ANALYSIS OF PROPOSED CONSENT ORDER
The Federal Trade Commission ("Commission") has accepted for public comment an agreement containing a proposed Consent Order from Nortek, Inc. ("Nortek"), which is designed to remedy the anticompetitive effects resulting from Norteks acquisition of NuTone Inc. ("NuTone"). Under the terms of the agreement, Nortek will be required to divest M & S Systems LP ("M & S"), its wholly-owned subsidiary, to a Commission-approved buyer.
The agreement containing proposed Consent Order has been placed on the public record for sixty (60) days for receipt of comments by interested persons. Comments received during this period will become part of the public record. After sixty (60) days, the Commission will again review the proposed Consent Order and the comments received, and will decide whether it should withdraw from the agreement and proposed Consent Order or make final the proposed Order.
On March 9, 1998, Williams Y&N Holdings, Inc., NuTones parent company, and NTK Sub, Inc., a wholly-owned subsidiary of Nortek, entered into a stock purchase and sale agreement whereby NTK Sub, Inc. agreed to acquire all of the outstanding shares of the capital stock of NuTone for approximately $242.5 million. According to the draft of the complaint that the Commission intends to issue, the acquisition, if consummated, would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45, in the market for the manufacture and sale of hard-wired residential intercoms.
Hard-wired residential intercoms are electrical devices that are installed in residences to provide room-to-room or room-to-entrance audio communication or monitoring functions through in-the-wall low voltage wiring. These intercoms often have the capability to provide background music from built-in AM/FM radios and/or cassette and CD players. In the United States hard-wired residential intercoms market, NuTone is the leading seller with about 56% of all sales, and Nortek, through its wholly-owned subsidiaries, M & S and Broan Mfg. Co., Inc., is the second largest competitor with about 31% of sales. Together, the merged firm would control approximately 87% of all U.S. hard-wired residential intercom sales. The proposed merger would increase the Herfindahl-Hirschman Index ("HHI"), the customary measure of industry concentration, by over 3400 points and produce a market concentration of over 7600 points. By eliminating competition between the top two competitors in this highly concentrated market, the acquisition would allow Nortek to unilaterally exercise market power, thereby increasing the likelihood that prices of hard-wired residential intercoms will increase and that services and innovation will decline.
It is unlikely that the competition eliminated by the proposed acquisition would be replaced by new entry into the U.S. hard-wired residential intercoms market or by expansion of sales by the remaining small competitors. A new entrant would need to undertake the difficult, expensive and time-consuming process of developing and marketing a competitive product, creating brand recognition among consumers, wholesalers and installers, and establishing a viable distribution network. Because of the expense and difficulty of accomplishing these tasks, new entry into the U.S. hard-wired residential intercoms market is not likely to occur even if the merged firm were to increase prices significantly after the merger. Likewise, the remaining small competitors would not be in a position to replace the competition eliminated by the merger because of the difficulty they would have in expanding their sales.
The proposed Consent Order requires that Nortek divest its M & S subsidiary to a third party approved by the Commission. The assets to be divested, in addition to hard-wired residential intercom assets, also include all assets relating to the M & S central vacuum and wholehouse stereo products. The purpose of this is to ensure the continued viability of the M & S business and to maintain its presence in the channels of product distribution.
The divestiture is required to be completed within six months after Nortek signs the Consent Order. If Nortek fails to divest M & S within the six month period, the Commission may appoint a trustee to accomplish the divestiture. An Agreement to Hold Separate signed by Nortek and M & S requires that they preserve and maintain the competitive viability of all of the assets to be divested in order to ensure that the competitive value of these assets will be maintained, and provides further that until the required divestiture is completed, M & S will be operated separately from Nortek. To further ensure the competitive viability of the assets, the proposed Consent Order also requires Nortek to provide technical assistance to the acquirer, at the acquirers request, for up to one year following the divestiture.
By accepting the proposed consent order, the Commission anticipates that the competitive problems alleged in the draft complaint will be resolved. The purpose of this analysis is to facilitate public comment on the proposed Order. It is not intended to constitute an official interpretation of the agreement and proposed Order or to modify in any way their terms.