The opinion of the court was delivered by: JACKSON
THOMAS PENFIELD JACKSON, U.S. DISTRICT JUDGE
This antitrust case is before the Court on the application of the Federal Trade Commission ("FTC" or "Commission") for a preliminary injunction against the imminent acquisition by PPG Industries, Inc. ("PPG") of Swedlow, Inc. ("Swedlow") pursuant to an "Agreement and Plan of Merger" dated August 21, 1985, as amended January 9, 1986, pending completion of administrative proceedings (Docket No. 9204) before the Commission to prohibit the transaction permanently.
PPG proposes to pay $41.8 million ($32.60 per share) for all outstanding shares of Swedlow. The agreement is terminable at will by either party if not consummated by March 15, 1986. The Commission, however, alleges that the effect of a PPG-Swedlow merger "may be substantially to lessen competition or to tend to create a monopoly" in the production of aircraft transparencies in violation of section 7 of the Clayton Act. 15 U.S.C. § 18. Anticipating such a finding by the FTC, it asks that the parties be enjoined from implementing the merger in the meantime.
For the reasons set forth below, the Court will grant the injunction, subject to a condition subsequent, namely, the entry of an appropriate hold separate order containing certain provisions hereinafter specified.
PPG and Swedlow are two of the leading manufacturers of aircraft "transparencies:" the windshields, canopies, and cockpit and cabin windows of both commercial and military aircraft. PPG is a large, publicly-owned diversified Pennsylvania corporation for which aircraft transparencies represent but a small percentage of its business. Nevertheless, it is the world's largest manufacturer of glass transparencies and a significant supplier of acrylic and composite transparencies. Swedlow is a smaller, closely-held California corporation of so-called "garage shop" origin, with its controlling stock owned by its founder, David Swedlow, and close associates, who began the business shortly after the discovery of acrylics in the 1930's. In the years since, Swedlow has become the largest manufacturer of acrylic transparencies in the world, although it has never undertaken to make transparencies from glass. PPG and Swedlow are nevertheless frequent competitors for contracts to supply transparencies to major U.S. airframe manufacturers. Thus, because PPG plans to acquire a direct competitor, as opposed to a customer or supplier, the proposed merger is ostensibly horizontal in effect.
The Commission contends that the resulting entity will be a single, market-dominant firm possessed of a near-monopoly on the most advanced technology for the fabrication of transparencies from both substances, and any combinations or permutations thereof, with the predictable result on commerce in the product. PPG and Swedlow respond that, despite their similarities in appearance and the efforts of many years to adapt them to the same purposes, glass and acrylic, as well as hybrids, remain fundamentally different products. Various dissimilar properties prevent their use interchangeably in all but a very few aircraft fenestrations. The merger is, therefore, they say, a "product extension" merger, the Commission having "gerrymandered" various possible product market definitions to make it appear as if they compete in the same market whereas, in fact, they do not.
While opposing the Commission on the merits, PPG and Swedlow also urge the Court to consider a "hold separate" order as an alternative to a "full-stop" injunction, i.e., "a form of preliminary relief which permits the challenged transaction to go forward, but requires the acquiring company to preserve the acquired company (or certain of the acquired assets) as a separate and independent entity during the course of antitrust proceedings." FTC v. Weyerhaeuser Co., 214 U.S. App. D.C. 254, 665 F.2d 1072, 1075 n.7 (D.C. Cir. 1981). The two primary purposes of a hold separate order are to maintain, insofar as possible, competitive balance during the pendency of the litigation and to make feasible adequate permanent relief, including divestiture, should the Commission ultimately prevail. Id.
While the Court does not have to resolve finally whether or not the proposed merger violates section 7 of the Clayton Act, the likelihood of the Commission's ultimate success on the merits is the principal element in an award of any form of interim relief, being expressly prescribed by the statute as a prerequisite to an injunction, 15 U.S.C. § 53(b), and by case law as antecedent to hold separate orders as well. Weyerhaeuser, 665 F.2d at 1085-87. Likelihood of ultimate success on the merits, in turn, depends upon a proper definition of the relevant product and geographic markets, their structure, and the anticompetitive effects if any, of the proposed acquisition.
