations located outside the United States.

This category, which reflects the expansion of the GE's businesses into countries and regions around the world, nearly quadrupled to more than 13 billion between 1985 and 1994, and now accounts for more than two thirds of GE's consolidated international revenues.

In 1994, GE's total foreign investment, excluding its financial services GE Capital, was 9.6 billion, up from 4.8 billion in 1988.

GE Capital's international net earning assets were 22.5 billion in 1994, up from 4.7 billion in 1988.

In addition, in 1994, GE made a net contribution to the United States balance of trade of a positive $4.4 billion.

Changes in the manner in which GE has structured its operation reflect the company's shift from a U.S. or North American focus to a global mind set.

In 1970, GE had a separate international group that was responsible for all of GE's export sales and non-U.S. operations.

This organizational structure continued until the early '80s when the international group was eliminated, and responsibility for international action was vested in each of GE's business, each of our product lines.

Instead of being treated as a separate, ancillary function, international growth is now viewed as a core mission of each of GE's 12 businesses.

Today each GE business has its own president and staff and is organized on a global basis.

We do not have a GE France or a GE China or a GE Japan.

Instead, for example, we have a GE Medical Systems business headquartered in Milwaukee, which has an Asian operation headquartered in Japan, and a European operation headquartered near Paris, both of which report directly back to Milwaukee.

The same is true for our 11 other businesses. Reflecting this global structure, many of GE's business leaders are now foreign nationals, including GE's Vice Chairman.

To add texture to this broad picture, I would like to focus for just a moment on changes in one of GE's oldest and best known businesses--GE Lighting.

For more than 100 years, this Edison-originated business was essentially a North American operation that engaged in export sales to customers in other regions of the world, but beginning in the late 1980s, GE Lighting has grown into a global business through a number of significant acquisitions and investments.

Prior to acquiring Tungsram, a Hungarian lighting company, Thorn, a UK firm, and Lindner, a German firm, between 1989 and 1994, GE Lighting had less than 2 percent share of the European light bulb business.

Today, as a result both of these acquisitions and large-scale investments in our European operations, GE Lighting has garnered more than 15 percent of European lamp sales--2 percent to 15 percent in five years.

GE Lighting has also made significant investments and growth in Asia.

In the 1990s, it formed a full function joint venture in India, entered into a major joint venture with a Chinese lamp manufacturer in Shanghai, launched distribution and sales ventures in Japan with Hitachi, and in Thailand, and formed an Indonesian lighting firm.

These expansion steps are now beginning to result in substantial increases in GE Lighting sales in Asia.

As a result of these measures, GE Light has generated significant international revenue growth.

Today more than 40 percent of GE Light's revenues come from sales outside the United States--almost triple the percentage only a decade ago.

The transformation of GE Lighting into a global business will improve its ability to compete successfully in the next century.

One of the most successful benefits, significant benefits in globalization, is enhanced scale.

With a global rather than merely a North American presence, GE Lighting's investments in research, develop new technologies and refine its existing technologies will be relatively less risky because the business will be able to commercialize its successes more rapidly across a broader customer base.

In addition to global product planning activities, GE Lighting will be able to take solutions developed in response to local or regional customer requirements and utilize them to generate increased sales in other parts of the world.

GE Light's enhanced scale has also facilitated the establishment of global Centers of Excellence.

These Centers of Excellence will enable GE Lighting to focus human and financial resources on lowering production costs, enhancing product quality, and expanding the range of offerings in our key lighting product categories.

For example, in Hungary, we have a Center of Excellence for our energy efficient compact fluorescent product family.

These products are designed and manufactured in Hungary for use and sale throughout the world.

GE globalization efforts have not been unique in the technology-driven industries in which it participates.

GE's primary competitors have taken similar steps to expand their product scope and geographic reach.

For example, to go back to the lighting business, Philips purchased Westinghouse Lighting Division in 1983, and Osram, which is owned by Siemens, purchased GTE Sylvania's U.S. lighting business in 1992.

As a result, GE, the only remaining major U.S.-based lighting company, competes around the world with these two European-based global companies as well as numerous smaller regional and local firms.

At the beginning of the 1980s, GE looked at Pittsburgh-based Westinghouse as a key competitor in its lighting, appliances, and power generation and distribution business, but today, our key competitors increasingly are foreign-based multinationals such as Siemens, Brown Boveri, Philips, Toshiba and Schneider.

Most of these firms have been able to establish a major position in the U.S. by acquiring U.S.-based firms that were once among GE's prime competitors.

In addition to the previously mentioned lighting acquisitions by Philips and Siemens, Asea Brown Boveri has acquired Combustion Engineering's and Westinghouse's power and transmission businesses.

Electrolux has purchased White Consolidated's major appliance business, and Schneider has acquired Square D's electrical distribution and control business.

Over the last decade, the environment in which GE businesses compete has become much more complex.

The markets in which new technologies are developed and in which products are sold are international rather than national in scope.

Acquisitions frequently involve assets located in a number of countries, and products and services that are marketed over a wide geographic area.

As the firms participating in particular industries globalize, intellectual property licensing and research and development efforts increasingly span regional boundaries, and many of GE's businesses now face more intensive and aggressive competition even though the number of industry participants has often declined as part of the process of global expansion by leading firms based on different regions in the world.

A number of our businesses involve the development of large technically complex products requiring the outlay of enormous up-front development costs.

These businesses include aircraft engines, medical systems which sell diagnostic imaging equipment, power systems which sell gas and steam turbines and combined cycle generation equipment, and transportation systems which sell locomotives.

We have witnessed increasingly fierce competition in these industries as our sophisticated customers--airlines, hospitals, utilities, railroads, and governments--have come under their own intense cost and budgetary pressures.

In sum, it is obvious to those of us engaged in the day-to-day global competition that the winners in the world marketplace will be firms and nations that create the lowest cost, highest value products in the quickest, most efficient manner.

The challenge facing the Commission and other competition authorities is how to prevent conduct that threatens competition without stifling transactions and chilling business initiatives that will benefit consumers by generating efficiencies in the development, production, and distribution of improved products and services.

Let me now mention several issues that are raised by this changing competitive environment and which I hope that the Commission will look at as it continues this very thoughtful process that is now embarked upon.

First, a more level playing field for growth by U.S.-based firms.

The emphasis that has been placed on market concentration in U.S. merger analysis has resulted in merger standards that are significantly more restrictive than those applied elsewhere in the world.

The different merger standards create an unequal global playing field that has the potential to disadvantage U.S.-based firms seeking to achieve the benefits of enhanced scale and globalizing technology-intense industries.

The dramatic differences in substantive merger standards are evident when one compares the major merger guidelines adopted during the last five years--in 1990, the European community merger regulation, the 1991 Canadian merger enforcement guidelines, and the 1992 Department of Justice-FTC horizontal merger guidelines.

As a matter of practice, the United States stands alone in focusing its merger analysis both on single firm market power and on market concentration that may facilitate the collusive or coordinated exercise of market power.

By contrast, European community merger regulation focuses on single firm market power alone, whether a merger, referred to as a concentration, will create or strengthen a dominant position with the result that effective competition will be significantly impeded in the common market.

With only limited and quite narrow exceptions, the EC merger regulation has been applied to address the threatened creation of a single dominant firm, and the Canadian merger enforcement guidelines take a single approach.

As a result, European-based firms with large European share positions are able to obtain efficiencies through mergers in both Europe and the U.S.

U.S.-based firms seeking to match these benefits through acquisitions not only face possible legal impediments in the U.S. from the stricter U.S. merger standards, but are also disadvantaged in Europe because they must outbid their European rivals when attempting to improve their competitive posture through acquisition.

An example drawn from GE's experience might assist in illustrating my concern.

In 1991, Schneider, a French company that is engaged in the sale of electrical distribution and control equipment, acquired Square D, then the leading U.S.-based firm in that industry.

Through its prior acquisition of Federal Pioneer, the leading Canadian electrical distribution equipment firm, and Telemecanique, another French firm, Schneider already had eclipsed its U.S.-based electrical distribution and control competitors with global and sales.

Its acquisition of Square D made Schneider the clear world leader in electrical distribution equipment and industrial controls with global sales now approximately three times those of GE.

This leadership position significantly reduces Schneider's risks in investing in the development of new global electrical distribution and control products, and thereby provides Schneider with important advantages in competing with its remaining U.S. rivals.

U.S. merger regimes precluded GE or Westinghouse from even attempting to bid against Schneider for Square D.

Under either the EC or the Canadian merger regimes, Westinghouse and GE could have submitted competing bids in an effort to capture some of the scale efficiencies that Schneider had already obtained through its prior non-U.S. acquisitions.

There are several constructive steps that the Commission should take to help level the playing field for U.S. firms.

An obvious but difficult step would be to develop a more uniform global view regarding the extent to which market concentration presents a significant risk facilitating non-competitive pricing, but obviously such harmonization will take years.

I believe that the Commission and the Antitrust Division should continue to refine the U.S. standards for merger review, placing greater reliance on competitive effects and less emphasis on concentration data.

I believe that the following steps would be beneficial--remove all presumptions based upon market share data.

Use the HHIs as a screen to determine when the potential competitive effect of a transaction merits scrutiny.

Secondly, focus the analysis on likely future market conditions, not just historical conditions, in order to give appropriate weight to global competition.

Three, give greater scope and weight to potential efficiency benefits of the transaction.

A second area of concern is the increased guidelines and flexibility which should be possible in evaluating proposed transactions in certain technology-driven industries.

Let's just take a few moments to explain the basis for my suggestion that the Commission use the 1994 Department of Defense task force report to clarify how the current merger guidelines apply in certain technology-driven industries.

The Commission and Antitrust Division are to be commended for the significant steps they have taken in the adoption and refinement of merger guidelines to assist businesses in determining when proposed transactions will raise significant U.S. antitrust concern.

