FTC Imposes Conditions on the Acquisition of FAG Kugelfischer Georg Schafer AG by INA-Holding Schaeffler KG

The Federal Trade Commission today announced a proposed consent order with INA-Holding Schaeffler KG (INA) and FAG Kugelfischer Georg Schafer AG (FAG) that will permit INA to complete its acquisition of FAG, while remedying the likely anticompetitive impact identified in the cartridge ball screw support bearing (CBSSB) market. Under the terms of the proposed order, INA and FAG would be required to divest FAG's CBSSB business to Aktiebolaget SKF (SKF) no later than 20 business days from the date on which INA begins its acquisition of FAG. In addition, INA and FAG would be required to provide prior notice to the Commission before entering into any joint venture activity related to North America with NTN Corporation of Japan (NTN), a large producer of bearings worldwide.

"This acquisition would have given INA a monopoly in the CBSSB market worldwide. The proposed order ensures that SKF will replace FAG as a competitor, maintaining the competition that existed before the acquisition to the benefit of customers," said Joseph J. Simons, Director of the FTC's Bureau of Competition.

The Parties and the Proposed Transaction

INA is a German corporation, with its headquarters in Herzogenaurach, Germany. INA is engaged in the research, development, manufacture, and sale of various types of ball and roller bearings. INA's principal subsidiary in the United States is located in Fort Mill, South Carolina.

FAG is also a German corporation, with its headquarters in Schweinfurt, Germany. FAG is also engaged in the research, development, manufacture, and sale of a variety of ball and roller bearings. FAG's principle subsidiary in the United States, Barden Corporation, is located in Danbury, Connecticut.

SKF is a Swedish corporation, with its headquarters in Goteborg, Sweden. SKF is the largest supplier of ball and roller bearings in the world.

On or about September 13, 2001, INA announced a cash tender offer to acquire all of the issued and outstanding shares of FAG. On or about October 15, 2001, FAG announced that it had reached a legally binding agreement with INA regarding the pricing of the acquisition and the management of the combined firm. The acquisition is valued at approximately $650 million.

The FTC's Concerns Regarding the Proposed Transaction

According to the Commission's complaint, the relevant line of commerce in which to analyze the competitive effects of the acquisition is the research, development, manufacture, and sale of CBSSBs, a type of bearing used in the manufacturing of machine tool equipment. CBSSBs are sold both to original equipment manufacturers as well as after-market customers for replacement purposes. The complaint alleges that the world is the relevant geographic area in which to analyze the competitive effects of the acquisition.

The Commission's complaint states that INA and FAG are the only two suppliers of CBSSBs in the world. The market for the research, development, manufacture, and sale of CBSSBs is highly concentrated, as measured by the Herfindahl-Hirschman Index. The proposed acquisition, if consummated, would result in a monopoly in the relevant market.

The complaint further alleges that entry into the research, development, manufacture, and sale of CBSSBs is a difficult process because of, among other things, the time and cost associated with researching and developing a line of CBSSB products, acquiring the necessary production assets, and developing the expertise needed to successfully design, produce, and market these products. New entry is not likely to occur to deter or counteract adverse competitive effects from the acquisition because the costs of entering the market and producing CBSSBs are high relative to the potential sales opportunities available to a new entrant. It would take more than two years for an entrant to accomplish the steps required for entry and achieve a significant market impact. Thus, new entry would not occur in a timely manner to deter or counteract the adverse competitive effects of the acquisition.

According to the Commission's complaint, the effects of the acquisition, if consummated, may be to lessen competition and to create a monopoly in the relevant market in violation of Section 7 of the Clayton Act, as amended, and Section 5 of the FTC Act, as amended. The Commission's complaint details the potential effects of the acquisition as: a) eliminating actual, direct, and substantial competition between INA and FAG in the relevant market; b) creating a monopoly in the relevant market, thereby substantially increasing the likelihood that INA will unilaterally exercise market power in the relevant market; c) reducing current incentives to improve service and product quality, or pursue further innovation in the relevant market; and d) increasing the likelihood that customers of CBSSBs would be forced to pay higher prices.

