ANALYSIS OF PROPOSED CONSENT ORDER
The Federal Trade Commission ("Commission") has accepted, subject to final approval, an agreement containing a proposed Consent Order from ABB AB and ABB AG (hereinafter collectively "ABB"), which is designed to remedy the anticompetitive effects resulting from ABBs acquisition of Elsag Bailey Process Automation N.V. ("Elsag Bailey"). Under the terms of the agreement, ABB will be required to divest the Analytical Division of Elsag Baileys Applied Automation, Inc. subsidiary, which is involved in the manufacture and sale of process gas chromatographs and the research and development of process mass spectrometers, to a Commission-approved buyer within six (6) months. If the sale of these assets is not made within six (6) months, the Commission may appoint a trustee to divest Elsag Baileys entire Applied Automation, Inc. subsidiary.
The proposed Consent Order has been placed on the public record for sixty (60) days for reception of comments by interested persons. Comments received during this period will become part of the public record. After sixty (60) days, the Commission will again review the proposed Consent Order and the comments received, and will decide whether it should withdraw from the proposed Consent Order or make final the proposed Order.
Pursuant to an October 26, 1998 cash tender offer, ABB agreed to acquire 100% of the issued and outstanding voting securities of Elsag Bailey for $1.1 billion. The proposed Complaint alleges that the acquisition, if consummated, would violate Section 7 of the Clayton Act, as amended, 15 U.S.C § 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45, in the markets for process gas chromatographs and process mass spectrometers.
Process gas chromatographs are analytical instruments used in process manufacturing applications to measure the chemical composition of a gas or a liquid by separating a sample into its individual components through selective chemical interaction or solubility, and measuring the separated components using a detector. ABB and Elsag Bailey are the worlds two leading suppliers of process gas chromatographs.
ABB is also one of the worlds leading suppliers of process mass spectrometers. Process mass spectrometers are analytical instruments used in process manufacturing applications to determine the chemical composition of a gas or vapor stream by taking a sample, ionizing the sample, separating the ions for a particular atomic or molecular species by their mass to charge ratio and measuring the concentration using a detector. While Elsag Bailey does not currently manufacture process mass spectrometers, it is involved in the research and development of a process mass spectrometer which it plans to begin manufacturing and selling in 1999. Thus, Elsag Bailey is an actual potential competitor in the market for process mass spectrometers.
The worldwide process gas chromatograph market is highly concentrated, and the proposed acquisition would substantially increase concentration in that market. The acquisition would result in a Herfindahl-Hirschman Index ("HHI") of 4,764 points, which is an increase of 2,310 points over the pre-acquisition HHI level. The combined firm would have a market share of almost 70%. By eliminating competition between the top two competitors in this highly concentrated market, the proposed acquisition would allow ABB to unilaterally exercise market power, thereby increasing the likelihood that process gas chromatograph customers would be forced to pay higher prices and that innovation in the process gas chromatograph market would decrease.
The worldwide process mass spectrometer market is also highly concentrated, with a pre- acquisition HHI of 4,150. Although Elsag Bailey does not currently manufacture and sell process mass spectrometers, it is involved in the research and development of a new mass spectrometer product, which it plans to introduce in 1999. It appears that the introduction of this product would result in increased competition in the process mass spectrometer market, leading to lower prices and increased innovation. ABBs proposed acquisition of Elsag Bailey would eliminate this significant source of future competition and leave the process mass spectrometer market highly concentrated for the foreseeable future.
Substantial barriers to new entry exist in the process gas chromatograph and process mass spectrometer markets. A new entrant into either of these markets would need to undertake the difficult, expensive and time-consuming process of developing and testing a product, establishing a track record for product quality, and developing a service and support network. Because of the difficulty of accomplishing these tasks, new entry into either the process gas chromatograph or process mass spectrometer market, other than Elsag Baileys imminent introduction of a process mass spectrometer, could not be accomplished in a timely manner and is therefore unlikely to deter or counteract the anticompetitive effects resulting from the transaction.
The proposed Consent Order effectively remedies the acquisitions anticompetitive effects in the process gas chromatograph and process mass spectrometer markets by requiring ABB to divest the assets of the Analytical Division of Elsag Baileys Applied Automation, Inc. subsidiary. Pursuant to the Consent Agreement, ABB is required to divest these assets no later than six (6) months from the date ABB signs the Consent Agreement. In the event that ABB fails to divest the assets of the Analytical Division within this six-month time frame, the Consent Agreement contains a "crown jewel" provision which allows the Commission to appoint a trustee to divest Elsag Baileys entire Applied Automation, Inc. subsidiary.
In order to ensure that the acquirer of the divested assets has access to all of the employees currently involved in Elsag Baileys process gas chromatograph and process mass spectrometer businesses, the Consent Agreement requires ABB to provide financial incentives for these individuals to accept employment with the acquirer. The Order also requires ABB to provide the Commission a report of compliance with the divestiture provisions of the Order within thirty (30) days following the date the Order becomes final, and every thirty (30) days thereafter until ABB has completed the required divestiture. Finally, an Agreement to Hold Separate signed by ABB requires that the Applied Automation Assets, which includes the Analytical Division Assets, be operated independently of ABB until the divestiture required by the Order is completed.
The purpose of this analysis is to facilitate public comment on the proposed Order, and it is not intended to constitute an official interpretation of the agreement and proposed Order or to modify in any way their terms.