Punishing Success One Merger at a Time

by S.M. Oliva, Mises Economics Blog
Jul. 16, 2010

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.