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Source link: http://archive.mises.org/13280/punishing-success-one-merger-at-a-time/

Punishing Success One Merger at a Time

July 14, 2010 by

Another day, another government intervention:

Settling a complaint by the Federal Trade Commission, Houghton International, Inc., the leading North American provider of hot rolling oil used to process aluminum, has agreed to sell some of the assets it acquired in 2008 through its purchase of D.A. Stuart GmbH, a transaction that included multiple product markets.

The FTC’s investigation found that Houghton’s acquisition of D.A. Stuart GmbH combined the two largest suppliers of aluminum hot rolling oil (AHRO) in North America, giving the combined firm control of almost 75 percent of the North American market.

The FTC’s complaint alleges that, through its purchase of Stuart, Houghton could unilaterally raise AHRO prices to U.S. consumers. The complaint also alleges that the acquisition could decrease innovation for this vital input into aluminum manufacturing. Under the order settling the FTC’s charges, Houghton will sell Stuart’s AHRO business to Quaker Chemical Corporation.

Omitted from the FTC’s press release — but buried in the official explanation of the proposed order — is this justification for violating Houghton’s property rights:

Quaker tried without much success to enter the North American market for AHRO in the late 1990s, but largely abandoned these efforts. Technological requirements, high customer switching costs and reputation pose substantial barriers to entrants attempting to sell AHRO to North American customers.

Ah, so there was competition, but it didn’t yield a market structure to the FTC’s liking. So the FTC plans to force the market to behave correctly — at Houghton’s expense of course:

The FTC order contains several provisions to ensure that the sale of the AHRO business to Quaker is successful and that Quaker will compete with Houghton as aggressively in the future as Stuart did in the past. First, it requires Houghton to provide transitional services to Quaker to ensure a smooth transfer of the AHRO assets. Second, it allows the FTC to appoint a trustee to oversee the assets’ sale if Houghton fails to complete the divestiture in the time required. Third, it requires Houghton to remove any impediments that might prevent former Stuart employees with AHRO experience from taking new jobs with Quaker. Finally, the order allows the FTC to appoint an interim monitor to oversee compliance with its terms.

Let’s briefly examine that third requirement. The proposed order requires Houghton to make certain “relevant employees” available to Quaker. Any contractual agreement preventing Quaker from hiring these employees is null and void. If Quaker makes an employment offer to any relevant employee, Houghton may not make a counter-offer or other attempt to retain the employee (which restrains, if not eliminates, competition for the employees’ services). And for the next year, Houghton may not take any action that might “directly or indirectly, solicit or otherwise attempt to induce” any relevant employee to leave Quaker or return to Houghton. Of course, if Quaker chooses not to hire a relevant employee, Houghton may pursue them without fear of FTC reprisal.

Turning to the larger issue, the FTC claims that Houghton’s purchase of D.A. Stuart harmed competition. Now, this merger closed more than two years ago; this is a post-merger challenge. Yet the FTC’s complaint reads like a pre-merger argument against hypothetical injuries to the market. The core allegation is that the merger “increases the likelihood that prices for AHRO and associated technical support services will increase above competitive levels.” But why is the FTC dealing in “likelihood”? There should be two years of post-merger data to prove the FTC’s case. Either the FTC never gathered the data, or the data doesn’t prove that prices rose “above competitive levels.” And since Houghton surrendered without trial, the FTC has no duty to show its work to the public.

And if you’re wondering why Houghton let the FTC push it around, look no further then the company’s attorney, Peter Guryan of Fried Frank:

Prior to joining Fried Frank, Mr. Guryan was a trial attorney in the Antitrust Division of the Department of Justice, where he played a significant role in the successful challenge of the proposed merger between WorldCom and Sprint. He was also a contributor to the ABA Antitrust Section’s Mergers and Acquisitions: Understanding the Antitrust Issues, 2d Edition (2004).