Despite efforts in the 1992 guidelines to stress that market share and concentration data are quote, only the starting point for analyzing the competitive impact of a merger, unquote, I believe that there continues to be a broadly-held perception that the transactions that join firms with large historical shares of U.S. sales in a particular industry are likely to be challenged because the government fears that such a transaction may facilitate collusion among the remaining firms.

This commonly held view of the Commission's approach to mergers simply cannot be squared with the real life experience of many in the business community.

I find particularly telling that there has not been a single instance that I can recall during the eight years that I have been at GE that my colleagues reacted with glee when two of their competitors announced they were merging either in the U.S. or elsewhere in the world.

Rather than anticipating increased profits from higher post-merger prices, we have usually foreseen the creation of more capable and vigorous competitors that would have enhanced ability to lower costs and reduce its risk from investing in the development of new products.

I attribute the disconnect between the general perception of the Commission's approach to mergers and the typical business reaction in many of the industries in which we participate to a failure by the Commission and the Antitrust Division to clarify the application of the merger guidelines in industries where huge initial research and development costs, heterogeneous products and relatively infrequent big ticket sales make oligopolistic coordination quite unlikely.

As I mentioned earlier, GE participates in a number of businesses that exhibit these characteristics.

One of the best examples of such an industry is the aircraft engine business.

GE aircraft engines together with its revenue sharing participants has spent in excess of $1.5 million to develop a new engine, known as the GE 90, to power the new wide-body Boeing 777 aircraft.

GE's competitors have also invested huge sums to modify their existing engine designs to meet the requirements of this new aircraft.

In order to recoup their enormous up-front expenditures and to attempt to generate some profit on this investment, each of the three competing firms has a strong incentive to win each order both because orders will enable the winning manufacturer to begin to generate sales revenue, and because orders will improve the competitive position of the winning manufacturer by helping to validate the technical approach with future customers by reducing its production cost as it advances along the manufacturing learning curve.

In addition, each aircraft engine manufacturer confronts highly sophisticated customers who employ complex bidding and negotiation techniques to obtain the best possible price for new aircraft in order to put themselves in the most advantageous position to succeed in the increasingly competitive airline industry.

Both the business community and consumers would benefit greatly if the Commission and the Antitrust Division would officially endorse the discussion of the merger guidelines contained in the 1994 report of the Defense Science Board Task Force on the antitrust aspects of the defense industry consolidation.

The report explained that while mergers involving standardized products such as tents and uniforms and boot may present a risk of facilitating coordinated interaction, in mergers involving sophisticated weapons systems, quote, the risk of anticompetitive harm through coordinated interaction will be small, even if the merger would eliminate one of a handful of competitors in a highly concentrated market.

The key factors cited in support of this conclusion--the complex heterogenous nature of the products, unique cost positions, and technical capabilities of the competing firms and the sporadic large-scale nature of the sales competitions--are present in many technology-driven industries with large up-front development costs.

I'm not suggesting that the Commission issue new merger guidelines.

Rather my more modest request is that the Commission and the division simply build upon the valuable guidance contained in the, contained in--excuse me--is contained in the 1994 DOD task force report.

Let's go to a third issue--increased legal certainty for partially-owned ventures.

The Commission and the Antitrust Division have provided valuable assistance to the business community through the issuance this spring of international antitrust guidelines and international intellectual property licensing guidelines.

Unfortunately, in the process of issuing these guidelines, the antitrust agency withdrew the guidance provided in other areas by the 1988 international guideline.

Of particular concern to us is the elimination of a clear statement of the federal antitrust agencies' views regarding the application of Section 1 of the Sherman Act to activities involving a company, and its less than wholly-owned subsidiary.

Many companies, including GE, have utilized joint ventures and partly-owned affiliates in their efforts to expand their businesses into diverse geographic areas where partners are an absolute necessity for market access.

These vendors may take many forms from a majority ownership and control to joint ownership and joint control to minority ownership with or without operational control.

In view of the extremely broad territorial reach of the U.S. laws delineated in the 1995 guideline, I believe that it would be quite helpful to reissue and amplify the guidelines contained in Case 9 of the 1988 guidelines in order to clarify when a parent company and its subsidiary will be considered by the Commission and the division to be a single economic unit for purposes of the Sherman Act.

That portion of the '88 guidelines set forth the Antitrust Division's view that a parent corporation and any subsidiary corporation of which the parent owns more than 50 percent of the voting stock are a single economic unit under one common control and thus are legally incapable of conspiring with each other within the meaning of Section 1.

In addition, the division at that time suggested that Section 1 would not apply where the parent corporation owned less than 50 percent of the stock, but actually had effective working control of the subsidiary.

In view of the important role that the partially-owned joint ventures and affiliates play in globalization efforts of many U.S. companies, it's reassuring to have the benefit of a clear statement of the Commission and the division's position on this subject.

A fourth area of consideration for the Commission is coordination among enforcement agencies.

The proliferation of national and regional competition laws, increasing number of international transactions threatens to burden both the parties and the competition authorities with multiple overlapping reviews.

This is an area where cooperation among competition authorities should be encouraged with the goal of developing creative approaches that can reduce procedural burdens without sacrificing effective substantive oversight.

In addition to exploring steps to reduce the cost and complexity associated with the review of international transactions, I believe that consideration should be given in appropriate cases to foregoing review in the U.S. when the transaction has as its main focus and competitive effect in other jurisdictions.

While multiple reviews will be appropriate in many situations, at some point, the costs of such multiple reviews will outweigh the potential benefits.

In marginal or de minimis cases, the Commission should consider deferring to other competition authorities, particularly since the Commission will retain the ability to take action in the event that U.S. competitive concern subsequently arises from such a transaction.

Let me just mention one last area of concern that I hope the Commission will consider--the creation of a uniform global antitrust floor.

As I have discussed earlier, it may be difficult to reach a consensus to reach harmonization on the analysis to be applied in looking at the likely competitive effects of mergers and joint ventures.

However, there does appear to be an emerging view that certain conduct that is per se illegal under the U.S. antitrust laws such as price fixing, bid rigging, and various market and customers allocation agreements among competitors should be barred around the world in order to promote global competition.

Harmonization efforts should begin with modest steps focused on these widely-recognized concerns.

I would urge the Commission to pursue both multilateral and bilateral vehicles to promote universal adoption and enforcement of a minimum set of basic competition rules that apply worldwide.

Although probably beyond the Commission's core antitrust mission, there is a related initiative that may be of even greater importance to fostering true global competition than the broad scale enactment and enforcement of basic antitrust laws.

This is a subject about which I feel deeply because I have to deal with it every day.

Although bribery is widely condemned, the U.S. stands virtually alone in the enactment and enforcement of laws prohibiting such conduct by companies.

There is a need for expanding FCPA-type prohibitions to root out corruption that too often displaces competition based on price, product quality, and customer service in a number of areas of the world.

In GE's experience, any disadvantages imposed on U.S.-based businesses by the more rigorous antitrust regime in the U.S. pales by comparison to the disadvantages imposed on U.S. firms in the international arena by corruption.

This is an issue that GE has tried to take a leadership role in addressing.

The answer is not to weaken the Foreign Corruption Practices Act, but instead to level up world standards by promoting adoption and enforcement of effective anti-bribery regimes in both the selling and buying nations.

The active involvement of the Commission and other appropriate U.S. governmental agencies in efforts to eliminate corruption and to establish appropriate anti-bribery regimes would make an enormous contribution to promoting genuine competition.

I appreciate the Commission's invitation, and I appreciate their indulgence in hearing my remarks.

Thank you very much.

CHAIRMAN PITOFSKY: Thank you very much. I have a comment and then a question.

I think the call to the more emphasis on competitive effects rather than numbers is one that's being heeded in the enforcement agencies.

Maybe we haven't gone as far as fast as we should, but I think that's actually going on.

I say that as someone who has been back in government for six months and therefore can take a fresh look at that issue.

Let me ask a very general question. Perhaps we can get at something that's helpful here.

As you know, one of the currently fashionable views about competition policy is Michael Porter's view--the scholar from Harvard--that one of the best ways to induce, to ensure that American firms will succeed in global competition is to make sure they compete very vigorously at home.

Now that's not going to apply to all of GE's markets. There are only going to be two or three venture companies regardless of what we do, but what about other portions of GE's market?

Do you see a connection between a firm that's lean and tough and competing hard in the U.S. and then its ability to succeed in international markets?

MR. HEINEMAN: I don't really see it that way, Mr. Chairman, at all.

I think, of course, we should compete very vigorously in the United States, but in most of the markets we are in we are truly in global competition.

We're facing as many serious foreign competitors as U.S.-based competitors, and so I think the statement doesn't have a lot of relevance in the world that I work in.

It is without doubt, however, that we're in a world where that kind of competition is essential to ring out all the excesses, to get to efficient low cost, high quality products, that are going to be necessary to win in the global arena.

It's--actually we have just been going through an exercise in our company about how we can improve our quality which we consider good, but we would like to improve upon, and we were talking about how in the eighties to some extent we went into industries where we avoid our Japanese competition, not U.S. companies, but Japanese competition, but with the result that we weren't forced by companies like Motorola, Hewlett-Packard to meet the quality standards of Japanese competition, and as a result, we're not as far along on the curve of some of those important things as U.S. companies that had to compete against the Japanese, so I guess I would turn it around and say that we may have been better off if we had been more competitive early on with the Japanese rather than U.S. companies to be truly competitive in the world economy today.

CHAIRMAN PITOFSKY: Fascinating. One more question--it is certainly true that American merger policy and joint venture policy is tougher than firms in Europe, Canada and Japan would face because we don't just rely on a dominant firm model, but could we not get to much the same place in facilitating the ability of American firms to compete if we kept our, our coordination model, but expanded efficiency defenses so that specific transactions that might be efficient could still go through?

MR. HEINEMAN: I mean certainly that would be a step in the right direction, and indeed I think that the challenge for all of you, and I know the intellectual challenge that you have been struggling with for some years is how to define that defense, what weight to give it, when it's appropriate, what kind of considerations go into an efficiency defense, and so I would hope that out of this process that would be one of the main building blocks for not a new antitrust policy, but one that's slightly different and more adaptive to the current circumstance.

