Alleging that Aspen Technology, Inc’s (AspenTech) $106.1 million acquisition of Hyprotech, Ltd. (Hyprotech) in 2002 was anticompetitive and led to the elimination of a significant competitor in the provision of process engineering simulation software for industry, the Federal Trade Commission today authorized its staff to file an administrative complaint challenging the transaction, which was exempt from the reporting obligations of the Hart-Scott-Rodino (HSR) Premerger Notification Act.
“AspenTech’s purchase of Hyprotech directly led to the combination of two of the three largest firms in the development and sale of certain process engineering simulation software,” said Susan Creighton, Director of the FTC’s Bureau of Competition. “Although the fact that a merger has been consummated increases the complexity of the Commission’s decision to seek relief, that hurdle is not sufficient for the agency to forgo a challenge to a transaction that is likely to lead to anticompetitive effects.”
The Respondent Companies
Founded in 1981, AspenTech is a for-profit corporation with headquarters in Cambridge, Massachusetts that licenses software and provides related services, such as consulting, maintenance, and training. Before acquiring Hyprotech, its customers included 46 of the world’s 50 largest chemical companies, 23 of the 25 largest petroleum companies, and 18 of the 20 largest pharmaceutical companies. The company develops a variety of software products, including engineering simulation software that it licenses to external clients. In 2002, AspenTech reported a loss of $83.5 million on revenues of over $320 million.
Until 2002, when it was acquired by AspenTech, Hyprotech, headquartered in Calgary, Canada, was a subsidiary of AEA Technology PLC (AEA). Founded in 1976, the company’s clients included 14 of the world’s 15 largest oil refiners, 13 of the top 14 chemical companies, eight of the top 10 pharmaceutical companies, and all of the top air processing companies. AspenTech reported that in the year ending March 31, 2002, Hyprotech had income of $4 million on $49 million in revenues. Like AspenTech, Hyprotech developed simulation and optimization software for use in industrial applications.
The Consummated Transaction
Before the acquisition, AspenTech and Hyprotech were both involved in the development, licensing, and support of continuous and batch process engineering simulation software for use by industry. Batch process simulation is the modeling of processes that entail a single production run with a finite beginning and end. It differs from continuous process simulation in that the latter experiences an ongoing flow of product inputs and outputs. Continuous process simulation software models individual units or an entire process chain inside a refinery, chemical plant or other process industry. Prior to the acquisition, AspenTech’s BatchPlus software suite included the leading batch simulator, with the BaSYS suite from Hyprotech second in the market. The companies also developed integrated engineering software that gathers information generated from process engineering software and allows users to store, update, and retrieve data depending on their needs. Prior to the acquisition, AspenTech’s Zyqad was the leading application for these uses, and Hyprotech’s AXSYS was in development and ready for release to committed buyers.
On March 10, 2002, AspenTech announced an agreement to acquire Hyprotech from AEA in an all-cash transaction worth $106.1 million. AspenTech consummated the transaction on May 31, 2002. Prior to the acquisition, AspenTech, Hyprotech, and Invensys Systems’ SimSci-Esscor division (SimSci) were the three leading providers of engineering process simulation software for process industries. Post-transaction, AspenTech controlled between 67 and 82 percent of the relevant product market for various engineering process simulation software.
The Relevant Product Markets
According to the FTC, prior to the acquisition, AspenTech and Hyprotech were direct and actual competitors worldwide for the development, licensing, and support of processing engineering software in the following markets: 1) continuous process engineering simulation flowsheet software for process industries; 2) continuous process engineering simulation flowsheet software for upstream oil and gas process industries; 3) continuous process engineering simulation flowsheet software for downstream refining process industries;
4) continuous process engineering simulation flowsheet software for chemical process industries; 5) continuous process engineering simulation flowsheet software for air separation process industries; 6) batch process engineering simulation flowsheet software for process industries; and 7) integrated engineering software for process industries.
The Commission’s Complaint
According to the Commission’s complaint, AspenTech’s acquisition of Hyprotech violated Section 7 of the Clayton Act and dramatically increased concentration in the relevant product markets. The transaction led to the combination of the two closest competitors in the product markets, leaving a combined AspenTech/Hyprotech as a strong number one and SimSci as a weak number two. Based on company estimates, the combined AspenTech/Hyprotech holds as much as 82 percent of the process simulation software market, with SimSci holding virtually all the remaining share of sales. Also, according to the complaint, since the mid-1990s, SimSci has been losing market share to AspenTech and Hyprotech.
Further, the complaint states that entry into the relevant product markets would not be timely, likely, nor sufficient to deter or counteract the alleged anticompetitive effects of AspenTech’s acquisition of Hyprotech. The acquisition also allegedly has eliminated actual, direct, and substantial competition between AspenTech and Hyprotech which, prior to the transaction, had the ability and incentive to compete but no longer do so. The complaint also states that the acquisition has led to reduced innovation competition in the relevant product markets and may lead to the exercise of unilateral market power by AspenTech in these markets.
In filing its complaint, the Commission is seeking to restore the competition lost through AspenTech’s acquisition of Hyprotech. Accordingly, it is seeking: 1) the divestiture of all Hyprotech software, intellectual property, contract rights, and other necessary assets; 2) the provision of any incentives necessary to provide any engineering talent necessary to the viability of the restored company; 3) the assignment to the buyer of any Hyprotech contracts and the recission and assignment of any Hyprotech product contracts entered into since May 31, 2002;
4) the destruction of any copies of Hyprotech intellectual property, including source code and executable code; 5) an agreement not to use any Hyprotech competitive or technological information gained since its acquisition by AspenTech; and 6) any other relief required to remedy the anticompetitive harm caused by the acquisition.
The Commission vote authorizing the staff to file the administrative complaint was 4-0-1, with Commissioner Pamela Jones Harbour not participating.
NOTE: The Commission issues or files a complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the named parties have violated the law. The administrative complaint marks the beginning of a proceeding in which the allegations will be ruled upon after a formal hearing by an administrative law judge.
Copies of the Commission’s complaint are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC’s Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580, Electronic Mail: email@example.com; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published “Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws,” which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.
(FTC File No.: 021-0153)
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