U.S. Department of Justice325 Seventh Street NWSuite 500
Dear Mr. Fones:
We are writing to convey the comments of The American Antitrust Institute regarding the proposed Final Judgment in United States of America v. Alcoa Inc. and Reynolds Metals Company (U.S. District Court, District of Columbia, Civil Action Number 1:00CV00954). Prior to a decision in that case, please publish these comments in the Federal Register, along with the Government’s responses to them, pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. 16(b)-(h).
We are pleased that the proposed Final Judgment (in conjunction with the European Commission’s requirement) would have the defendants sell off all of Reynolds’s current alumina-refining capacity as a condition of the lawful merger of these two companies. As one can see from the AAI’s monograph analyzing the competitive impact of this merger, previously provided to the Antitrust Division of the U.S. Department of Justice (see archive), we focused on the alumina market in our own analysis, because we feel that this market is where the merger poses the largest competitive threat.
Whether the proposed settlement of this investigation will preserve competition in the alumina market, however, cannot be determined at this time. The United States chose to condition its approval of the merger only on certain "divestitures" in the abstract, without having first approved particular buyers for the divested assets, as the antitrust agencies have sometimes done in other mergers. Given that decision, we would ask the Justice Department and the Court to allow a second phase of public comment once specific buyers have been found for the divested assets. At this point, the institutional pressure is great for the Justice Department to accept any typically competent buyer of the assets, and in this industry we feel that that may not be a sufficiently high standard. A second--possibly quite brief--public comment period would help insure that a higher standard is reached.
As Federal Trade Commission Chairman Robert Pitofsky noted in a February 17, 2000, speech about restructurings (including divestitures) in the merger-review process, "the Commission in recent years has often insisted on knowing who the buyer or buyers [of divested assets] are likely to be, and on seeing the buyers’ business plan," before entering a consent agreement.1 Indeed, Chairman Pitofsky noted, "[a] buyer up-front is now required in about 60% of Commission divestitures."2
In our view, this is a laudable trend. Consider the conclusions of a 1999 study conducted by the FTC’s Bureau of Competition in collaboration with the Bureau of Economics, which Chairman Pitofsky discussed in his February speech. The study reviewed 35 orders entered into between 1990 and 1994 that required the divestiture of assets as a result of FTC action, and determined which ones had succeeded in creating viable operations in the relevant market.3 The result, according to Chairman Pitofsky, was that "[i]n those instances in which divestiture did not work out, it usually was because the seller engaged in strategic conduct to seek out marginally effective buyers . . . or buyers, because of informational disadvantages and lack of experience in the particular markets involved, were unduly optimistic about their ability to compete effectively with the acquired assets." In other words, ineffective divestitures are generally caused by a poor selection of buyers.4
This is precisely our concern in the Alcoa/Reynolds case. We believe the new owners of the divested alumina refineries must be able to run them at least as efficiently as Reynolds has done in the past, and must be at least as well-positioned as Reynolds has been to compete with Alcoa for alumina sales, in order to insure against diminished competition. These determinations must be made on a case-by-case basis, considering the financial strength, operational experience, and management quality of the new owners, as well as their history of competitive (or collusive) behavior. Our research suggests that Alcoa is an unusually well-managed company in an industry where poor, high-cost, tradition-bound management is not uncommon. Thus, many of the potential buyers of the divested assets might have high overhead costs or unsophisticated management practices that would prevent them from competing meaningfully against a newly strengthened Alcoa.
Moreover, a buyer’s suitability depends on what it is likely to do with its new alumina capacity. Will it sell at least as much alumina to third parties as Reynolds did, or will it use more of the alumina in its own aluminum smelters? To the extent that the alumina is used internally, will it simply substitute for third-party alumina that the owner previously purchased on the open market, or will it be used to expand aluminum production? The answers to such questions are buyer-specific, and could dramatically affect the future competitive dynamics of the aluminum industry.
For the above reasons, we once again urge the United States to allow some form of public comment on the proposed Final Judgment after buyers are found for the divested assets, even if the comment period is relatively brief. This is an industry with huge barriers to entry, relatively few large players, highly inelastic demand, and a history of antitrust problems. We cannot afford to tip the scales in an anticompetitive direction by allowing Alcoa to find weak or otherwise inappropriate buyers for the assets it is being asked to divest. A public explanation of the Government’s reasons for approving specific buyers and a brief public comment on the buyers will help us avoid this result.
Albert FoerPresidentAmerican Antitrust Institute
Matthew SiegelResearch FellowAmerican Antitrust Institute
Cc: The District Court for the District of ColumbiaThe Hon. Joel Klein, Assistant Attorney General for Antitrust
1 See Robert Pitofsky, "The Nature and Limits of Restructuring in Merger Review" (Feb. 17, 2000), or at http://www.ftc.gov/speeches/pitofsky/restruct.htm.
2 Ibid., note 13, citing Richard G. Parker, "Global Merger Enforcement" (Sept. 28, 1999), available at http://www.ftc.gov/speeches/other/barcelona.htm.
3 Federal Trade Commission Bureau of Competition Staff, "A Study of the Commission's Divestiture Process" (1999).
4 As reported in the press release announcing the 1999 study of the divestiture process, William Baer, then director of the FTC's Bureau of Competition, assessed the study as follows: "The study confirms the importance of one of the approaches currently being used by the Commission, the so-called 'up-front buyer,' where the buyer of the assets to be divested is identified earlier in the process. The use of the up-front buyer both reduces the likelihood that consumers will be harmed while waiting for the divestiture, and also assures that there will be an acceptable buyer."