fag
INA-Holding Schaeffler KG and FAG Kugelfischer Georg Schдfer AG -
Analysis
Analysis of
Agreement Containing Consent Orders
To Aid Public Comment
The Federal Trade Commission ("Commission")
has accepted, subject to final approval, an Agreement Containing Consent
Orders ("Consent Agreement") from INA-Holding Schaeffler KG ("INA") and
FAG Kugelfischer Georg Schдfer AG ("FAG"), which is designed to remedy the
anticompetitive effects resulting from INA's acquisition of FAG. Under the
terms of the Consent Agreement, INA and FAG will be required to divest
FAG's cartridge ball screw support bearing ("CBSSB") business. FAG's CBSSB
business will be divested to Aktiebolaget SKF ("SKF"), and will take place
no later than twenty (20) business days from the date on which INA begins
its acquisition of FAG.
The proposed Consent Agreement has been
placed on the public record for thirty (30) days for receipt of comments
by interested persons. Comments received during this period will become
part of the public record. After thirty (30) days, the Commission will
again review the proposed Consent Agreement and the comments received, and
will decide whether it should withdraw from the proposed Consent Agreement
or make final the Decision and Order.
Pursuant to a cash tender offer announced
on September 13, 2001, INA proposes to acquire all of the outstanding
shares of FAG. The total value of the transaction is approximately $650
million. The Commission's Complaint alleges that the proposed 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 worldwide market for the research,
development, manufacture and sale of CBSSBs.
FAG and INA are the only two suppliers of
CBSSBs in the world. CBSSBs are critical components in many industrial
machine tools, and are utilized by machine tool original equipment
manufacturers ("OEMs") around the world. Machine tools are machines that
are used in the production of other equipment, and include grinding
machines, milling machines, and laser drilling and cutting systems.
Machine tool OEMs utilize CBSSBs to reduce the friction associated with
the rotation of a rolling screw. This rotation is used to control linear
motion for accurate positioning, and is vital to the proper functioning of
certain machine tools. Although other types of bearings can be used to
accomplish this purpose, CBSSBs are easier, less expensive, and less time
intensive to use than the potential alternatives. CBSSBs also allow end
users of machine tools to replace the bearings easily, quickly and without
incurring substantial cost. Moreover, once a machine tool is designed with
CBSSBs, the process of switching to an alternative type of bearing would
require a costly and time consuming redesign of the tool. For these
reasons, it is highly unlikely that OEMs, or end users, would switch from
CBSSBs to alternative technologies even if CBSSB prices increased
significantly.
The global market for CBSSBs is highly
concentrated. If the proposed acquisition is consummated, the combined
firm would monopolize the worldwide market for CBSSBs. Prior to the
acquisition, INA and FAG frequently competed against each other for CBSSB
business, and this competition benefitted CBSSB customers. By eliminating
competition between the two competitors in this highly concentrated
market, the proposed acquisition would allow the combined firm to exercise
market power unilaterally, thereby increasing the likelihood that
purchasers of CBSSBs would be forced to pay higher prices and that
innovation, service levels, and product quality in this market would
decrease.
There are significant impediments to new
entry into the CBSSB market. A new entrant into the CBSSB market would
need to undertake the difficult, expensive and time-consuming process of
researching and developing a line of CBSSB products, acquiring the
necessary production assets, and developing the expertise needed to
successfully design, manufacture, and market these products. It would take
a new entrant over two years to accomplish these steps and achieve a
significant market impact. Additionally, new entry into the CBSSB market
is unlikely to occur because the costs of entering the market and
producing CBSSBs are high relative to the limited sales opportunities
available to new entrants.
The Consent Agreement effectively remedies
the acquisition's anticompetitive effects in the worldwide market for
CBSSBs by requiring INA and FAG to divest FAG's CBSSB business. This
business consists of, among other things, FAG's specialized tooling
equipment, technical drawings, advertising and training materials,
customer lists, and other assets used in the research, development,
manufacturing, quality assurance, marketing, customer support and sale of
CBSSBs (collectively "CBSSB Assets"). Pursuant to the Consent Agreement,
INA and FAG are required to divest the CBSSB Assets to SKF within twenty
(20) business days from the date on which INA begins its acquisition of
FAG. If the Commission determines that SKF is not an acceptable buyer or
that the manner of the divestiture is not acceptable, INA and FAG must
rescind the sale to SKF within three (3) business days, and divest the
CBSSB Assets to a Commission-approved buyer within three (3) months. If
INA and FAG have not divested the CBSSB Assets within the time and in the
manner required by the Consent Agreement, the Commission may appoint a
trustee to divest these assets and any additional FAG machinery that the
trustee deems appropriate, subject to Commission approval.
