also Baker Hughes, 908 F.2d at 985, if they are merger-specific and
cognizable — i.e., verified and not the result of anticompetitive
reductions in output and services.
Heinz calculates that it will achieve merger-specific savings of
between $9.4 million and $12 million. See Tr. 759. Production of baby
food products will be consolidated at the more advanced Pittsburgh
plant, which can handle the combined volume of Heinz and Beech-Nut sales
and still have 20 percent capacity available for future growth. See Tr.
684. Consolidation of production in the automated Pittsburgh plant will
achieve substantial cost savings in salaries and operating costs. (At
the Canajoharie plant it takes 320 workers to produce 10 million cases
of baby food, while 150 workers produce 12 million cases at Pittsburgh.)
Substantial savings would also be realized in the cost of converting raw
materials, reducing waste, and consolidating administrative overhead.
Defendants adduced the testimony of David Painter, who evaluated mergers
at the Commission for many years. He found the variable manufacturing
cost savings that will be achieved in the merger "substantial,
significant . . . among the largest that I have ever seen certainly in
a manufacturing segment." Tr. 750; DX 629 at ¶ 82. Consolidation of
production in the Pittsburgh plant, he found, would reduce the cost of
processing the volume of baby food now produced by Beech-Nut by some 43
percent, a savings he found "extraordinary." Tr. 759-760.
Heinz also argues that its distribution network is much more efficient
than Beech-Nut's current system. By taking advantage of Heinz's six
regional distribution centers, Heinz argues that it can cut substantial
costs that result from Beech-Nut's current distribution network, which
includes only two distribution sites.
These are the kinds of efficiencies recognized by the Commission's
Horizontal Merger Guidelines ¶ 4: "efficiencies resulting from shifting
production among facilities formerly owned separately, which enable the
merging firms to reduce the marginal cost of production. . . ." They
will "enabl[e] the combined firm to achieve lower costs in producing a
given quantity and quality than either firm could have achieved without
the proposed transaction." Id. In the context of this particular case,
those efficiencies will enable Heinz to provide the best of the two
companies' recipes under the new Heinz/Beech-Nut (or Beech-Nut/Heinz)
label, and to apply its value pricing strategy to the entire combined
production volume. The Commission does not seriously dispute the
proposition that the merger will result in better recipes for former
Heinz buyers and value pricing for former Beech-Nut buyers. Those
consumer benefits will be immediate and virtually automatic, and to
recognize them does not require accepting at face value the aspirational
testimony of Heinz executives. Whether Heinz will use the considerable
cost savings from the merger to mount a vigorous campaign against Gerber
for shelf space and market share remains to be seen. When the
efficiencies of the merger are combined with the new platform for
product innovation, however, it appears more likely than not that
Gerber's own predictions of more intense competition, see DX 701 at 199;
DX 717 at 147; DX 703 at 183, will come true.
The conditions for increased competition in the form of product
innovation and product differentiation will be enhanced by the merger,
because the distribution of the combined entities will add Heinz's ACV
to Beech-Nut's ACV. Current Heinz policy disfavors attempts to launch
new products in the absence of substantial nationwide distribution, see
Tr. 442, 446.*fn8 The testimony of defendants' expert Professor
Baker explains and justifies that policy. He testified that new product
launches are only practical when a firm's ACV is high enough — his
threshold is 70 percent — to ensure higher levels of distribution, so that
marketing is cost effective, see Tr. 990.
The merged entity will have an ACV of about 90 percent (some 10
percent of food stores carry only Gerber). That ACV will be high enough
to support introduction of the Heinz Environmental "Oasis" program that
is already in place in Europe, as well as a planned aseptic baby food
product. As Heinz describes its Oasis program, it is an effort to
convince mothers that Heinz baby food is "more nutritious and safe than
anything that they can do themselves." PX 695.
The FTC asserts that Heinz has over-estimated the probable success of
the Oasis program, challenges Professor Baker's use of an ACV threshold
of 70 percent as too high, and argues that there are no barriers to
Heinz's innovation because it has the ability to spread development
costs for new products over its broader world markets, thereby making
development more cost effective. Those assertions, however, are mainly
lawyers' arguments. Their record support in Dr. Hilke's conclusory
testimony I found unconvincing.
[T]he economic concept of competition, rather than
any desire to preserve rivals as such, is the lodestar
that shall guide the contemporary application of the
antitrust laws. . . . [T]his principle requires the
district court . . . to make a judgment whether the
challenged acquisition is likely to hurt consumers, as
by making it easier for the firms in the market to
collude, expressly or tacitly, and thereby force price
above or farther above the competitive level.
Hospital Corp. of Am. v. FTC, 807 F.2d 1381, 1386 (7th Cir. 1986)
(Posner, J.). The Commission made its prima facie case by showing
increased market concentration. The defendants rebutted that case with
proof that the proposed merger will in fact increase competition. The
Commission, responded to the rebuttal case essentially with only
"Section 7 involves probabilities, not certainties or possibilities.
The Supreme Court has adopted a totality of the circumstances approach
to the statute, weighing a variety of factors to determine the effects
of a particular transaction on competition." Baker Hughes, 908 F.2d at
984. I find it more probable than not that consummation of the
Heinz/Beech-Nut merger will actually increase competition in jarred baby
food in the United States.
Weighing the equities in a merger case requires considering "the
potential benefits, public and private, that may be lost by merger
blocking injunction, whether or not those benefits could be asserted
defensively in a proceeding for permanent relief." FTC v. Weyerhaeuser
Co., 665 F.2d 1072, 1084 (D.C.Cir. 1981). The public equities involved
in this case are quite straightforward.*fn9 On the one hand, if the
merger is allowed to proceed before the full-scale administrative
proceedings contemplated by the Federal Trade Commission Act can be had,
the outcome of such proceedings
will not matter, because the Canajoharie plant will be closed, the
Beech-Nut distribution channels will be closed, the new label and
recipes will be in place, and it will be impossible as a practical
matter to undo the transaction. On the other hand, if the Commission's
motion for preliminary injunction is granted, the defendants' right of
appeal under 28 U.S.C. § 1292 (a)(1) will not matter: "[I]t is well
recognized that the issuance of a preliminary injunction prior to a full
trial on the merits is an extraordinary and drastic remedy. This is
particularly true in the acquisition and merger context, because, as a
result of the short life-span of most tender offers, the issuance of a
preliminary injunction blocking an acquisition or merger will in all
likelihood prevent the transaction from ever being consummated." FTC v.
Exxon Corp., 636 F.2d 1336, 1343 (D.C.Cir. 1980).
It is undisputed that a preliminary injunction would kill this merger.
Appellate review of my decision in this cast is thus, as a practical
matter, available only if the motion for preliminary injunction is
denied. While this observation does not affect the overall resolution of
the instant motion, it is a factor that tips the balance of the equities
slightly in favor of denying the motion.
Although the Commission did establish a prima facie case supporting
a preliminary injunction, it did not effectively respond to the
defendants' rebuttal evidence, and it ultimately failed to sustain its
burden of persuasion for the proposition that it is likely to succeed on
the merits. Having considered the Commission's likelihood of ultimate
success, and having weighed the equities, I conclude that it would not
be in the public interest to grant the Commission's motion for
preliminary injunction. An appropriate order accompanies this Opinion.