ANALYSIS OF AGREEMENT CONTAINING CONSENT ORDER

TO AID PUBLIC COMMENT


The Federal Trade Commission ("Commission") has accepted, subject to final approval, an Agreement Containing Consent Order ("Consent Agreement") from Tyco International, Ltd. ("Tyco"), which is designed to remedy the anticompetitive effects resulting from Tyco's acquisition of Mallinckrodt, Inc. Under the terms of the agreement, Tyco will be required to divest its endotracheal tube business within ten days of the date the Consent Agreement is placed on the public record to Hudson RCI, or to another Commission-approved buyer no later than six (6) months from the date Tyco signed the Consent Agreement. If the sale of Tyco's endotracheal tube business is not made within six (6) months, the Commission may appoint a trustee to divest it.

The proposed Consent Agreement has been placed on the public record for thirty (30) days for reception of comments by interested persons. Comments received during this period will become part of the public record. After thirty (30) days, the Commission will again review the proposed Consent Agreement and the comments received, and will decide whether it should withdraw from the proposed Consent Agreement or make final the Decision & Order.

Pursuant to a July 28, 2000 Agreement and Plan of Merger, Tyco agreed to acquire Mallinckrodt in a stock-for-stock transaction valued at approximately $4.2 billion. The Commission's 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 market for endotracheal tubes.

Tyco, through its Kendall Division, and Mallinckrodt are the largest providers of endotracheal tubes in the United States. Endotracheal tubes are devices that are inserted through the nose or mouth into the trachea to provide oxygen or anesthesia. Hospitals and emergency personnel use endotracheal tubes to maintain a secure airway during surgical procedures and emergency situations.

The United States endotracheal tube market is highly concentrated, and the proposed acquisition would produce a firm controlling approximately 86% of the market. Mallinckrodt is the largest supplier of endotracheal tubes, claiming that its products are used in over 70% of the surgical procedures performed in the United States each year. Tyco is the next largest supplier. Both companies have product lines consisting of over one hundred different types of endotracheal tubes and related accessories, and have long track records of customer acceptance. As the two largest suppliers in the market, Tyco and Mallinckrodt frequently bid against each other for important hospital group purchasing organization contracts. Tyco and Mallinckrodt are the only two firms that have won contracts to supply members of the largest and most important group purchasing organizations. By eliminating competition between the two most significant competitors in this highly concentrated market, the proposed acquisition would allow the combined Tyco/Mallinckrodt to exercise market power unilaterally, thereby increasing the likelihood that purchasers of endotracheal tubes would be forced to pay higher prices and that innovation and service levels in the market would decrease.

Substantial barriers to new entry exist in the endotracheal tube market. Effective new entry would require the development of a full line of endotracheal tube products, obtaining approvals from the Food and Drug Administration, procurement of several million dollars' worth of specialized manufacturing equipment, and the establishment of a sales and marketing force. Entry is further hampered by the fact that endotracheal tubes are critically important to customers, though relatively inexpensive, so customers would be reluctant to consider new, unproven products even in the face of higher prices. In light of the fact that the endotracheal tube market is relatively small compared to the costs that a new entrant would have to incur, new entry is not likely to occur. Additionally, new entry into the endotracheal tube market is made more unlikely because of long-term hospital group purchasing organization contracts that may reduce the amount of sales opportunities available to new entrants. Because of the difficulty of accomplishing these tasks, new entry into the United States endotracheal tube market is unlikely to deter or counteract the anticompetitive effects resulting from the transaction

The Consent Agreement effectively remedies the acquisition's anticompetitive effects in the United States endotracheal tube market by requiring Tyco to divest its Sheridan line of endotracheal tube products. Pursuant to the Consent Agreement, Tyco is required to divest the Sheridan Line to Hudson RCI within ten days of the date the Commission places the Order on the public record. If the divestiture to Hudson RCI is not accomplished, Tyco must divest the Sheridan Line to a Commission-approved acquirer within six months. Should Tyco fail to do so, the Commission may appoint a trustee to divest the business.

The Consent Agreement includes a number of provisions that are designed to ensure that the transition of Tyco's endotracheal tube business to the acquirer is successful. The Consent Agreement requires Tyco to provide incentives to certain key employees to accept employment, and remain employed, by the acquirer. Tyco employees who had been involved with selling the Sheridan endotracheal tube line are prohibited from selling the Mallinckrodt endotracheal tube products for a period of one year. Tyco is also prohibited from inducing key hospital group purchasing organizations from terminating their contracts with the acquirer for a period of two years. Finally, Tyco employees involved with the endotracheal tube business are prohibited from disclosing any confidential information to employees involved with the Mallinckrodt line.

In order to ensure that the Commission remains informed about the status of the Tyco endotracheal tube business pending divestiture, and about efforts being made to accomplish the divestiture, the Consent Agreement requires Tyco to report to the Commission within 30 days, and every thirty days thereafter until the divestiture is accomplished. In addition, Tyco is required to report to the Commission every 60 days regarding its obligations to provide transitional services and facilities management.

The purpose of this analysis is to facilitate public comment on the Consent Agreement, and it is not intended to constitute an official interpretation of the Consent Agreement or to modify in any way its terms.