CHAIRMAN PITOFSKY: Other questions?

COMMISSIONER STAREK: One of your four principal recommendations for change in the way we analyze mergers is to focus the analysis on likely future market conditions and not historical conditions, and I wondered what should we use to determine likely future market conditions?

MR. HEINEMAN: Well, I grant you that it's not easy, but it's not easy for us, either.

We have seen our markets change in a matter literally of a year or two.

I think the plans of companies that are, that are public, the kinds of market trends that exist in other nations, to the extent you have access to them, product plans, for example, our company I think like many companies, is engaged now heavily in multi-generation product planning, trying to lay out a technology plan and a marketing plan building platforms that carry forward, and to the extent that you have access to that kind of information, that would give you some indication I think of where future markets are going, so I think there is, there is ample information among competitors as to where they are going as the planning cycle and the planning thinking is much more I think systematic about the future than it was.

I have been with GE eight years, and to me there has been a quantum leap in our ability to think systematically about where we want to go over the next four or five years, along a whole variety of product lines than existed before.

COMMISSIONER STAREK: You wouldn't discount necessarily the economics of cartel behavior as one of the measures for future market conditions?

MR. HEINEMAN: No. No. In fact, we face it in Europe quite a bit, so I certainly wouldn't discount it.

COMMISSIONER STAREK: Well, with regard to Europe, though, I mean it's true, as the Chairman and you point out, that because they only look at dominant firm behavior, that their record is not as supposedly strong as ours is, but I think it only tells part of the story really because, you know, each one of the nations, of course, has a, has a competition enforcement authority which looks at a lot of things that EU doesn't look at, so I think their record in individual nations is pretty good.

MR. HEINEMAN: I don't disagree with that, although I do find illustrative this example I gave in my prepared remarks of a firm that basically can buy--Canadian electric distribution firm--buy in the U.S., make acquisitions in Europe, and have a different standard in Europe than we would face in the United States if we were trying to sort of have a string of pearls is the corporate cliche by buying up firms around the world.

I think it does yield a different result, and in this case, one that has created quite a fierce and competitive for us.

COMMISSIONER STAREK: Thank you.

COMMISSIONER AZCUENAGA: I find your remarks very interesting, and just focusing on one, which is the merger review, I felt that I could have written most of it myself, so obviously I agree with a lot of it.

We have talked a lot about efficiencies, and this is only early on into these hearings, but there is a concern that the Commission pay greater attention to efficiencies.

My empirical observation, having been here almost forever, is that the agency already gives a great deal of credit to efficiency justifications and has backed off from prosecuting any case in which any sort of valid justification has been presented.

My question is where do you think the perception comes from that we don't give enough credence to efficiency justifications? Because I think that will be helpful to us in deciding how to articulate and clarify our policy in this area.

MR. HEINEMAN: Well, perhaps one source is that, as I mentioned just a moment ago, trying to articulate it, as a body of doctrine or as a set of principles or as guidelines or criteria, not just in individual cases, might be a useful way of giving some guidance in the area, trying to define something.

I think probably everyone in this room, since it is a valid concern by no means the only value to be advanced in the antitrust analysis, but I guess I would make that suggestion as a way of trying to define and delimit the area in a way that perhaps those of us in industry haven't seen even though it may be existence in the decision of the Commission.

COMMISSIONER AZCUENAGA: Thank you.

COMMISSIONER VARNEY: One question--have you had the opportunity--I didn't see it in your remarks, to think about what does the vertical integration theory mean in the antitrust context as we become more global in our competition as we see more and more U.S. companies attempting to integrate vertically?

Would we be well served by paying attention to what you said generally here in the vertical context, or do you have some more specific thoughts about what we ought to be looking at in those kinds of transactions?

MR. HEINEMAN: Well, I certainly wouldn't want to comment on Time Warner and Turner as someone who also has some interest in cable programming, things like that.

COMMISSIONER VARNEY: With the exception of that transaction.

MR. HEINEMAN: I don't think this is probably the appropriate place to say anything about that.

I guess I do think that the principles would apply.

To be perfectly honest, I have been thinking more horizontally than vertically, but I would certainly think that some of the same considerations should obtain.

COMMISSIONER VARNEY: If you have an opportunity over the next few months during these hearings to give that any thought, I would be very interested.

It seems to me GE is a strong global competitor in your experience in a lot of vertical integrations from foreign corporations that we're beginning to see in this country.

MR. HEINEMAN: I'll be delighted to supplement my remarks in a letter, although ironically the sort of current buzz word in our company is deverticalizing.

We're going the other direction in terms of trying to outsource, and so--

COMMISSIONER VARNEY: Which makes me think maybe we, you know, we are still looking for the right balance on vertical integration because we're hearing a lot now about core competencies as we move into the information which is supposedly easier to outsource to the most competent supplier.

MR. HEINEMAN: Absolutely.

MS. DE SANTI: I just had a couple of questions.

In part of your remarks, you talked about the joint ventures and strategic alliances that GE has been involved in as significant factors in the business, but the thrust of the first part of your remarks really goes to an argument that you need these mergers in order to have the enhanced scale that enables you to spread the risks.

And my question goes to why mergers rather than joint ventures or other strategic alliances?

Could you tell us something about the business reasons why you would, why you find yourself in situation where you believe that you really need a merger and not another kind of horizontal relationship?

MR. HEINEMAN: I think--I guess I would say that we can live with both, and in some instance, we need to, in fact to be in joint ventures, not into mergers.

Obviously to the extent that we have control of our ability to ring out efficiencies, to be more productive, to make unilateral decisions in terms of manufacturing process, sourcing, working capital turns, all these things, it's easier than when you have got a joint venture partner. We mustn't forget--let's assume we have 51 percent. We still have a 49 percent owner who has minority rights. We have to observe the corporate formalities, not just for form reasons, but for good and sufficient substantive legal reasons, so joint ventures are--to some extent, require more observance of the other partner's interest and may not be quite as effective.

On the other hand, they can be enormously important and successful in terms of what I said--market access, cost sharing, and other sorts of activities.

We have a--one of the most successful joint ventures probably in American history is the joint venture between our aircraft engines division and a French company called Sneckma.

We make together the engine that goes on the Boeing 737, which has been one of the most successful planes and one of the most successful engines in history, so it's awfully hard to, to generalize as to why you would be in one situation or the other.

Often in a foreign country, you don't necessarily have the luxury of hundred percent merger that you might, you might here for all sort of political or industrial policy reasons.

MS. DE SANTI: My second question is an example of the saying that imitation is the sincerest form of flattery.

I would like to ask you a follow-up question that Commissioner Azcuenaga asked one of the speakers last week, which was if, if you are assessing from a business point of view one transaction versus another, how do you make an assessment of the efficiency benefits?

If you could give us more information on that, that might be relevant to expanding on, our own views on efficiencies.

MR. HEINEMAN: I would be delighted to, and I'll tell you, as part of my supplemental letter, I'll try to sort of if I can without giving away proprietary information, lay out to some extent the kind of due diligence that we go through in looking at possible acquisition targets for exactly this set of issues.

I mean obviously we're good people. We're looking at manufacturing. We're looking at technology. We look at outsourcing. We look at a wide variety of things--technology, product development plans, and so again for GE, interestingly enough, I think that our story over the last ten years has been efficiency.

Our profits have grown faster than our top line because I think one thing that Jack Welch stands for is making these the leanest, toughest businesses that he can, and that we have--as I was flying down here today, I said gee, I really ought to get this number, but in the last ten or twelve years, our market basket of companies has probably had a price increase of one or two percent--radically different, for example, than the automobile companies which have had this huge price umbrella and price increases.

Literally our companies have had a tiny price increase, so our road to profitability has been through efficiencies, which brings me back then to your question, which is as we go through the due diligence, in any deal, the absolutely central inquiry is where can we find efficiencies and synergies that will make both enterprises when put together much more competitive, because that's what our, our competitors are doing around the world.

As, again, as I said in any prepared remarks, when we hear that there has been a merger, again the reaction is that's just going to make a much, much tougher competitor. They're going to do the same thing. They're going to take cost out, and they're going to be able to spread development in R&D costs across the broader base, and it's going to be a lot tougher for us, and that's what we're seeing all the time.

CHAIRMAN PITOFSKY: Thank you very much.

MR. HEINEMAN: My pleasure. Thank you very much.

CHAIRMAN PITOFSKY: And thank you again for an extraordinary panoramic view of the issues we will be discussing over the next several months.

Our next speaker comes to us with a background in an area that we have been particularly interested in, and that is R&D.

Dr. William Coyne is Vice President, Research and Development for the 3M Corporation, a position he has held since February 1994.

From September 1990 to February 1994, he was President and General Manager for 3M Canada.

Before that, he was Vice President of the Medical Products Group, the Health Care Group, and the Health Care Products and Services Group for that company.

Before that, he was Vice President of Surgery Products Division for 3M.

He serves on the Committee on Canada-U.S. Relations, as a member of the Advisory Board of the Partech International Venture Capital Fund, and past Chairman of London Investment and Education.

It's a great pleasure to welcome him to these proceedings.

DR. COYNE: Thank you, Mr. Chairman. Good afternoon. I'm really pleased to be able to speak with the Commission this afternoon.

As a student of innovation at 3M, whether in a business environment or in the laboratory, for the last 27 years, I'm going take a little different approach than you have heard so far and talk about what happens inside the company as far as creating new business, protecting business, and creating new markets within our company.

We believe, as do many other others outside our company, that the long-established culture of innovation at 3M is truly world class, and we have a vision to be recognized as the most innovative enterprise in the world, and we believe we have the capability of achieving that, if we're not there yet, and one evidence of how the outside world perceives us is that while I'm here in Washington, we're going to be presented the 1995 President's Award of Technology, Medal of Technology tomorrow at the White House, so we're very pleased to be able to accept that award on behalf of all the innovators at 3M.

