Antitrust Law Daily Wrap Up, ACQUISITIONS & MERGERS NEWS: FTC Commissioners offer differing views on ZF Friedrichshafen, TRW settlement, (May 11, 2015)

By Greg Hammond, J.D.

The FTC has released a statement supporting its 4-1 decision to approve a proposed consent order, settling charges that the proposed merger between ZF Friedrichshafen AG and TRW Automotive Holdings Corp. would be anticompetitive. Commissioner Joshua D. Wright issued a dissenting statement, claiming the Commission failed to meet its burden in showing that the acquisition would result in an increased likelihood of harm from coordinated effects or from unilateral effects, and Commissioner Maureen K. Ohlhausen issued a separate statement (In the Matter of ZF Friedrichshafen AG, File No. 141-0235).

The Commission filed charges against ZF Friedrichshafen AG and TRW Automotive Holdings Corp. in May 2015, alleging that the proposed merger between the two companies—representing two of only three North American suppliers of heavy vehicle tie rods—would likely harm competition in North America. A tie rod is a rigid connector that links a vehicle’s wheels with the steering control mechanism. Because tie rods are heavy, it is not economical to ship them over long distances. As a result, customers in North America predominantly buy from suppliers that have production facilities in the United States, Canada, or Mexico and do not consider suppliers outside of North America as viable options.

A proposed consent order, requiring the combined entity to divest TRW’s North American and European linkage and suspension business for heavy and light vehicles, was approved by the Commission on a 4-1 vote, with Commissioner Wright dissenting.

The majority found that the proposed combination would reduce the number of significant competitors in the relevant market from three to two, which would substantially increase concentration in an already highly concentrated market. “Based on this increase in concentration and current market conditions, we believe the transaction is likely to produce substantial anticompetitive effects in the relevant market, in particular, by increasing the potential for coordination,” the Commission wrote. “Furthermore, there is unlikely to be any entry that would alleviate our competitive concerns.”

“I respectfully dissent because the evidence is insufficient to provide reason to believe ZF’s acquisition will substantially lessen competition for heavy vehicle tie rods sold in North America,” Commissioner Wright wrote in his dissenting statement. “In particular, I believe the Commission has not met its burden to show that the acquisition will result in an increased likelihood of harm from coordinated effects or from unilateral effects. As a consequence, the Commission should close the investigation and allow the parties to complete the proposed transaction without imposing a remedy.”

In a separate statement, Commissioner Maureen K. Ohlhausen stated that she was satisfied that the “reason to believe” prong the FTC must assess in issuing a complaint was met in this case. However, she also noted that each Commissioner has different views on how much evidence is actually required to satisfy the reason to believe standard.

“I respect Commissioner Wright’s view that the standard was not met for him in this case,” Commissioner Ohlhausen said. Nevertheless, “For the reasons identified in the majority statement in this matter, I determined that there is a credible basis on which to conclude that this merger may enhance the vulnerability to coordinated effects that already exists in the relevant market at issue.”

The Commission’s statement identified various factors that supported its finding of a credible basis on which to conclude the merger might enhance the risk of coordination: (1) the proposed merger would result in a highly concentrated relevant market; (2) the market is susceptible to coordinated conduct, which is evidenced by various recent cases of collusion in the automotive parts industry; and (3) the merger would decrease the impediments to reaching common terms of coordination, making it easier to monitor compliance with, and retaliate against potential deviation from, a coordinated scheme, because there would be two main competitors left.

“Our concern that the merger may enhance the relevant market’s vulnerability to coordination is backed by the well-accepted view that markets with only two or three firms are more conducive to anticompetitive outcomes than markets with four or more firms,” the Commission stated. “The proposed merger would eliminate a third competitor and create greater symmetry between the two remaining firms.”

Commissioner Wright disagreed, noting that the Commission has “no evidence to conclude that a simple reduction in the number of firms in this market is likely to lead to higher prices and lower output.” Assuming that such a relationship exists in this market without any evidence to suggest that it does “harkens back to the bad old days of the first half of the 20th century, when the structure-conduct-performance paradigm was in vogue.”

Companies: ZF Friedrichshafen AG; TRW Automotive Holdings Corp.

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