The Commission's goal in evaluating
possible purchasers of divested assets is to maintain the competitive
environment that existed prior to the acquisition. A proposed buyer of
divested assets must not itself present competitive problems. The
Commission is satisfied that SKF is a well-qualified acquirer of the
divested assets. SKF is a publicly-traded Swedish corporation and the
largest supplier of ball and roller bearings worldwide. SKF has been
active in the bearings industry since 1907, and currently has production
sites in 22 countries around the world and sales activities in almost
every country in the world. SKF is also a current producer of ball screw
support bearings, the product from which CBSSBs were originally derived.
Thus, SKF has the necessary industry expertise to manufacture and sell
CBSSBs, and its entry into the CBSSB market will effectively replace the
competition being eliminated by INA's acquisition of FAG. Furthermore, SKF
does not pose separate competitive issues as the acquirer of the divested
assets.
The Consent Agreement includes a number of
provisions that are designed to ensure that the divestiture of the CBSSB
Assets is successful. The Consent Agreement requires that, for a period of
six (6) months, INA and FAG provide SKF with personnel, assistance, and
training at no cost to SKF. This provision will ensure that SKF is able to
effectively manufacture and market CBSSBs of the same quality as those
currently produced by FAG. Additionally, if requested by SKF, INA and FAG
are required to provide transitional manufacturing services at variable
cost to SKF for up to six (6) months. This will ensure that SKF is able to
serve customers in the CBSSB market without delay. In order to further
facilitate SKF's entry into the CBSSB market, the Consent Agreement also
prohibits INA and FAG from using any catalog numbers currently used by FAG
to identify its CBSSBs.
To preserve the competitive viability and
independence of the CBSSB Assets pending divestiture, the Consent
Agreement includes an Order to Maintain Assets. This Order contains a
number of provisions designed to ensure that the viability,
competitiveness, and marketability of the CBSSB Assets and other FAG
machinery are not diminished. The Order to Maintain Assets also provides
that the Commission may appoint one or more monitors to ensure that INA
and FAG expeditiously comply with their obligations under the Consent
Agreement.
In order to ensure that the Commission
remains informed about the status of the pending divestiture, and about
efforts being made to accomplish the divestiture, the Consent Agreement
requires INA and FAG to file an initial status report with the Commission
within ten (10) days of the date the Consent Agreement is executed, and
additional reports every thirty (30) days thereafter until the
Commission's Decision and Order becomes final. Once the Commission's Order
becomes final, INA and FAG have sixty (60) days within which to submit a
verified written report detailing the manner in which they have complied,
or intend to comply, with the Commission's Order. This reporting
requirement continues until INA and FAG have fully complied with the
Commission's Order.
In addition to the divestiture outlined
above, the Commission's Order also addresses potential competitive issues
raised by a possible future joint venture between FAG and NTN Corporation
of Japan ("NTN"), another large producer of bearings worldwide. Although
no joint activities have taken place to date, a preliminary agreement
between FAG and NTN indicates that a wide range of possible joint
marketing, joint production and joint sales activities are contemplated by
the joint venture between the two companies. INA has publicly asserted
that it welcomes the alliance with NTN and is prepared to continue this
cooperation with NTN after INA's acquisition of FAG. Given that this
scenario creates the possibility of a future global three-firm alliance,
and given that such joint venture activities may not otherwise trigger
Hart-Scott-Rodino reporting requirements, the Commission's Order requires
INA and FAG to provide prior notice to the Commission before entering into
any such joint venture activities with NTN affecting North America. This
requirement will give the Commission an opportunity to review such
activities for potential competitive harm before they take place.
The purpose of this analysis is to
facilitate public comment on the Consent Agreement, and it is not intended
to constitute an official interpretation of the Consent Agreement or to
modify its terms in any way.
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