So I would like to talk a little bit about 3M, talk a little bit about how we do the research, how we innovate, and then leave you with some I believe important message on--to help you in your deliberation.

The way I'm going to do that is I need to use a 3M product here, and that's the overhead projector, although I don't see--you don't have our brand here, but I'll use it anyway.

And we're trained to speak with pictures at 3M. If this works, you'll hear me from over here as well.

(Showing slides) This is a little bit about 3M. We're a small company. Relative to GE, we're only $15 billion, and over 50 percent of our sales are outside the U.S., and as we look forward to the future, we look at our business outside the U.S. as a term we use in our company for our international business, we'll continue to grow much faster than our U.S. business.

We have relatively good earnings. I'll be talking about our R&D investment.

We have about 85,000 employees, about 46,000 in the U.S.

These are some of the markets that we participate in.

We're quite a diverse company, as is GE. We are in our consumer products business in transportation, electronics, office products, imaging and information. We are in the health care business, construction business, industrial products, safety and security, and communication arts.

I'll be talking a little bit more about the technologies that we have at 3M, but here is a representation of some of those technologies, all the way from chips for connection to electrodes for health sciences.

We're known by most of you by our adhesive technology.

We are in the medical business as far as X-ray equipment, and we have a major business in information processing.

Additional technologies here--I won't be talking about all of these today, but this is a micro-application technology, which is able to transmit light through a tube, hollow tube.

We are in the aerospace business. We provide advance materials to the aerospace industry.

We are in our memory media business, which I will talk a little bit about in a few minutes because I think it's a good example of where a lot of innovation still hasn't produced the results that we expect, and health care and non-wovens.

I always like to quote our Chairman because he believes and I think many companies in the U.S. could say this, that research and development really is the key to the future of our company, and I think it's the key to the future of most companies in the U.S. today.

What we have to put behind that, that expectation is we have 84 laboratories around the world. Most of those are in the U.S., and 8,300 scientists and technicians working for 3M Company.

About 6,000 of those people are in the U.S., and the rest outside the U.S., and as I said, most of our laboratories are here either in St. Paul or in Austin, Texas.

We do continue to invest in research and development.

We spend about a billion dollars right now in research and development.

As a percent of sales, that has varied in the last few years from a high of 7.3 percent where we continued to invest in the recessionary period we had in the U.S. to 6.9 percent this year, but it has continually increased year after year, and in 1995, we'll spend 1.1 billion in research and development.

I don't know the relevance of this, but this is a chart that I picked out of the Wall Street Journal a few months ago, and that is the fact that many other large companies in the U.S. are reducing their investment in research and development, and I think at least one story that tells is the fact that it's very difficult to measure the productivity of your research and development investment, and I'll be talking a little bit about how we intend to do that.

An important fact I think for your consideration is that being a global company, we do spend 75 percent of that billion dollars in our laboratories in the U.S., so our laboratories in the U.S. are responsible for building technology and building products for businesses around the, around the world, and we anticipate that that ratio will stay about the same in the future, even though our international business will continue to grow faster because having campus of technologists and technical people in the U.S. is the most efficient way for us to build innovation and build products and build technology for our future.

I talked about the vision, but let me just talk a little bit about how important that is for the company.

That sends a signal to the innovators in this company that they need to develop technology and products that are going to be recognized by our customers and by our competitors as innovative products, and we think this is really key.

It is not a vision that we just want to put up on the wall and say that's nice to have.

It's a vision that drives what we do and not only in our laboratories, but in the rest of the company, and so we take this seriously, and we judge what we're doing and how we're investing our dollars by this vision.

Some of the history of 3M really is represented by introducing products to the market that were very unique in the history of this company.

These are not all the first--in fact the first first from 3M was a wet or dry sandpaper that was used in the automobile industry that changed the character of sanding automobiles at that time.

We were the first to introduce masking tape, Scotch Tape, transparent tape, reflective highway signs, which most of you know, but the green reflective highway signs are 3M's product.

And in each of these cases, the original product has been translated into new and newer and newer technology each year,

Even our oldest product--sandpaper--is using the latest technology in 3M in order to maintain our competitive position.

We were the first in magnetic media, the first company to be able to put media on tape to record information, audio tapes.

You don't see our name on audio tapes today, and I think that's a message that I'll be delivering to you today, the fact that unless you can continue to innovate, even though you're first on the market, you may lose your competitive position in those markets.

We were the first with a video tape, and we're still in that business today.

Repositionable notes you know as post-it notes. That was an innovation from 3M and one that people talk about at 3M quite a bit, but it's only one of many innovations that 3M has brought to the marketplace.

We were first to bring a non-plaster cast to the marketplace, fiberglass cast, and later imaging systems which GE connects their MRIs and CAT scanners to to produce an X-ray, and so these are some of the firsts that we have put on the market.

One that is missing from here that I think is important to talk about, and that is thermal fax.

3M many years ago became the first company to understand how to make copies, and that was the thermal fax process.

We did not, we did not--unfortunately, we were not able to continue to innovate in that particular industry, and we got out of that business back in the mid-80s because the new Xerox technology took over that marketplace, so another example of the fact that, that innovation can give you a market position, but it's fleeting, and unless you continue to innovate, you cannot maintain your market position in any market.

The other point to make is really one that hasn't been brought up yet today, and that's intellectual property.

Intellectual property, it's important to protect innovations, and in each of these cases and many other cases, we have not only built a strong intellectual property position in these markets, we have had to litigate to maintain those positions here and around the world.

One of the things I think you are struggling with is how do you measure innovation?

And I don't have a good answer except how we measure it at 3M and how we measure it at 3M is through 3M sales of new products.

That's the end result of innovation. The customer is saying you have something that we want to buy, and we measure it by saying that in any one year at 3M, 30 percent of the sales of that year should come from products that are, that have been on the market less than four years.

We have raised that goal over the last two or three years. It for many years was 25 percent and five.

We have found out that that rate of innovation was not fast enough for today's markets, and we have raised it to 30 percent and four years, and I'm going to tell you in a few minutes that isn't even enough.

This is a chart that illustrates the three different goals that we have had for new products.

The green bars are 25 percent in five years, 30 percent in four years, and the new goal, that's 40 percent in four years, which we think is the level that we're going to have to achieve in today's global marketplace in order to get adequate growth in our company, and adequate growth in our company is not large. Adequate growth in our company is 8 percent growth in the U.S. and 12 percent growth outside the U.S.

These red bars are another measurement of output, and that is first year new products, and so in 1994, we introduced a billion dollars worth of new products to the marketplace in that one year, and fortunately, I will keep my job because this year, we're going to exceed that again, and we will have 1.3 billion this year.

The point I'm making here is that we think the current measurement of new products should be about 10 percent.

In order for a company like 3M to be competitive in today's marketplace, 10 percent of our sales should come from products that are introduced that year, and we think that's a good measure of innovation.

We also measure patents and patents filed, and what this chart shows through '94 that we continued to increase the technology development at 3M as illustrated by our patent protection.

This is, '95 is a just over half of the year, so we will have another record year in 1995, which is another measurement of how our scientists are building technology and protecting technology in this company.

One of the suggestions for me today was to say okay, that's fine. That's the record, but how do you really do it, and what are the issues that you're dealing with in our laboratories today in order to meet the increased productivity goals that we have from our laboratories? And I will talk a little bit about that over the next few minutes.

I think this, this applies not only to our company, but to other companies as well.

We think that the four strategies that I'm outlining here are the appropriate strategies in order to build productivity in our research and development investment.

Determining the customer's unarticulated needs is not an easy thing to do, but that's where innovation comes from.

Innovation comes from technical people spending time with the customer, the end customer, not necessarily the customer that distributes the product, but the customer that uses that product, and to determine what problems we can solve with our technology for that particular customer, and so that's a strategy that we have had for some years, and the first that you saw earlier on an earlier overhead came from primarily a technical person understanding the needs of the customer the customer necessarily didn't understand at the time.

One of the biggest issues is what do we take to market?

Every good company has more things in their laboratories than they can take to market.

My comment is on what I said to you earlier, that we use a pacing concept, and saying that we have to, in every business we have in the company, and we have 45 divisions in the company, we have to have a product within that division that truly changes the basis of competition in order for that division to be competitive long term and to have sustainable growth, and that's how, one of the focuses we have on determining how we invest our dollars is the pacing, what we're calling the pacing plus today, the pacing new product, inventions in our laboratories.

Every company in the world is trying to increase speed to market.

If you miss the market window, no matter how good that product is, you have lost in that marketplace.

You have to be first to market in most innovations, and so we do a lot in our company to make sure that we have the systems in place to bring products to the market as fast as possible, and finally, leveraging the technology that we have built in the company, and I'll conclude this afternoon by just talking a little bit about technology, technology platforms, and how to leverage technology or how we do it.

I will show you a list of 33 technologies that we have in the company that may or may not mean much to you, but the point is this is along the lines of core competencies.

We look at our core competencies in our company as being technologies and technology platforms from which we can build new businesses.

We have 45 divisions. We have at least 33 technologies platforms, and those technologies in many cases that I'll show you can be applied to most of those businesses, so if you see a new product coming out from 3M, it probably will contain one or probably more than one technology from this technology list, and that is how we keep our innovation going.

You would also see on this list technologies that have been with the company for many years, and technologies that have, we have brought into the company in the last year or two.

And this is the rest of the list. I don't expect you to remember all these, but it is just an example of identifying the technology from which we can build new businesses.

Let me give you some examples that may, some examples that may tell you a little bit more, and I don't think you can read that very well, but this is our chemical ceramic technology that was initially developed at 3M for making a better sandpaper back in the eighties.

It was another evolution of making a better abrasive material, but we also, today we find this chemical ceramic technology in all these businesses within 3M.

