FTC Challenges Flow International's Proposed Acquisition of Rival OMAX Corp.

The Federal Trade Commission today issued a complaint charging that Flow International Corporation’s (Flow) proposed $109 million acquisition of rival waterjet manufacturer OMAX Corporation (OMAX) would be anticompetitive and in violation of federal antitrust laws. Under the terms of a consent order resolving the Commission’s complaint and allowing the transaction to proceed, Flow will be required to grant to any firm a royalty-free license to two OMAX patents relating to the controllers used in waterjet cutting systems.

“Flow and OMAX are each other’s closest competitor in the highly concentrated U.S. market for waterjet cutting systems,” said Jeffrey Schmidt, Director of the FTC’s Bureau of Competition. “The consent agreement announced today will remedy the Commission’s competitive concerns, and will benefit consumers by ensuring that Flow will continue to face direct competition in this market going forward.”

The Relevant Product Market

The relevant product market at issue in this transaction is the development, manufacture, marketing, and sale of waterjet cutting systems. These systems use high-pressure water mixed with abrasive garnet particles to cut a wide variety of materials, including steel and stone. Both Flow and Omax have developed PC-based controllers that automatically compensate for the unique cutting characteristics of waterjet systems. The controllers, for example, manage the taper of the waterjet – the waterjet expands as it leaves the nozzle, forming a cone shape – and the lag – the faster the cutting head moves, the more the waterjet trails behind the cut.

Flow and OMAX are the leading manufacturers of waterjet cutting systems in the United States. Flow, a publicly traded company, is headquartered in Kent, Washington. Its PC-based
controller, along with the accompanying sales and marketing efforts, has made Flow the leading supplier of waterjet cutting systems in the United States. OMAX, Flow’s closest competitor, also uses PC-based controllers to run its waterjet cutting systems, and holds two broad patents covering controllers. OMAX’s controllers are a significant factor behind its position as the second leading supplier of waterjet cutting systems in the United States.

On December 5, 2007, Flow signed an exclusive option agreement to negotiate the acquisition of OMAX. Under the agreement, Flow and OMAX will work to negotiate a definitive agreement for Flow to acquire OMAX. Upon closing, Flow will pay approximately $109 million in cash and stock with the potential for a contingent earn-out in two years of up to $26 million. The closing also will settle a long-running and expensive lawsuit between Flow and OMAX relating to controllers and patents.

The Commission’s Complaint

The Commission’s complaint alleges that the proposed acquisition would be anticompetitive and would substantially lessen competition in the U.S. market for the development, manufacture, marketing, and sale of waterjet cutting systems, in violation of Section 5 of the FTC Act and Section 7 of the Clayton Act, as amended. Specifically, the complaint alleges that the acquisition would eliminate direct competition between Flow and OMAX and enable Flow to exercise unilateral market power in the relevant market.

According to the complaint, both Flow and OMAX produce waterjet cutting systems that feature relatively inexpensive yet sophisticated PC-based controllers. These controllers make FLOW and OMAX each other’s closest competitors in the relevant market. The complaint further alleges that OMAX holds two broad patents that prevent new entry sufficient to deter or counteract the likely anticompetitive harm that would be caused by the proposed acquisition.

Terms of the Consent Order

The Commission’s consent order is designed to remedy the alleged anticompetitive effects of the proposed acquisition. The order requires Flow to grant each competitor seeking one a royalty-free license to OMAX’s two broad patents. Since other aspects of Flow and OMAX’s businesses can easily be duplicated by competitors, requiring Flow to grant these licenses will ensure that other firms are able to replace the competition that would otherwise have been eliminated by the proposed acquisition.

The Commission vote to accept the complaint and consent order was 4-0. The FTC will publish an announcement regarding the agreement in the Federal Register shortly. The complaint, consent order, and an analysis to aid public comment can be found on the Commission’s Web site at http://www.ftc.gov/os/caselist/0810079/index.shtm. The agreement will be subject to public comment for 30 days, beginning today and continuing through August 8, 2008, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, Room H-135, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC is requesting that any comment filed in paper form near the end of the public comment period be sent by courier or overnight service, if possible, because U.S. postal mail in the Washington area and at the Commission is subject to delay due to heightened security precautions.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the documents related to this matter are available from the FTC's web site at http://www.ftc.gov and the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC’s Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to antitrust@ftc.gov, or write to the Office of Policy and Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580. To learn more about the Bureau of Competition, read “Competition Counts” at http://www.ftc.gov/competitioncounts.

(FTC File No. 081-0079)
(Flow-OMAX.final)