At this preliminary stage of the contest, upon the evidence now before the Court, it appears that the relevant product market is one of aircraft transparencies requiring, for want of a better term, "high technology" to produce, without regard to the materials of which they are fabricated. The recent history of the industry indicates that, on most aircraft, advanced glass and/or acrylic (or composite) transparencies are now - or will soon become - functionally interchangeable in the sense that each can substantially meet the design specifications established by the airframe manufacturers.
Glass and acrylic undoubtedly still do have advantages and disadvantages vis-a-vis one another, but producers of glass transparencies and manufacturers of acrylic transparencies consistently bid against one another for contracts to fill the same apertures, and the trend in their respective technological evolutions is clearly in the direction of an eventual coalescence.
The relevant geographic market within which to assess the effects of an acquisition must "correspond to the commercial realities of the industry and be economically significant." Brown Shoe Co. v. United States, 370 U.S. 294, 336, 8 L. Ed. 2d 510, 82 S. Ct. 1502 (1962). Here the evidence points to a United States market for aircraft transparencies. While a single foreign company, the British firm Triplex Safety Glass Co. Ltd. ("Triplex"), presently sells transparencies to U.S. airframe manufacturers and the military, and some U.S. transparency manufacturers, including both PPG and Swedlow, do sell abroad, the total dollar sales resulting from these transactions is relatively insignificant.
The current United States all - transparency market - the closest available approximation of a high-tech market shown by the evidence - by all familiar antitrust standards, is already highly concentrated.
In 1984, the top four firms accounted for over 80 percent of all sales, the top eight firms more than 90 percent, and the Herfindahl-Hirschmann Index ("HHI") was 1,943.
PPG was the largest manufacturer with a nearly 30 percent share of the market, and Swedlow a close second with about 23 percent. That market would become significantly more concentrated were PPG and Swedlow to merge. Not only would the new PPG/Swedlow entity have close to 53 percent of the market, two-and-a-half times as much as the nearest competitor, Sierracin Corp., (the only other firm both the Commission and defendants recognize as having comparable high-tech capabilities), but the HHI would rise over 1,300 points to 3,295. According to the Justice Department Guidelines, where the post-merger market would be in a highly-concentrated range (over 1,800), any acquisition which would result in an increase of 50 points in the HHI will raise serious antitrust concerns. Department of Justice Guidelines para. 3.1.
While there may be no fixed numerical threshhold at which an increase in market concentration resulting from a horizontal merger triggers the antitrust laws, see, e.g., United States v. Philadelphia National Bank, 374 U.S. 321, 10 L. Ed. 2d 915, 83 S. Ct. 1715 (1963), this case does not at the moment appear to be borderline. Assuming the traditional rules of antitrust analysis will continue to apply, the FTC and the Court of Appeals may almost surely be expected to find that the change in market structure following a PPG-Swedlow merger will be sufficiently inimical to competition to forbid the acquisition altogether.
Moreover, largely due to the sophisticated technology which delimits the market initially, the emergence of new producers who could quickly redress anticompetitive conduct resulting from increased concentration in the market, is not foreseeable. Knowledgeable witnesses have estimated that it would take anywhere from two to six years, or more - not counting the cost - to acquire the technological expertise, assemble the trained personnel, and devise the tooling to enter the market as a credible competitor, thereby acknowledging that there are high market entry barriers to exacerbate and prolong the effects of concentration.
Should the PPG-Swedlow merger be allowed to go forward, the reduced competition and increased concentration in the relevant markets will afford a fertile medium for interdependent anticompetitive conduct; more likely, it will precipitate leading firm behavior.
Either way, the effects to be anticipated from a PPG-Swedlow merger include a decline in vigorous inter-material research and development, an increase in the price of both glass and acrylic, and an erosion in quality of service. Experience teaches that without worthy rivals ready to exploit lapses in competitive intensity, ...