Statement of Commissioner Thomas B. Leary
Synopsys Inc./Avant! Corporation
File No. 021-0049
After an extensive inquiry, the Commission has voted unanimously to close its investigation of the already-consummated acquisition by Synopsys, Inc. of Avant! Corporation. The acquisition was notified under the Hart-Scott-Rodino process on December 28, 2001. The Commission did not choose to seek a preliminary injunction and the transaction closed on June 6, 2002, but the Commission kept the investigation open to consider whether it would be appropriate to bring an administrative complaint for post-closing relief.
Despite the ultimate unanimous vote, resolution of the matter has not been easy. The investigation has generated a small mountain of internal and external commentary, and it has been the subject of intense debate. Not only are the products somewhat exotic but the acquisition is vertical, and analysis of potential effects in vertical mergers is complicated. Like others, I feel an obligation in these circumstances to explain my views, within the constraints imposed by confidentiality obligations.
The products involved in the transaction involve software that is used in the design of computer chips. Synopsys currently enjoys a share of almost 90% in so-called "logical synthesis" or "front-end" tools for chip design and Avant! has a share of about 40% in so-called "place and route" or "back-end" tools. (I am informed that "front-end" tools are roughly analogous to a narrative description of the routes needed to travel between various different destinations and "back-end" tools are roughly analogous to plotted routes on a map.) Traditionally, the front-end tools and the back-end tools have communicated with each other through standard formats that made it possible for tools from one supplier to be used in combination with tools from another.
The first question in this case was whether the acquisition would give Synopsys an incentive to enhance the back-end competitive position of the formerly independent Avant!, by making it harder for competing back-end products to communicate with Synopsys' dominant front-end product. Only if the answer to the first question is affirmative, is it necessary to consider the second question whether any such strategy would adversely affect the competitive process and ultimately injure consumers.
At the risk of over-simplification, it could be said that the early merger cases simply assumed that the answer to both questions should be "yes" - - that a vertical merger would create the incentive for the upstream entity to deal exclusively (or on a favored basis) with the downstream affiliate and that this "foreclosure" would adversely affect competition.(1) The so-called "New Learning" or "Chicago-School" theories, which gained widespread acceptance after the late 1970s,(2) challenged both assumptions. It was argued that in many cases a dominant upstream firm could not even theoretically increase its available "single monopoly profit" by foreclosing rivals of a downstream affiliate(3) and that, in any event, a hypothetical foreclosure would not necessarily have an adverse effect on competition.(4)
The 1984 Merger Guidelines - - which are still authoritative, insofar as they address vertical transactions - - specifically mention some circumstances where it was thought that foreclosure could cause competitive harm.(5) Section 4.21, which is potentially pertinent here,(6) states that a merger can raise barriers to entry if the "vertical integration" between the upstream and the downstream markets is so extensive an entrant would have to get into both markets simultaneously, and that this could result in competitive harm if the potential for entry is an important market discipline.
In the intervening years, an extensive "post-Chicago" literature has continued to identify hypothetical situations where an integrated firm may have the incentive to foreclose or disadvantage rivals of its downstream affiliate.(7) Even though it may not be possible to earn more than a single monopoly profit in the short-term, it is argued that conduct of this kind may sufficiently weaken rivals to injure competition and consumers in the long-term. It is, of course, possible that the incentives of a supplier can change if it integrates downstream but an analysis of the factors that will make foreclosure strategies profitable for a single firm is complicated. The further analysis of the factors that will cause these strategies to be anticompetitive (including consideration of offsetting efficiencies) is more complicated still. This complexity may help to explain why the agencies have not revisited the vertical merger guidelines in the last eighteen years.
In light of the economic literature on strategic conduct, however, I believe it is appropriate to broadly interpret the "barriers to entry" language in the 1984 Guidelines. Specifically, I would apply the entry barrier language not only to new competitors but to expanded sales by existing competitors. It still is not enough to show that a foreclosure strategy will benefit the downstream affiliate at the expense of its rivals, but there is concern if these rivals will be so weakened that they are no longer able to discipline a hypothetical price increase through expanded sales of their own.
As the 1984 Guidelines indicate,(8) it is also appropriate to scrutinize with particular care a vertical merger by a company that arguably already enjoys market dominance at one level. Courts are reluctant to pass judgement on aggressive (but non-predatory) strategies of dominant companies, and rightly so.(9) In my view, however, this hands-off policy should not necessarily apply to mergers. I believe we have a statutory obligation to try to sort out and weigh the possible anti-competitive or pro-competitive aspects of a merger transaction, complex though the process may be.
