FTC Chairman Robert Pitofsky Testifies before Senate Subcommittee on Mergers and Acquisitions in the Defense Industry

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Federal Trade Commission Chairman Robert Pitofsky testified today before the Senate Judiciary Subcommittee on Antitrust, Business Rights and Competition on the topic of defense industry mergers and acquisitions. The Chairman delivered Commission testimony that addresses the consolidation of the defense industry after the Cold War, competition policy in defense industry mergers and acquisitions and the analysis undertaken by federal antitrust authorities.

The prepared remarks state that the "Commission views the application of the antitrust laws to defense industry mergers as squarely in the public interest. Effective antitrust review by the Commission and the Department of Justice protects the Defense Department, and ultimately the American taxpayers, from the risk that a firm or group of firms could exercise market power by raising prices or reducing output, quality, service or innovation." Chairman Pitofsky added, that "there is generally no conflict between antitrust enforcement and national security."

According to the Commission testimony, declining defense budgets after the Cold War forced deep cuts in the number and size of weapons programs that hit particularly hard an industry that was heavily invested in plants and infrastructure. The industry's response was to reduce capacity through consolidation, a process which Defense Department officials encouraged, the testimony says.

The Commission described the analytical framework for merger analysis and discussed the definition of both relevant product and geographic markets and the impact of a merger on the structure and behavior of those markets.

The testimony refers to the joint Department of Justice and Federal Trade Commission

Merger Guidelines as the "framework used by the Commission to analyze mergers." Certain industries have special characteristics that make them different from other industries, and the Guidelines provide a flexible tool that allows for these characteristics to be taken into account. "The characteristics of the defense industry fit into the framework of the Guidelines' analysis," the remarks state.

With regard to market definition, the testimony explains that "[i]n the defense industry, relevant product markets may consist of an existing product, such as tank ammunition, or of the development effort for a future weapon system, such as the design and development of the next generation tactical aircraft. The 'mission' for which the weapons systems are designed will often establish the parameters of the relevant markets." The testimony also describes a similar analysis for the identification of the relevant geographic market. "The Commission attempts to identify alternative suppliers in other geographic areas to which customers could turn if prices rose in the relevant product market. In the defense industry, the relevant geographic market almost always encompasses the entire United States."

In describing how the Commission identifies the market participants and their market shares, the remarks point out that "[i]n rapidly changing industries, such as the defense industry, historical market share statistics may provide an incomplete or inaccurate picture of competitive conditions. Because of declining demand, the nature of the procurement process, and the technological complexity of many new weapons systems, the analysis of current market indices in the defense industry must be supplemented by a forward-looking analysis of the relative cost structures and technological capabilities of the market participants."

For the assessment of the conditions of entry into the market, the next step in the analysis, the Commission states that it usually uses a two year period for potential entry into the market. However, in the defense industry the "entry period may be shortened or lengthened depending on scheduled procurements." The testimony also refers to "unusual aspects of entry analysis" and points to the role of the Defense Department in providing information about entry conditions and potential participants.

In determining whether a defense merger is likely to have anticompetitive effects, the Commission testimony explains that "[t]he majority of recent merger challenges have been based on a unilateral anticompetitive effects theory" -- that is where the merged firm would have the ability to raise prices without any cooperation from other firms in the industry.

In summarizing the Commission's history with mergers and acquisitions involving defense firms, the testimony states that "[t]he Commission has not hesitated to stop or modify proposed mergers that unduly threaten the Defense Department's ability to obtain the best mix of price and quality for its military requirements." The Commission testimony concludes by making special reference to the unique role of the Defense Department in assisting the antitrust review.

Copies of the FTC testimony are available on the Internet at the FTC's World Wide Web site at: http://www.ftc.gov and from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

Ann B. Malester
Bureau of Competition

(FTC File No. P859910)

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