Let me give you an example. We find this chemical ceramic technology in dental filling materials where we can replace the amalgam in a posterior tooth with a ceramic compus of material that has the properties that we can replace in amalgam.

We find our ceramics in finishing marble, as an example, we find our ceramic materials in connecting fiberoptic cables, so it's an example of a technology that can produce innovation in many different industries.

Our fluorchemical technology, which is one of the oldest in the company, is not only found in selling fluorchemicals, particularly fluorchemicals to replace CFCs that don't damage the ozone, but we also find our fluorchemicals in our pharmaceutical business.

One of our most successful new pharmaceuticals came from using proprietary fluorchemical technology and using that to build molecules that have specific action in the body, and we find our fluorchemicals being useful in liquid crystal displays as well where they have properties that are different than other chemicals for liquid crystals in our laptop computers.

And the final one on technology I would like to talk about is our micro-structure surface.

This started back in the sixties with a lens that you see on this overhead projector which is called a fernel lens.

That's micro-structured surface, and we were the ones that invented overhead projectors because of that technology, but you find that technology in many different businesses today, examples being the lights that I showed you along the highway. It's a micro- structure surface that has a property called total internal reflectance where we can put a bulb at the end of a long tube, and the light is reflected very efficiently throughout that whole tube.

We find micro-structure surfaces in laptop computers as well where we can enhance the light coming through a laptop computer. It's a big business for 3M.

We find these surfaces to make smart adhesives, smart adhesive being those that we can put something up on a large semi-trailer, commercial graphics business. We can reposition it and then put it down permanently, and so--and the final--I'm not going to describe all of these, but another example would be we can close diapers using micro-structured surfaces.

That's an advance to Velcro-type material where you can have surfaces that meet together using a new technology from 3M, so this is a third example of leveraging technology.

So what does that all mean as far as your considerations are concerned?

I have some take-home messages that I think relate to what I have talked about so far, and my summary is that No. 1, innovation is unpredictable, that returns from successful innovation are fleeting, so as you look at a success today, that success may not have, may not be long term depending on new technology coming into those businesses.

Innovation is difficult to measure. There's a high level of failure. I didn't talk about failures today. I only talked about successes, but I would expect that in our laboratories, less than 50 percent of the innovations relate to products that bring dollars back to 3M.

The third point is innovation is difficult to protect. Patents are necessary, and they often require litigation to enforce, and that's not only in this country.

Protection of innovation is necessary to provide incentive for reinvestment.

And No. 5 is all markets recycle, and they recycle usually due to technology changes, and their predictability of that happening is uncertain.

And No. 6, concentration of our R&D does not necessarily control technology or market.

And No. 7, which I didn't mention in my remarks until now, is that control of the supply chain inhibits the delivery of innovation to the market in many of our businesses.

Just because you have an innovation doesn't necessarily mean that that is going to be successful in the marketplace if the supply chain doesn't allow you to get to that particular market.

And No. 8, collaboration may be necessary to receive return for innovation.

I will give you three examples from 3M. In our central research laboratories over the last few years, we have become the world leader in the ability to make a blue-green laser, and so what's the use of a blue-green laser?

Blue-green lasers will allow you to read four to eight times the amount of information on an optical disk than the red lasers that are used today.

Our scientists have been able to invent and produce a blue-green laser that still is not commercial, but in order for us to get a return on that, we have to work with companies that are able to use that technology in making a drive.

We can make a magnetic media or the optical media. We have to partner with companies that can make the drive to make that commercial product.

The second thing is really in our memory media business. We're good at putting magnetic media or optical media on tape or on disk, but we're not good at making the drives that record and read that, and so we work with many partners in order to bring those innovations to the marketplace.

Now a more recent one is our investment in lithium polymer batteries, which is one of the best opportunities to create a, an electric car, one that will have the capacity and ability to have 300 miles between charges.

We did not innovate in that marketplace. In fact we got Hydro and Argonne National Laboratories have the basic technology.

3M has the capability of making the product through many of our process technologies in our company, so they came to us and said 3M, you have the ability to, to take this technology to market better than any other company, and so we're working with, with that technology in our company.

And finally, much of our competition in the future will come from technology developed outside the U.S.

New industries are being developed today and will continue to be developed faster we believe outside the U.S. than inside the U.S., so as we look at competition in the U.S., that's only part of the equation that we're going to have to look at as we adjudge innovation.

And those are my remarks, and I would be glad to answer any questions that you may have.

CHAIRMAN PITOFSKY: Thank you very much. Dr. Coyne, one of the theses that have been advanced about antitrust being a little out of date is the following proposition, that in the kind of markets that your firm is so successful in, quite often the customers primarily care about product innovation and not about price.

I don't think anybody is going to suggest they don't care at all about price, but that the emphasis in, in looking for sources of supply is a company that they are confident will keep innovating and they don't worry all that much about 5 percent or 10 percent.

And since antitrust is key to price and not innovation, the claim is made that we're a little out of date.

What do you think about all of that?

DR. COYNE: Well, I don't agree that price is not a factor.

It was not maybe up until ten years ago, and it's very intense today, and so in almost every one of our markets what the customer demands an innovative product, an advanced product at the same price or lower price than what we have today, and I would say that that exists in almost all of our businesses.

And in some businesses like the electronics industry, our customers want a dramatically improved product at a lower price, and in fact many of our competitors from outside the U.S. are using what is called forward pricing, and pricing as if they had all the volume, and it makes it very difficult for us to compete.

The solution to that for us is to provide the customer with a product that will save them money, that will be productive for them, and that's the only place that we can get equivalent price.

CHAIRMAN PITOFSKY: The second question along the same line, the suggestion has been made that innovation markets, assuming nobody disregards price, but they care a lot about innovation, that the time periods established by the, the government's guidelines which are generally one and two-year time periods, to see who your competitors are, really don't make any sense.

Your competitor might be somebody that you can predict now will get to the market not one year from now but three years or five years from now.

Have you encountered situations like that?

DR. COYNE: If I understand the question, what my answer--and you can clarify it if I'm not answering that question--but the ones we worry about most are not the existing competitors, but the new entries who bring a new activity or a new solution to the customer's needs using some technology that we're not even in.

You know, a good example might be in the pharmaceutical industry, the biotechnology industry, and the existing pharmaceutical industry, that kind of thing is happening in many of our industries.

We tend to like to be the one that comes in with the new technology to create new markets, but--

CHAIRMAN PITOFSKY: And that company that you think might be the real threat to your position might not be in the market right away?

DR. COYNE: That's correct.

CHAIRMAN PITOFSKY: Might be, not get to the market for three, four or five years.

DR. COYNE: They may be a start-up company in many cases, and the way we approach that is that we make investments in venture capital companies in order to get an eye on the new technology that is coming to the marketplace, but in many cases, those are the companies that will create new industries or transform industries, existing industries.

CHAIRMAN PITOFSKY: Thank you.

COMMISSIONER VARNEY: I'm very intrigued by what I think you labeled number 6 in your messages, which was concentration in R&D doesn't assure market share.

Is that right?

DR. COYNE: Yes.

COMMISSIONER VARNEY: I would really like to expand on that because what we see or what I have seen since I have been here is you have two competitors that are two of the three R&D competitors and there is no necessarily product market yet, but there is innovation market and they are traditional antitrust areas--oh, my God, we can't allow this combination, where it seems to me that in R&D, perhaps these combinations are more efficient and do get the product to market faster, particularly when you're looking at a combination with somebody who has access to the distribution chain.

DR. COYNE: Okay. Well, what I'm trying to say there, and I may not be directly answering your question, what I'm trying to say there is really consistent with some of the other points, is that markets continue to change through new technology, and so concentrating existing technology in a particular market may or may not have an effect.

It may have a short-term effect, but it probably won't have a long-term effect, and in fact it may be an incentive for new technology to come into that marketplace.

I think there is very few markets that we have been in, and we're in a lot of them, where technology hasn't transformed the market.

Sometimes we're there to do that, to make sure that happens.

Sometimes we miss it like in our copying partnerships.

COMMISSIONER VARNEY: Another area that since I have been at the Commission we have seen is patents.

You have got a product you want to get to market, but you have got a competitor who has got a blocking patent, and one solution in some instances is to acquire the competitor, and there is no other lesser restrictive alternative.

Again, traditional antitrust theory with that kind concentration, where that's a problem, would require us to attempt to change that kind of or change or prevent that kind of transaction from occurring.

Can you give us any thought about that? I mean it's an issue that we keep running up against when competitors are trying to acquire another company because of the blocking patent and they can't get the product to market without acquiring the patent.

DR. COYNE: There is somebody in the audience who can answer that better than me, but let me give my attempt.

That doesn't happen very often in 3M because our--and here is why, is because our scientists are asked to understand the intellectual property thoroughly before they start down the path of a new product, so it's rare that we have a product, okay, we have invented the product, but boy, there's a blocking patent.

We are inventing products that have strong intellectual property protection to start with. That's the orientation.

Sometimes we have surprises, but normally, that doesn't happen.

I don't know.

COMMISSIONER VARNEY: Again, the transactions we see are where, are those where the surprises are.

I think of the ones that I have seen, it's universally true they had strong, a strong intellectual property regime in the company, and it got surprised, and now they're attempting, because they have put so much R&D and investment into that particular product line, they really want to get it to market, and they just can't get it to market without dealing with this blocking patent.

DR. COYNE: Okay. That could occur, but I guess what, the point you're making is should you or not, should you allow or not allow that?

COMMISSIONER VARNEY: And what should we look to in making that determination about whether a company is attempting to buy a monopolist position or they are attempting to bring a product to market that otherwise won't get there?

DR. COYNE: Well, it would be favorable for you depending--that could be good for both companies.

The company that has the patent, they may not have any value out of that patent, and the company that's already in the marketplace that needs that patent in order to bring product to the marketplace, so it could be a win-win for both companies, and if it is, I think that would be a positive decision.

MS. DE SANTI: I had a follow-up to the questions that the Chairman was asking you.

