In an administrative opinion announced today, the Federal Trade Commission ruled that Chicago Bridge & Iron Company (CB&I) illegally acquired certain Pitt-Des Moines, Inc. (PDM) assets. CB&I completed the acquisition of PDM assets in February 2001, during the pendency of a Commission investigation. According to the opinion, signed by Commissioner Orson Swindle, the acquisition substantially lessened competition in four relevant product markets in the United States. The Commission therefore held that the acquisition violated Section 7 of the Clayton Act and Section 5 of the FTC Act. To restore competition as it existed prior to the merger, the Commission ordered CB&I to create two separate, stand-alone divisions capable of competing in the relevant markets, and to divest one of those divisions within six months.
History of the Case
CB&I is one of the world’s leading global engineering and construction companies. PDM was a diversified engineering and construction company, and a distributor of a broad range of carbon steel products. Prior to the 2001 transaction, CB&I and PDM competed against each other as the two leading U.S. producers of large, field-erected industrial and water storage tanks and other specialized steel-plate structures.
The Commission’s complaint challenged CB&I’s acquisition of PDM’s Engineered Construction and Water Divisions. The complaint alleged, among other things, that the consummated merger significantly reduced competition in four separate markets involving the design and construction of various types of field-erected specialty and industrial storage tanks in the United States:
- liquefied natural gas (LNG) storage tanks;
- liquefied petroleum gas (LPG) storage tanks;
- liquid atmospheric gas (LIN/LOX) storage tanks; and
- thermal vacuum chambers (TVCs).
Following an administrative trial to resolve these charges, an administrative law judge ruled that the acquisition was anticompetitive and ordered CB&I to divest all assets obtained in the acquisition. Both CB&I and counsel supporting the complaint appealed this initial decision, and the case was reviewed by the full Commission. In the opinion released today, the Commission upheld the initial decision’s finding that the acquisition was unlawful, but differed with that decision’s analysis on certain issues and with the decision’s final relief.
The Commission’s Opinion
According to the unanimous opinion of the Commission, “[t]his case involves the acquisition of a company by its closest competitor in four relevant markets.” CB&I and PDM were the dominant United States suppliers in each of the four relevant markets prior to the acquisition. The Commission stated that the acquisition provided CB&I with a monopoly or near-monopoly position in each of the markets.
The Commission found that there were extraordinarily high levels of concentration in the markets. Although the administrative law judge’s initial decision refused to rely on Herfindahl-Hirschman Indices (HHIs) – which measure market concentrations and can indicate market power – the Commission considered this evidence in its analysis. “We have considered the probative value of the concentration data in this case in light of all other evidence and have concluded that the evidence here corroborates . . . the inferences that can be drawn from the HHIs,” stated the opinion. In particular, the Commission examined evidence of pre-acquisition sales, showing that CB&I and PDM made by far the greatest number of sales over the last decade, as well as contemporaneous business documents and customer testimony to reach its conclusion that the acquisition was likely substantially to lessen competition.
The opinion also examined whether new entry or fringe firm expansion will be capable of restoring in a timely manner the competition lost as a result of the acquisition. The Commission explained that “[e]stablished antitrust principles hold that entry must be not only likely to occur in a timely manner but also sufficient to constrain post-merger price increases to pre-merger levels.” After examining the entry conditions, bidding history, and post-acquisition bidding evidence in the each of the relevant markets, the Commission found that entry in these markets does not meet these standards.
The opinion explains that entry and expansion in each of the relevant markets are difficult and time-consuming. For example, the opinion states that for LNG tanks, “[t]he evidence . . .establishes that, at a minimum, a new entrant would need to go through a time-consuming process to develop procedures to meet the unique challenges of building LNG tanks; recruit and hire supervisors with highly specialized experience; gain access to local labor forces; and acquire expertise in dealing with complex regulatory requirements. . . . Without such attributes, an entrant’s bid is not likely to be taken seriously, and it will be unable to constrain CB&I effectively.” In other words, a tank supplier’s experience and reputation play a key role in its ability to compete. “In essence, a new entrant faces a conundrum: its lack of experience and inability to build a reputation place it at a competitive disadvantage in terms of winning a bid, which is the very thing it needs to gain experience and build a reputation,” explained the Commission. The Commission found that there are similarly high barriers to entry in the markets for LPG and LIN/LOX tanks and for TVCs.
The Commission also examined post-acquisition bids in each of the tank markets. The opinion recognized that new firms in the LNG tank market and fringe firms in the LPG tank and LIN/LOX tank markets had submitted bids for various post-acquisition projects and, in some instances, had won a bid. It found, however, that the new entrants in the LNG tank market were unable sufficiently to constrain CB&I. In addition, the Commission found that fringe firms in the LPG and LIN/LOX tank markets, which were present prior to the acquisition, had not increased their aggregate market presence post-acquisition. “Thus, while other firms may enter and exit each of these markets, the evidence shows that their presence has not diminished the market dominance of the merged firm, nor have they undermined the conclusion that CB&I and PDM would have remained the only two major players in these markets absent the acquisition,” stated the Commission. The Commission found no post-acquisition entry in the TVC market. The opinion concluded that entry in each of the relevant markets was unable in a timely manner to restore the competition lost from the acquisition.
The Commission’s order requires a divestiture to restore competition as it existed prior to the merger. The order differs from the relief proposed in the administrative law judge’s initial decision. The Commission determined that the relief contained in the initial decision was unlikely to restore a viable competitor to the market, and its order therefore contains more comprehensive relief. Specifically, the Commission ordered CB&I to reorganize its business unit related to the relevant products into two separate, stand-alone subsidiaries, and to divest one of those subsidiaries within six months. The opinion explains that CB&I is in the “best position to know how to create two viable entities from its current business,” and that this approach “will remedy the anticompetitive effects of the merger more quickly than would immediately appointing a divestiture trustee, who would have to learn the business before recommending a divestiture package.”
Among other things, the order requires CB&I to divide its current customer contracts between the two newly-created subsidiaries, and to facilitate the transfer of employees so that each subsidiary has the technical expertise to complete the customer contracts assigned to it and to bid on and complete new customer contacts. In particular, CB&I must provide incentives for employees to accept offers of employment from the acquirer and remove contractual impediments that would prohibit employees from accepting such offers. The Commission appointed a monitor trustee to oversee the divestiture and, among other things, to assess the need for CB&I to provide technical assistance and administrative services to the acquirer. The Commission also reserved the right to appoint a divestiture trustee in the event that CB&I does not accomplish the divestiture in six months.
Copies of the Commission’s opinion and order 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 DC 20580.
(Docket No. 9300)
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