What does it take to settle a merger case?

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Look at any recent merger settlement accepted by the Commission and the answer is clear: An acceptable merger remedy must eliminate the potential for anticompetitive effects that would likely occur if the merger were to proceed. Typically this means creating another competitor to take the place of one of the merging companies so that customers are not harmed by the merger. In short, a merger remedy must fix the specific competitive problems created by the merger.

While the Commission’s remedial target is clear, crafting a remedy that fixes the competitive problems requires a discussion tailored to the specific facts of the case. The FTC is always willing to discuss proposed divestitures, but the back-and-forth of settlement negotiations is for the purpose of determining whether the remedy will fully address the competitive concerns, not to try to convince staff or the Commission that they should compromise and accept something less than a full remedy of competitive concerns.

Two recent cases reviewed by the Mergers II Division illustrate the challenges, and potential benefits, of working with the FTC to craft this type of tailored settlement package. Both cases involved mergers of manufacturing companies. Both involved concerns about unilateral and coordinated harms arising from the underlying merger. And in both cases FTC staff engaged in serious discussions about possible plant divestitures as a way of avoiding litigation. Yet only one merger went forward subject to a negotiated settlement requiring divestitures.

In the recent matter of Superior Plus Corp. and Canexus Corporation, the proposed merger would have created a merged firm controlling more than half of all sodium chlorate production capacity in North America. (Sodium chlorate is a homogeneous commodity-chemical used predominantly to bleach wood pulp for paper and tissue products.) As indicated in the FTC’s complaint, the merger raised concerns about unilateral price increases from output suppression—a competitive concern discussed in Section 6.3 of the Horizontal Merger Guidelines. Specifically, the complaint alleged that Superior would have incentives to engage in post-merger output curtailment because:

  • the merged firm would have a high market share,
  • the merged firm would have relatively little output already committed at fixed pricing,
  • the margin on curtailed output would be relatively low,
  • the supply responses of rivals would be relatively small, and
  • the market elasticity of demand is relatively low.

According to the complaint, Superior had a history of using capacity curtailment to try to raise prices, and a larger post-merger market share plant portfolio would have only increased its incentive and ability to do so in the future.

The merger also raised concerns about post-merger coordinated interaction, because it would have consolidated more than 80% of all North American production in the hands of just two companies: Superior and AkzoNobel. As alleged in the complaint, stable market shares and high barriers to entry render the sodium chlorate market vulnerable to coordination. Moreover, the merger would have eliminated Canexus, a disruptive competitor whose aggressive price competition and large, low-cost plant made it uniquely able to disrupt potential coordination.

Superior engaged FTC staff in discussion of a proposal to divest as much as 215,000 metric tons of capacity. Nonetheless, the Commission determined that it had reason to believe that the acquisition, even with the proposed divestitures, would still result in competitive harm. Though substantial, none of the various proposals included the right package of plants and other assets to fully eliminate both output suppression and coordination concerns with the underlying merger. By a unanimous 3-0 vote, the Commission sought to challenge the merger. Shortly thereafter, Superior elected to abandon the transaction, rather than agree to additional plant divestitures that might have more completely addressed the risks of competitive harm posed by the merger.

By contrast, consent negotiations in another recent matter led to a very different outcome. In Ball Corporation’s acquisition of Rexam PLC, the parties proposed to combine the two largest manufacturers of aluminum beverage cans in both the United States and the world. Absent a remedy, the merger would have substantially increased market concentration among producers of standard 12 oz. aluminum cans in three regional markets. It would also have greatly concentrated specialty (i.e. non-standard size) can production, given Ball and Rexam’s combined 76% of this market segment.

In this case, settlement discussions produced an acceptable remedy involving a divestiture package consisting of eight plants and associated assets. With these assets, a new aluminum can manufacturer would have a network of plants throughout the United States sufficient to serve customers in each of three regional markets for standard cans, with the ability to compete on par with Ball in the national market for specialty cans. As detailed in the FTC’s analysis to aid public comment, the proposed divestiture to Ardagh would make it the third-largest producer in the U.S. and the world, with a broad manufacturing footprint, well-balanced product mix, and flexible manufacturing capabilities. Its entry as a substantial and viable competitor remedies both unilateral and coordinated concerns with the underlying merger, while still allowing Ball to achieve beneficial efficiencies through its acquisition of Rexam.

Crafting remedies through negotiated settlements allows the Commission to eliminate the risk of anticompetitive harm posed by some mergers, while still preserving as much of the legitimate efficiencies as possible. But the give-and-take of settlement negotiations does not entail trade-offs that leave some potential for anticompetitive harm unaddressed. If, in the end, it is not possible to fully address competitive concerns without undermining the business case for the merger, then settlement negotiations may not result in an acceptable merger remedy. In those cases, the Commission is prepared to challenge the merger.

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