When, when you're in a situation where perhaps you have a position in the venture capital or whatever, you have some sense of new technologies that may be coming down the road three, four, five years out, can you give me some sense of the typical degree of certainty with which you look at that?

One of your points, one of your messages was innovation is uncertain if we're looking at situations, circumstances, and trying to assess what the likely situation is going to be three, four, five years out, with what degree of certainty is it possible to do that?

DR. COYNE: I guess the only certainty is that it is probably going to change.

And the other certainty is it's going to change much faster than it has in the past, and what we're--the investment that we're talking about in venture capital is to increase our certainty as to what technology changes are going to happen, and what we should do about that, and not--and one of the things would be not to, not to stay with a technology that isn't going to be as efficient in the future and to divert our resources to something else.

CHAIRMAN PITOFSKY: Any other questions?

MS. VALENTINE: One more--could you flush out a little bit more your comment that came after the one that Christine found intriguing which is how control of the supply chain poses a barrier to getting the product to market?

DR. COYNE: I'll just give you two general examples.

We're in the office market, and we're in the consumer market and we're in the retail markets.

The retail supply chain may or may not want innovation in that supply chain, and if you don't have a good way of getting, particularly a small company--I think 3M has a much better chance of getting their innovating product to the market in those supply chains because we're, we already have a wide array of products in those markets, but those supply chains don't necessarily want innovative products through that supply chain if it doesn't meet their other needs, their efficiency, their return, et cetera.

I think it's a consideration that probably people who are more expert in it than I am should look at, that just because you have an innovation doesn't mean you have a win in the marketplace.

You may be blocked out by the supply chain, and in many of our industries, the supply chain is getting more power. Distribution is getting more power, and they are controlling the customer.

MS. VALENTINE: Who exactly is this? Can you ever replicate these supply chains?

DR. COYNE: Can we replicate supply chains?

MS. VALENTINE: Yeah. Can you try to find other ways of getting the product to market?

DR. COYNE: Oh, yes. Sure, but it's very difficult to do that because the supply chains are built because they are more efficient, and they deliver product more efficiently to the customer, and the cost in the supply chain is less, but they can control who they work with from a manufacturer point of view.

CHAIRMAN PITOFSKY: Thank you very much, Dr. Coyne.

Our third speaker today is Tom Leary, and old friend, and one of the most astute observers of the kind of issues that we're addressing that I have encountered.

Tom is a partner at the law firm of Hogan & Hartson practicing principally in the area of antitrust and trade regulation.

From 1971 to 1983, he served as attorney in charge of antitrust, and assistant general counsel with overall responsibility for antitrust in commercial law matters at General Motors.

Before joining GM, Mr. Leary was a partner at the New York law firm of White & Case.

He is a former member of the Council of the Antitrust Section of the ABA, and of the Council of the Antitrust Section of the New York State Bar Association.

He is currently on the Advisory Board of BNA Antitrust and Trade Regulation Report, which it is a pleasure to welcome him to these proceedings.

MR. LEARY: Since my appearance before this group was moved up from December to today on very short notice, I don't have any prepared remarks. I apologize.

I'm going to have to be a little bit more informal than you may be used to.

That's not all bad because I interpret that as permission maybe to be a little more irreverent, so we might be able to have a little more give and take here.

I want to say first of all, that I'm not here representing any particular client or any particular business group, but I have obviously represented clients in the merger process before the antitrust agencies, and I have represented business groups in arguing some of these issues. I think I should tell you that my views are obviously informed by that experience.

Just one final preliminary thing--I think that this is a wonderful idea and a wonderful time to have hearings on this subject. The reason I think it's a wonderful time is because I sense on the political side an era of general good feeling about antitrust matters as a result of the good efforts of the incumbents in both agencies and their immediate predecessors. Antitrust is less of a hot button political issue today than it has been in recent memory, and I think that's a great advantage for you, because it gives you an opportunity to consider these issues unclouded by political pressures from one side or the other. So I think this is a good thing at a good time.

I want to talk about merger policy because that's on today's agenda.

I want to talk about horizontal matters, and vertical matters, give you some of my views on matters of substance and some on matters of procedure.

I had the opportunity not only to listen to the two fine presentations here today, but also to read their talks and the talks of some of the people who addressed you last week. The first thing I want to say on a substantive point is that I concur completely in what I sense is a consensus that you want to de-emphasize to some degree statistical measures of concentration. My reasons for that are a little bit different maybe than what you have heard. In the first place, the exercise gives a spurious impression of precision in an area that is totally imprecise. Start with market definition.

Sometimes people may react to these statistics as if the market they are talking about is a real thing like a medieval walled city or the only saloon in a frontier town.

It just isn't so. It just isn't so. Markets are fluid, and they are shifting, and what you're dealing with is not a fenced-off market in any sense of the word.

You are dealing with a spectrum, not only from a geographical point of view, but from a product point of view.

I would love to try to do some kind of an econometric analysis of the competition between say local movie theaters and HBO and Blockbuster and computers five or ten years down the road, all of them providing similar kinds of things to people. That's just one example.

You simply have to recognize that you're attempting to draw precise dividing lines in an area that is inherently imprecise.

The second problem is that what Bob Pitofsky referred to earlier as the "coordination model" game theory, which underpins the guidelines to a degree, is in and of itself inadequate.

Even at the most simplistic level, where people have to deal only with output and price decisions, as you know there is no economic literature that would support the notion that seven is better than six or six is better than five.

The HHI levels were put in there as a historical matter for political reasons as much as economic reasons. And when you do game theory about things beyond mere price and output levels, you're hopelessly lost. When the parameters of competition increase as they do in the real world, and as they are in the real world more and more evolving into more complex areas of competition, the whole notion that you can apply game theory falls down.

I want to tell you a personal experience. As Bob Pitofsky mentioned, I was in General Motors for the decade of the seventies, and for a good part of that decade, the auto industry was an ecomomist's classic example of a tight oligopoly--high barriers to entry, et cetera, et cetera. I guess I was privy during that decade to just about every significant business plan that was developed in the company.

It was part of my job because my job would have been to defend the corporation had the Commission ever brought a proceeding against the auto industry based on oligopoly theory, and they almost did. I have to tell you I never once in all of the years I was there saw anything that resembled this notion of trying to game out what the competitors were going to do so that we could seek the lowest common denominator.

It just wasn't there, and the reason why it wasn't there even in that tight oligopoly was because the parameters of competition were so complex, because the product was so complicated, because the ways in which you could try to get a competitive advantage were so different. And that persists to this day.

People don't sit around and try to figure out how they can make the same automobile.

They don't just sit around and try to figure out how to make a vehicle that someone else is making more cost effectively than they do.

They try to figure out what is a niche out there that no one else is serving--Chrysler Minivan, good example--so that they can go in there and in effect be by themselves for a period of time. They don't sit back and say, gosh, if we go in there, why another company is just going to follow, so maybe we won't go in at all.

That's not the way competition works. That's not the way it works in the real world. So in a sense, a basic concept of the HHI guidelines is flawed, inadequate.

There is another problem that I'll call the Youngstown fallacy.

Judge Weinfeld's opinion in Bethlehem/Youngstown about 35 years ago, stands for the notion that it's no defense that the combination of the No. 2 and No. 3 companies might make them a more effective competitor against the then No. 1, which was U.S. Steel, the dominant company.

The way the HHI guidelines work, as you know, is that the merger of two companies that are not dominant companies is worse if there is a very dominant company in there because that makes the HHI a lot higher--not on account of those two companies, and on account of their merger, but because of the presence of that monster out there. The HHI analysis would lead you to believe that the merger is worse.

That doesn't make any sense. That can't be so. So I think for those reasons, among others that have been mentioned to you, that extensive reliance on HHI presumptions is wrong. However, as far as I'm concerned, the good news about this is that in my experience, your staff doesn't rely on them anyway.

My personal experience with Commission staff, and with Department of Justice staff, is that they are a lot more sophisticated than the guidelines--a lot more.

I personally have never had a case in all of my experience with Hart Scott Rodino where the HHI numbers were decisive. It's never happened to me because your people are better than a lot of people give them credit for.

Now what do you do about that? There is a disconnect, there really is a disconnect between some of the stuff that's written in the guidelines, impressions that are in the business community, and the way the merger laws are actually enforced in my experience and in the experience of some other people.

I hate to suggest that you rewrite guidelines. That is the most labor-intensive kind of thing.

I'm suggesting to you you might want to explore other ways of informing the business community and the bar at large about the way merger law is actually enforced as opposed to the way it's written.

I think one of the commissioners suggested a few years ago the possibility of reporting on mergers that were cleared, and the rationale for it.

I think that notion foundered to some degree on problems of confidentiality because, particularly with companies that don't have public shareholders and don't announce these things to the world you may find yourself talking about things that are non-public.

I don't know whether there is some anonymous way to do it, some way to discuss these matters while at the same time protecting the identity of the parties.

There has always been an institutional reluctance on the part of antitrust agencies, and it may be true of all government agencies, to explain why you don't do something.

I guess that's because people are afraid somehow or other by explaining why they didn't do something in Case A, it will foreclose a lot of options in Case B.

I think that's also the reason, frankly, why the antitrust agencies tend to litigate on a much more primitive basis than they administer internally. There is a reluctance to take a public position that is as enlightened as a position that you might take within the walls of this building.

Maybe you ought to re-think that. Maybe, maybe you're giving up too much. Maybe you're giving up too much in terms of informing the world as to what you're doing in order to retain that element of flexibility that keeping things in here does.

You may remember a few years ago there was a perceived problem that there was one set of guidelines out there and then an informal set of guidelines with a whole bunch of different numbers that only a kind of a small circle of inside lawyers knew about.

You may be getting there again. In a different context, you may be getting there again. I do not really see in my practice that the guidelines as written are applied, and thank God for it. You're better off for it, you know. If you think about it, the way the guidelines are theoretically supposed to be administered is that in order to define a market initially, you have to consider all of these real world facts like who's out there and who's likely to get in there and all of this real stuff.