Yeah, that sounds like a guy who’d put his client’s interests ahead of perpetuating the antitrust system that keeps him in a lucrative, law-firm partnership. Actually, I’d be more interested in learning the identity of the attorney for Quaker who no doubt lobbied the FTC to bring this action, which resulted in a substantial government subsidy in the form of Houghton’s forced sale of the D.A. Stuart assets to Quaker.

{ 14 comments }

Jeffrey Tucker July 14, 2010 at 4:21 pm

That’s disgusting, and transparent. And news only here – which itself is an outrage. America’s centrally planned economy, but it never makes the news.

J Cortez July 14, 2010 at 5:10 pm

These people are insane.

These FTC are posts depressing. What does it take for a business to be left alone?

Capt Mike July 14, 2010 at 5:27 pm

Who at Houghton is stupid enough to use this attorney????

Also, I like my Franks steamed in beer and not fried.

S.M. Oliva July 14, 2010 at 5:49 pm

You’d be surprised at the percentage of FTC cases where the defense lawyer used to work at the FTC and DOJ.

Capt Mike July 14, 2010 at 6:11 pm

Probably not. But I take your point.

But my point really was not that the guy was ex-FTC, but that he caved and the client LET HIM.

My guys are ex-IRS and ex-FDA and they have NEVER advised me to cave (to our mutual benefit, I might add).

S.M. Oliva July 14, 2010 at 6:32 pm

Interesting. Antitrust lawyers generally advise their clients to cave. Must be something in their DNA.

J. Murray July 15, 2010 at 5:59 am

It’s possible that those lawyers truly believe in what the FTC is doing and are not actually working in the best interest of their client.

pussum207 July 15, 2010 at 10:31 am

Certainly, in the telecommunications industry, industry players frequently challenge the regulator and there are a lot of ex-regulatory people working in the industry. The difference is that the client in the telecom business expects to have to deal with the regulator continuously, perhaps for decades, so the costs to any one firm of an out-of-control regulator are very high indeed and the benefits of disciplining them via the courts thus corresponding high. The expectation of this sort of response restrains to some degree the regulator’s behaviour, i.e., they tend to be very conscious of their legal vulnerabilities.From reading your excellent posts, Skip, I am inclined to think that the FTC’s situation is different for a couple of reasons. One, they have been pushing the boundaries successfully for years so the fight back to justice for any one victim will be long, hard and dangerous. Two, it is not an integral part of most firms’ business to deal with the FTC or DOJ on a continuing and indefinite basis, as is the case in the telecom world. Thus, the FTC can get away with something similar to the approach taken by US prosecutors with so-called white collar criminals – i.e., cave and “put it past you” or we destroy your life.The mystery is why firms like Intel cave in. Perhaps the costs of an uncertain outcome after a long legal battle are too high. I have noted from time to time that many entrepreneurs and execs are surprisingly non-ideological – they are not concerned with what’s right, they just want to know what is permitted so that they get on with their business. Finally, regulatory strategists can often be concerned with anything that might limit their ability to use the regulator in the future to harass their competitors, even though that greater future ability comes with a cost in the short run. It comes from inhabiting for too long a world in which the possibility of surviving or failing based on the market alone is beyond imagining.

S.M. Oliva July 15, 2010 at 10:43 am

Thank you for the comments. Regarding Intel, it’s notable that their in-house general counsel is an ex-DOJ official who was actually known for litigating (he defended Rambus in a seven-year FTC case). I suspect the decision to cave there was not pressured by counsel, but rather cowardice on the board or management’s part.

Capt Mike July 14, 2010 at 6:35 pm

Wow. Maybe I should try law school. Just what we need – another lawyer.
I guess the deck is so stacked….Well yeah, if you can make up your own rules as you go I guess it is!

Christopher July 15, 2010 at 9:23 am

Oh My God.

Christopher July 15, 2010 at 10:06 am

Quaker Chem is based in PA so I wonder if they were calling in some political favors.

http://www.quakerchem.com/index.html

Tungsten Wedding Bands July 21, 2010 at 10:44 pm

Maybe I should try law school,http://www.tocoy.net

hesbon kerongo July 31, 2010 at 9:04 am

I would want to try it

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