Terms of the Consent Order

The proposed consent order effectively remedies the acquisition's anticompetitive effects in the worldwide market for CBSSBs by requiring INA and FAG to divest FAG's CBSSB business. The business consists of, among other things, FAG's specialized tooling equipment, technical drawings, advertising and training materials, customer lists, and other assets used in the research, development, manufacturing, quality assurance, marketing, customer support and sale of CBSSBs (the CBSSB Assets). Pursuant to the proposed consent order, INA and FAG are required to divest the CBSSB Assets to SKF within 20 business days from the date on which INA begins its acquisition of FAG. If the Commission determines that SKF is not an acceptable buyer, or that the manner of the divestiture is not acceptable, INA and FAG must rescind the sale to SKF within three business days, and divest the CBSSB Assets to a Commission-approved buyer within three months. If INA and FAG have not divested the CBSSB Assets within the time and in the manner required by the proposed consent order, the Commission may appoint a trustee to divest the CBSSB Assets and any additional FAG machinery that the trustee deems appropriate, subject to Commission approval.

As explained in the Commission's Analysis of Agreement Containing Consent Orders To Aid Public Comment, the Commission is satisfied that SKF is a well-qualified acquirer of the divested assets. SKF is a publicly-traded Swedish corporation and the largest supplier of ball and roller bearings in the world. SKF has been active in the bearings industry since 1907, and currently has production sites in 22 countries around the world and sales activities in almost every country in the world. SKF is also a current producer of ball screw support bearings, the product from which CBSSBs were originally derived. Consequently, SKF has the necessary industry expertise to manufacture and sell CBSSBs, and its entry into the CBSSB market will effectively replace the competition being eliminated by INA's acquisition of FAG. Moreover, SKF does not pose separate competitive issues as the acquirer of the divested assets.

In addition to divesting the CBSSB Assets, the Commission's proposed order also addresses potential competitive issues raised by a possible future joint venture between FAG and NTN, a large producer of bearings worldwide. Although no joint activities have taken place to date, a preliminary agreement between FAG and NTN indicates that a wide range of possible joint marketing, production, and sales activities are contemplated by the joint venture. INA has publicly asserted that it welcomes the alliance with NTN and is prepared to continue the cooperation with NTN after its acquisition of FAG. Because such activities create the possibility of a future global three-firm alliance, which may not otherwise trigger Hart-Scott-Rodino reporting requirements, the Commission's proposed order requires INA and FAG to provide the Commission prior notice before entering into any such joint venture activities with NTN affecting North America. This requirement will give the Commission an opportunity to review such activities for potential competitive harm before they take place.

Other Terms of the Proposed Order

The proposed consent order contains a number of additional provisions that are designed to ensure that the divestiture of the CBSSB Assets is successful. Among other things, for a period of six months, INA and FAG must provide SKF with personnel, assistance, and training at no cost to SKF. If requested by SKF, INA and FAG are required to provide transitional manufacturing services at variable cost to SKF for up to six months. To further facilitate SKF's entry into the CBSSB market, the proposed consent order also prohibits INA and FAG from using any catalog numbers currently used by FAG to identify its CBSSBs.

The proposed consent order also includes an Order to Maintain Assets, to preserve the competitive viability and independence of the CBSSB Assets pending divestiture. The Order to Maintain Assets provides, among other things, that the Commission may appoint one or more monitors to ensure that INA and FAG expeditiously comply with their obligations under the proposed consent order.

The Commission vote to accept the proposed consent order and place a copy on the public record, and to approve the complaint and the Order to Maintain Assets was 4-0, with Chairman Timothy J. Muris not participating. The order will be subject to public comment for 30 days, until January 22, after which the Commission will decide whether to make it final. Comments should be sent to: Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, D.C. 20580.

Copies of the complaint and the proposed consent order are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

The FTC's Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published "Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws," which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

(File No. 021-0002)