You have to really get your hands dirty until you define a market, and then what you do is sort of go off the main path -- you take this detour and you go haring through a statistical thicket, and you construct market shares, and you construct HHIs and so on. Then what you do is come right back where you started from in order to determine whether those numbers mean anything or whether they are important. So what I would urge you to do first of all is don't waste a lot of time trying to improve the signs on that detour.

Don't waste a lot of time trying to figure out more precise ways to calculate markets or market shares, or tweaking your presumptions, because as I said before, you would be lending a spurious note of precision to an exercise that is inherently imprecise. The real tough hard work is done at the outset when you're on that main road trying to figure out who the competitors are, and who they are likely to be, and at the very end of the path when you're trying to figure out whether those HHI numbers mean anything. Those calculations themselves are not all that important, and they are not treated as all that important by your own staff with experience administering these laws.

The only other thing I want to say on, while I'm on this subject of horizontal mergers has to do with conformity in other jurisdictions.

There has been some talk about efforts to try to make our practice conform more closely with foreign practice.

I concur in that entirely. I just want to add that you shouldn't completely forget about this very strange situation we have in this country where there are theoretically two sets of guidelines of national application dealing with mergers--one for the FTC and the Department of Justice who got their act together, and then we have separate guidelines out there for the states. It's totally ridiculous.

I have never heard a principled argument as to why there should be two sets of national antitrust policy.

Now, I know the political background, and I know how it came about and so on. I'm just saying there is nothing principled about it, and I would urge you to do whatever you can to ease that situation because the state enforcement of the antitrust laws is kind of like an act of God. You don't know when it's going to strike, and the guidelines that they are purporting to administer are primitive in the extreme.

I don't know how you smooze them out of it, but it may be that there are ways in which you could cede some authority to the states, cede some authority to the states over mergers that have their primary impact within a particular state, in order to somehow or other encourage them to keep their hands off interstate transactions with their guidelines which I better not use any more adjectives to describe.

Okay. What do I have to say on the subject of vertical mergers?

You know, frankly, it's a bit of a mess right now.

There was a decade or so of benign neglect on the issue of vertical mergers, and then there were a lot of what I would call thought experiments performed by the post-Chicago school of economists, which identify certain hypothetical situations under which there could be competitive harm from vertical mergers beyond those that had been recognized under the ruling paradigm in the eighties.

I tried to wade through some of those mind experiments and the only trouble is that the indicators point in all directions. They don't lend themselves to presumptions.

The bottom line is almost anything is possible; it's chaos theory right now, and I don't think you can build antitrust policy out of chaos theory. I think that's the current state of the so called post-Chicago learning on vertical mergers.

So what are you going to do about it? What are you going to do about it?

The problem is that the post-Chicago analysis which shows that under certain circumstances competitive harm can flow has been used like a hunting license to attack vertical combinations without doing the skull-cracking work that the theory requires.

It reminds me of something that happened about ten years ago, pointing in the opposite direction.

Remember contestable markets? The whole notion of contestable markets was used to approve in the Department of Transportation a bunch of airline mergers that I personally happen to think were anticompetitive. People kind of waved their hands, said contestable markets, and somehow or other that got you from here to there without really thinking anymore about it.

Well, don't think that just by waving your hands and talking about raising rivals' cost you can get from here to there without thinking about it.

There is a lot of confusion out there now, and part of the confusion, frankly--I'm going to make a lot of enemies here, maybe-- is that you're creating law by accepting consent decrees without thinking the thing through.

I think, to be brutal about it, there is a lot of wisdom in what Deborah Owen had to say in General Dynamics/Martin Marietta and what Mary Azcuenaga had to say in Lilly/PCS. You haven't really thought through what the competitive problem is, and you haven't really thought through why this decree addresses it, and you have accepted a consent just because people are willing to agree to it.

Well, why not? Why not? The parties are willing to agree to it. It's not going to make things any worse. Why not agree to it?

The problem is that those consent decrees are used as precedents--the only precedent you have got right now.

I'm not recommending that you don't take a consent decree if a party is willing to adhere to it, but maybe you oughtn't to tout it as precedent.

Maybe you shouldn't give speeches which talk about these consent decrees. You have got an audience of antitrust lawyers sitting there not really knowing what you did with that consent decree, because you haven't really gone through the rigorous dance steps that the post-Chicago theory would suggest you have to do.

The best I can glean from this, frankly, as an outside practitioner is that a vertical merger is apt to be challenged if one party or the other has a position that is roughly like an essential facility somewhere, and God knows what kind of a decree the Commission is going to require, whether it's going to be something really serious or something that's just going to make people feel good.

I don't think that's a satisfactory state of affairs, particularly in an area where you're talking about this as something new.

I mean this is something that is supposed to be differentiating this Administration from the previous one.

I think people out there are frankly very bewildered and confused. I could be dead wrong, but if my perception is correct and that's where you are on vertical analysis right now, maybe you ought to say so because people just genuinely do not understand.

However, I guess one thing I personally like is that element of the Lily/PCS decree which talks about continuing scrutiny.

I don't read that as conditional approval, quote, unquote, but I read it as saying we're going to let this go by because frankly we don't know a hell of a lot about this business. It's a brand new business.

This health care management business didn't exist a decade ago. Nobody knows where it's going. Nobody knows whether it's an interim step between the situation that's out there now and some other situation. So maybe it's a prudent thing for the Commission to say we don't really know what's going on here, and we're going to watch it very closely.

I would urge you, though, if you say you're going to do that, do it.

As we all know, the compliance follow-up record in both of the antitrust agencies historically has been weak.

Compliance Departments in both of these agencies have not been your strongest because people -- I guess for understandable reasons -- tend to focus on getting the scalp. You know, they have got the number. They have got the win, or however you count them, and then people tend to forget about it. I would suggest that if you're going to punt that way -- and maybe that's the best thing you can do right now in this whole vertical area--if you're going to punt that way, mean it.

Let me conclude by making a couple of comments that are directed at process.

I think the improvements that the agencies have announced in the Hart Scott Rodino process in the last six months have had a very major impact in creating that sense of good feeling that's out there about antitrust.

There may be people out there that I talked to who are critical, but I don't think there is anybody out there who is catatonic, and I think in part the reason is because there is evidence here in these hearings and other evidence of a willingness to have an open mind.

How can you go beyond? How can you build on that?

I think there are still too many transactions that are required to be reported, and I recognize that there is the funding problem.

I recognize that both agencies are dependent upon Hart Scott Rodino filing fees for their support, and I certainly would be the last one to urge less money for the antitrust agencies.

I wish there were some way of having a disconnect between your appropriations and the filing fees.

I think you would all be better off if you had an appropriation that you would live with for better or for worse, and Hart Scott Rodino revenues went into the public coffers somewhere or went for some other purpose.

I don't know whether that's politically feasible. Maybe it's politically feasible, as a long-term thing. As a long-term thing, I think you would be better off if there was a disconnect.

I think there is still a problem with the scope of second requests. It's a philosophical problem, I think. Theoretically, in Hart Scott the purpose of a second request is to help you screen out those transactions that are likely to cause competitive harm from those transactions that are unlikely to cause competitive harm

You do not need a massive document disclosure to do that, I don't think.

I think one of the problems in the past has been that the second requests as administered were really discovery oriented.

It would be nice to be able to look for those smoking guns and find them because they might help you in litigation down the road, notwithstanding the fact that the existence of smoking guns -- and by those I mean these documents with all the locker room rhetoric that turn up from time to time -- don't really have a lot to do with the substantive analysis.

It may be that, further work on the scope of second requests pointing more toward that screening function and less toward that discovery function would be worth it.

And finally, I think there are indications of improvement in the relationship between the DOJ and the FTC on this clearance process, allocation of responsibility.

It was really awful at one time. I remember a couple of years ago we had a deal where the clearance fight took up I think 22 days out of the first 30. Well, you get a second request willy-nilly under those circumstances. That's not really fair.

The only thing I would recommend is that, apart from keeping up the good work, at some point you might usefully publish some informal clearance guidelines between the DOJ and the FTC based on industries or something.

It might be useful to let the outside world know what those informal guidelines are because one of the first things that clients ask you when you're going to have to notify a deal, is which agency is it going to go to do it. And you know, we keep saying that's not really the most important question, but clients want to know. They want to know, and guidelines might be helpful.

I mentioned efforts to rationalize enforcement responsibility, and I want to emphasize this goes beyond mergers. You need to rationalize to some more intelligent degree the allocation of responsibility between state and federal authorities so that you don't have that wild card out there which is unpredictable.

In conclusion, I just want to emphasize something I've said two or three times.

I think the antitrust debate has come a long way in the years I have been practicing antitrust law, and it's at a far more sophisticated level than it used to be.

I remember John Shenefield--I guess I'm pinch hitting for him today--and we were on a panel about 15 years ago. I think he had just stepped down from being head of the Antitrust Division, and I was working for General Motors at the time.

And he leaned over and he said, he said "I hope you're not going to waste any time claiming that the antitrust laws have a seriously detrimental effect on international competitiveness," I said to him: "John, I won't say anything about that if you won't say that the antitrust laws have anything to do with the battle against inflation." And he said: "Okay, it's a deal, I won't say that."

We have come a long way from that kind of sloganeering, and I think that you have. The papers I have read and the presentations that I have listened to here today are at a fairly sophisticated level, and I hope it's constructive and useful for you.

CHAIRMAN PITOFSKY: Tom, thank you very much. It sounds to me that you're sort of in the camp of some other people who spoke last week to the effect that the problem here is not that the antitrust rules are out of date, or maybe some of them are, but that the lack of clarity is hurtful, that the uncertainty is a real problem, and by the way, I agree with you that there are significant areas in the guidelines where the staff's analysis is really not consistent with the guidelines. It's more sophisticated, more thoughtful.

I guess my question is you follow this area very closely.

