DealLawyers.com Blog

On January 5, 2005, the Federal Trade Commission voted 5-0 to unwind the merger of Chicago Bridge & Iron, Inc., and Pitt-Des Moines, Inc., two companies engaged in the manufacture of steel water storage tanks and other steel-enforced structures, concluding that the merger was anticompetitive. This is an extremely important decision.

Interestingly, the deal was reported to the antitrust agencies under the HSR Act and was CLEARED by the FTC. After clearing the deal, and after it closed, the FTC opened a SECOND investigation into the deal, and ultimately required it to be unwound. The relief is expansive, and the portion of the Commission decision concerning relief is extraordinary, especially to those not familiar with the full breadth of the FTC’s power to order relief in merger investigations.

The Commission ordered expansive relief, requiring Chicago Bridge to reorganize its business unit related to the relevant products (water storage tanks) into two separate, stand-alone subsidiaries, and to divest one of those subsidiaries within six months (Imagine That!!). 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 Chicago Bridge:

* to divide its current customer contracts between the two newly-created subsidiaries (as far as I can tell, this is the first time the FTC required the division of customer contracts by the party being required to divest);

* 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;

* to 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 FTC’s decision in Chicago Bridge was not a “one-off.” The agency has reviewed many closed deals over the last few years, and the recent focus on reviewing and challenging closed transactions raises a host of significant issues that antitrust lawyers have only just begun to consider (see, for example, the decisions regarding MSC.Software, AspenTech, and Evanston Illinois Hospital).

Undoubtedly, the FTC has the ability under section 7 to remedy any anticompetitive transaction, regardless of whether it has closed or is pending and whether it was below or above the HSR Act’s reporting thresholds. At any time, the antitrust agencies can intervene and remedy competitive problems that are caused by mergers unduly concentrating a market. Nevertheless, aggressive use of the post-close challenge raises serious legal and practical issues, and may serve to chill business activity, slow innovation, and ultimately harm customers.

There are strong considerations that militate against aggressive post-close review, especially in high-tech markets. First, high-technology industries develop rapidly; as a result, markets and market definitions frequently change. What was a market yesterday is an afterthought today—for example, no one is concerned about whether Wang will dominate the Electronic Word Processor market or IBM the 7.5 (or for that matter 5.25) inch disk drive market—because markets disappear in the blink of an eye.

Historically, regulatory review focused on a static view of relevant markets. Because high-tech markets change dynamically, it is imperative that the agencies carefully consider whether mergers that lead to apparent concentration truly are anticompetitive or instead represent a temporary concentration. As the Court of Appeals for the D.C. Circuit observed in United States v. Microsoft, “[r]apid technological change leads to markets in which firms compete through innovation for temporary market dominance, from which they may be displaced by the next wave of product advancements.”

Post-close review can paralyze markets. If the FTC prevails in its post-close challenges, companies like Chicago Bridge not only stand to lose the valuable assets they acquired, but perhaps more importantly, those companies stand to lose years of independent product development that they would have engaged in but for the futile attempt to acquire a competitor. Especially in high-tech industries, the lost opportunities could be considerable: while they may find themselves in the position they were in prior to the consummation of a merger later challenged, all of their competitors or potential competitors presumably have moved on and continued to develop next-generation products during that time.

I’ll continue to explore these issues as time goes on…..