Potential complexities are present here. On the one hand, a merger that could even slightly reinforce the position of an already dominant firm raises serious questions. On the other hand, it is possible that this merger will facilitate an eventual seamless integration between the front-end and the back-end tools. This could result in a vastly improved product, which would be a genuine merger efficiency. We would not want to interfere with this development even if it made life very uncomfortable for competitors at either end.
The point of this discussion is simply to indicate that a full analysis of the potential competitive effects of the Synopsys/Avant! transaction could have been very difficult, particularly since there was a diversity of informed (but not necessarily disinterested) opinions about what the future would hold. Fortunately, the analysis can proceed step-by-step. As my colleagues point out in their own statements, there is good reason to believe that Synopsys has neither the incentive nor the intention to adopt a strategy of total or partial foreclosure (by impeding connections). We can therefore resolve the case at the first step of the analysis. When we decide to close the investigation on this basis, after searching analysis, it does not mean that this is the only important issue. It simply means that right now we do not need to address the even-more complicated issue of the competitive effects of a hypothetical foreclosure.
I also agree that it is prudent to watch this market closely in the future, to see whether our present views about incentives and intentions prove to be accurate. If we are wrong, then it will be necessary to inquire further about ultimate market effects and perhaps seek relief that addresses the underlying transaction. In this inquiry, it would be appropriate to apply the standards of Clayton Act merger law rather than the more rigorous standards of Sherman Act monopolization law.
One final comment. The Hart-Scott-Rodino process has made it both possible and mandatory to review the vast majority of significant mergers in advance and, at times, that burden has overwhelmed both antitrust agencies. Moreover, history has demonstrated that it can be difficult to obtain effective post-merger relief. For these reasons, the agencies may have tended to de-emphasize scrutiny of consummated transactions. Conditions are somewhat different now, and the Chairman of the Commission has already expressed an interest in some post-transaction reviews.(10) (One advantage of post-hoc review, of course, is that it can focus more on history than on predictions.)(11) It is likely that caveats of the kind expressed in the separate statements here will become more common in the future.
1. See, e.g., Brown Shoe Co. v. United States, 370 U.S. 294, 323-24 (1962).
2. Some would say that the 1977 Sylvania decision marked the turning-point. (Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977)).
3. Specifically, in those cases where the upstream and downstream products are used in fixed proportions.
4. See Robert H. Bork, The Antitrust Paradox, 229-43 (1978).
5. U.S. Dep't of Justice, Merger Guidelines, 49 Fed. Reg. 26,823 (1984), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,103 [hereinafter 1984 Guidelines] at Section 4.2.
6. Sections 4.22 (facilitation of collusion) and 4.23 (evasion of rate regulation) are not involved in the analysis.
7. See, e.g., Michael H. Riordan and Steven C. Salop, Symposium On Post-Chicago Economics: Evaluating Vertical Mergers: A Post-Chicago Approach, 63 Antitrust L.J. 513 (1995); see also David Reiffen and Michael Vita, Is There New Thinking on Vertical Mergers? A Comment, 63 Antitrust L.J. 917 (1995) [rebuttal], and Michael H. Riordan and Steven C. Salop, Evaluating Vertical Mergers: Reply to Reiffen and Vita Comment, 63 Antitrust L.J. 943 (1995) [surrebuttal].
8. See 1984 Guidelines, supra note 5, Section 4.213.
9. See, e.g., Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 282 (2d Cir. 1979), cert. denied, 444 U.S. 1093 (1980).
10. See Prepared Remarks of Timothy J. Muris, Antitrust Enforcement at the Federal Trade Commission: In a Word - Continuity, before American Bar Association Antitrust Section Annual Meeting, Chicago, IL, August 7, 2001; see also Statement of Commissioners Orson Swindle and Thomas B. Leary, PepsiCo, Inc./The Quaker Oats Company, File No. 011-0059, available at: www.ftc.gov/os/2001/08/swindlelearypepsistatment.htm .
11. Post-transaction reviews can actually serve a dual purpose. First, original predictions about a particular transaction may have been inaccurate and, second, we may learn things that will sharpen our analysis of other transactions.