Would it make sense for a, for a substantial elaboration of the vertical merger guidelines, would it make sense to take a shot at joint venture guidelines?

Is there some other way to introduce some clarity in an era in which very few cases go to court, antitrust almost never goes to the Supreme Court, and therefore, the regulators have discretion without as much judicial supervision as I think was once envisioned?

MR. LEARY: As I said, I really hesitate to suggest new guidelines because that embarks you on a process that you and I are too old to suggest.

I'm just wondering if it wouldn't be very useful to know what it was about, say, Lily/PCS or what it was about MCI/British Telecom--that's the other agency--that caused the problem. I cannot believe that anybody went through the hundred pages of Riordan-Salop analysis and applied all of those factors pointing all over the lot. I just can't believe that people did that in order to come up with some concern about those deals, and it would be very useful to know what the real concerns were.

Maybe we're not ready for guidelines yet, but maybe there is some way that you and your sister agency can inform the business community and the bar--at this stage of our fairly primitive state of economic knowledge -- about what it is that you're really looking at and looking at hard?

COMMISSIONER AZCUENAGA: I've heard so much this afternoon from all three speakers with which I agree for the most part. I've just been sitting here nodding, and that certainly is the case with you, Tom, but you did, you were provocative on two or three points, provocative in the good sense of the word, that I can follow up on some of those.

First of all, the question of the numbers which is already--of HHI numbers which has come up a number of times already in these hearing, and perhaps I should begin by stating what my position has been.

I have been on record since shortly after the '92 guidelines were adopted for the point of view that the numbers are simply a starting point to allow some, some things to be pushed off the board, and basically a decision about whether to investigate the transaction or not, and once that decision is made, that we should not go back to the numbers at all, so I'm sympathetic to the point of view that we should concentrate more on competitive effects.

It is true I believe that a couple of members of the staff of the Commission have supported the sliding scale, and I won't give you a rundown of all the commissioners because they have changed since then, but as I was listening to you talk about the numbers, and you're most articulate and persuasive, the question that came to my mind is do you think we should get rid of the HHI numbers and the guidelines all together?

MR. LEARY: You know, I think they serve a function primarily as sort of a safe harbor screen, and I mean it in the real roughest sense.

I'll just tell you personally what I do. When people come in with a proposal, the first thing we do is look at what is from our point of view the worst possible market definition an antitrust agency could adopt. If in that worst possible definition the HHI post-merger comes in under 1800--I don't pay any attention to that 1000-- you're in pretty good shape.

You're in pretty good shape. And as a practical matter, whether you agree or disagree with a sliding scale, you make a judgment as to the amount of further effort based on that rough cut judgment. If the HHI is going to come in fairly low, you may figure maybe we can just throw this one over the transom and walk away and nothing will happen. Or maybe what we need to do is prepare a business executive to explain in a general way the rationale for the transaction and the expected benefits and things of that kind. Maybe that will be enough. Maybe that's all we have to do.

We use it for that purpose, and I think maybe it's useful for that purpose.

COMMISSIONER AZCUENAGA: The way the guidelines are set up now, there are three levels.

There is mergers, acquisitions, under a thousand HHI, and then moderately concentrated range, a thousand to 1800, if my recollection serves me, and then everything sells above that, and we have two different presumptions for moderately concentrated and highly concentrated, which I have never found very useful.

MR. LEARY: I haven't, either.

COMMISSIONER AZCUENAGA: What would you think about just saying that anything below a thousand we'll ignore, and everything else that simply tells us if it's above the thousand, we'll investigate and ignore the numbers?

And before you answer that question, let me add one other fact, which is that we have found violations based on adjudicative records of liability under Section 7 in the moderately concentrated range, and another fact that you would not be so privy to because it's confidential is that there have been many acquisitions where the transaction would lead us into the range of 8,000, 9,000, 10,000 where the Commission has decided not to take action, so that would figure into my evaluation of what the floor should be, but what do you think of just--

MR. LEARY: I wouldn't do that if I were you. I wouldn't change the numbers.

I would urge you to somehow or other make the bar aware of the reasons why you attacked in a case that is in the mid-range because there is not much experience with that out there. If you could somehow or other explain it to people, we could be alert for whatever those factors may be. Conversely if you clear one way up in the 8,000 range, there is something special going on. If there is some way that you could tell people about that, without violating confidentiality, that would be much more helpful than tweaking the guidelines.

COMMISSIONER AZCUENAGA: That leads me to another area that you raised which I think has been a very troubling area for a long time.

That is the question of can we do more to explain individual decisions when we don't have an opinion on an adjudicative record, we have a consent agreement or we close the case?

MR. LEARY: Yes.

COMMISSIONER AZCUENAGA: Mergers, of course, are extremely fact intensive.

We worked for a long, long time to come up with joint guidelines. That was, to understate the case, not the easiest thing we have ever done. Worthwhile I think, and they have served us very well, but each time we have a merger, there will be at the Commission five different decisions.

MR. LEARY: Yes.

COMMISSIONER AZCUENAGA: And the length of time it takes to explain those is very difficult.

If you don't put in all the factors, you are in danger of misleading the private bar about what the problems are.

Frequently people will come to me and say well, I read about why you decided a case in the Wall Street Journal, and aside from the fact that it's not why I decided it usually.

MR. LEARY: Yes.

COMMISSIONER AZCUENAGA: They pick up on certain aspects of it and give those cases greater importance on those particular facts than they perhaps should have, and it seems to me under the current state of the law, which is, which requires us to be extremely fact intensive and to look at the economics, that the best thing people can do is to go and make their own stories under the guidelines, and that the guidelines as they are give a lot of flexibility for people to do that, and that perhaps that's a value we should, we should weigh in the balance on the other side, that the guidelines are fairly complete, but not detailed, but provide the opportunity for someone in business to come in and actually tell us what's going on, and if we start expanding on them, perhaps some of that flexibility will be lost.

MR. LEARY: Yes. Let me say I agree in part and disagree in part.

My experience has been that once you are in the notification process, the guidelines as written are sufficiently flexible to enable you to make the best case that you possibly can for the merger. You will be heard, and if you have an efficiency story you can make it.

I normally don't like to say I am now talking about the "efficiency defense."

I personally would much rather say this is the reason we're doing this deal, so you will understand the transaction.

I think I'm at a better psychological posture than if I put it in as a defense, but you know what I'm saying.

If there is a story there, you can make it. Sometimes, you know, you have a much better efficiency story than you really feel comfortable talking about because there are inhibitions on talking about what you intend to do with plants in some geographical areas. You're afraid, quite frankly, that you're going to get some Senator mad, but that's another problem.

I have never felt, I really have never felt constrained by the guidelines to a narrow channel. I don't care how they are written, frankly.

I have never felt constrained to a narrow channel in presenting the best possible efficiency case, and people will listen.

I think the problem exists more before you get to making the deal and notifying the deal.

You know just pursuing a transaction can be immensely expensive. I mean people are looking at whether they are going to spend a half a million dollars on due diligence and a bunch of lawyers and investment bankers and all of these people that get involved in this? They want to know up front what the odds are.

That's when it becomes really difficult, when you're kind of flying blind. There is a lot at stake at that very preliminary stage, and it's very hard for the counselor to go other than by some kind of gut feeling, and it would I think be tremendously helpful to have more information rather than less for that purpose -- understanding that I would be a damn fool if I confined my presentation post-notification to tailor it to some other case.

Long answer to a short question--I'm sorry.

COMMISSIONER AZCUENAGA: Good answer; I appreciate it, and I don't want to monopolize. I have one more question if we have time, and perhaps I should address this both to you, Tom, and to Ben Heineman, about the foreign substantive law.

We're charged with the responsibility of deciding what we think is competitive and what we think is not competitive, and I think we have taken the position generally, at least it's my understanding that we don't compromise on that just to bring our views into line with either the states or with foreign authorities.

Do you think with respect to the question of comparing our law, to our moving our law closer to the laws of foreign countries that this agency should compromise our views about what is competitive and what is not?

MR. LEARY: You go first.

MR. HEINEMAN: I don't think you should compromise your views.

It may be that your views would, you would have a different and broader view if you took some of the kind of consideration into effect that we have been discussing, and that won't necessarily be deharmonization, but it will maybe lead to greater conclusion without total uniformity and harmonization, so I think maybe a different view of what is competitive and anticompetitive taking other factors into account may be the best way for you to go while being consistent with your charter.

MR. LEARY: About the only thing I can say on that is I'm maybe a little bit more wary than some of my

predecessors about necessarily endorsing what facially may seem to be more liberal approaches taken by foreign antitrust authorities.

My sense is that they may be less bound by concentration figures, but I also always have this lingering sense that they are more chauvinistic, and it makes me a little nervous, quite frankly. Really, I don't know enough really about the way they think and they decide cases over there to have an informed opinion.

COMMISSIONER AZCUENAGA: Thank you.

CHAIRMAN PITOFSKY: Well, I want to end these proceedings on an upbeat note, Tom.

Just think if the guideline numbers had applied 45 years ago in the case you disliked the most, Bethlehem Youngstown would have been found to be in the safe harbor.

MR. LEARY: Is that right?

CHAIRMAN PITOFSKY: I want to thank all of our speakers very much for a fascinating discussion.

MR. LEARY: Thank you.

(Whereupon, at 3:20 p.m., the proceedings were recessed, to reconvene at 9:30 a.m. the following day.)

//

C E R T I F I C A T E

DOCKET/CASE NUMBER:P951201

CASE TITLE: HEARINGS ON GLOBAL AND INNOVATION-BASED COMPETITION

HEARING DATE: October 17, 1995

I HEREBY CERTIFY that the transcript contained herein is a full and accurate transcript of the notes taken by me at the hearing on the above cause before the FEDERAL TRADE COMMISSION to the best of my knowledge and belief.

DATED: October 17, 1995

SIGNATURE OF REPORTER

Catherine S. Boyd

(NAME OF REPORTER - TYPED)