Resolving Anticompetitive Concerns, FTC Clears Dainippon's Acquisition of Bayer Corp.'s High-Performance Organic Pigment Business

The Federal Trade Commission today said that it will require Japan's Dainippon Ink and Chemicals, Incorporated (Dainippon) to divest certain assets prior to the proposed acquisition by its U.S. subsidiary Sun Chemical Corporation (Sun Chemical) of Bayer Corporation's (Bayer) high-performance pigment business. Under the terms of a proposed consent order with the FTC, Dainippon must divest Sun Chemical's perylene business to Ciba Specialty Chemicals Inc. and Ciba Specialty Chemicals Corporation (collectively Ciba), or to another Commission-approved buyer if it is unable to transfer the assets to Ciba.

Perylenes are organic pigments used to impart unique shades of red color to a number of products, including coatings, plastics, and fibers. They are termed high-performance organic pigments because they offer a particularly high degree of durability and transparency. High-performance organic pigments in general, and perylenes specifically, are significantly more expensive than commodity (or classical) pigments, a second type of organic pigments.

"After conducting a thorough investigation, the Commission has appropriately required the divestiture of Sun Chemical's perylene business to Ciba," said Joe Simons, Director of the FTC's Bureau of Competition. "In the absence of such a requirement, competition in this important industrial market would be reduced worldwide, from three significant participants to two, leading to higher prices for consumers." He noted that perylenes are often used in commercial automobile paint applications, helping to prevent colors from fading and ensuring

that such coatings can endure prolonged exposure to sunlight and weather.

Parties to the Transaction

Dainippon is a diversified global chemicals company based in Tokyo, Japan. Primarily through Sun Chemical, Dainippon manufactures and sells a full range of organic pigments, including perylenes. Sun Chemical is the third-largest supplier of perylenes in the world. Its perylenes are produced through two third-party "toll" manufacturers, Lobeco Products and Forth Technologies, which are located in South Carolina and Kentucky, respectively. Sun Chemical provides these toll manufacturers the intellectual property, manufacturing know-how and raw materials, as well as some of the equipment, to produce perylenes.

Bayer, a subsidiary of Bayer AG, is headquartered in Pittsburgh, Pennsylvania, and engages in the healthcare, life sciences, polymers, and chemicals industries. Bayer manufactures organic pigments at its facilities located in Bushy Park, South Carolina, and Lerma, Mexico. Bayer primarily participates in the high performance pigments segment and is considered a leader in the production of perylenes, which it manufactures at the Bushy Park plant. It is currently the second largest supplier of perylenes in the world.

According to the FTC's complaint, the proposed acquisition would violate Section 5 of the FTC Act and Section 7 of the Clayton Act, in the world market for perylenes. Sun Chemical and Bayer are two of only four viable suppliers of perylenes, the complaint states. The market for perylenes is already highly concentrated and the proposed acquisition would eliminate the vigorous head-to-head competition between Sun Chemical and Bayer that has benefitted perylene customers in the past. By eliminating this competition, the proposed acquisition would allow the combined firm unilaterally to exercise power, and also would increase the likelihood of coordinated interaction among the remaining perylene suppliers. The result, the FTC contends, would be higher perylene prices and reduced innovation and service within the market.

The Commission's complaint also states that entry into the perylene market by another competitor is not likely and would not be timely to deter or counteract any anticompetitive effects of the proposed transaction. It is anticipated that any new entry would take more than two years and is unlikely to occur due to the significant capital investment required to become a viable perylene supplier, relative to the limited sales opportunities available to new entrants.

The proposed consent order, which is subject to public comment and final Commission approval, requires Dainippon to divest Sun Chemical's perylene business to Ciba, a diversified specialty chemicals company that is a leading supplier for pigments, but does not currently manufacture or sell perylenes. According to the Commission, this divestiture would fully remedy the potential anticompetitive impact of the transaction as proposed in the following ways: first, it would allow the divestiture of the Sun Chemical's perylene business to the best-positioned acquirer; next, Ciba will receive everything it needs to continue the divested assets as an ongoing business; and third, as detailed below, the proposed consent agreement contains certain measures designed to ensure an effective transition of the Sun Chemical assets to Ciba.

Under terms of the proposed order, Ciba will receive all of the assets necessary to replace the competition by Sun Chemical in the perylene market. Sun Chemical will divest its entire perylene business to Ciba, including: all of its current perylene products; all perylene research and development; manufacturing technology; scientific know-how; technical assistance and expertise; customer lists; raw material, intermediate, and finished product inventory; and perylene product names, colors, codes, and trade dress (associated identifying colors and trademarks). As Sun Chemical manufactures perylenes through toll manufacturers, no manufacturing equipment or facilities are included in the proposed divestiture. Instead, Ciba has entered into contracts with these manufacturers that will become effective when the divestiture has closed.

The proposed order also provides Ciba with the opportunity to hire one or more of Sun Chemical's employees who have key responsibilities in the perylene business. These employees will help Ciba understand Sun Chemical's perylene manufacturing, research, and development process. Sun Chemical also will be required to provide technical assistance to Ciba for one year after the divestiture to ensure it is able to successfully take over the perylene product line. In addition, the proposed order will allow the FTC to appoint an interim monitor to supervise the transfer of assets and to ensure that Sun Chemical provides the required technical assistance to Ciba.

Finally, in the event that Sun Chemical's divestiture to Ciba fails to take place, the proposed order will allow the Commission to remedy the anticompetitive effects of the transaction in other ways. For example, if the FTC notifies Dainippon before the proposed order is finalized that Ciba is not an acceptable acquirer of the perylene assets, or that the manner in which the divestiture was made is unacceptable, the order would require Dainippon to rescind the Ciba transaction and divest the assets to a Commission-approved buyer within 90 days. If the assets are not divested to a new acquirer within this time, the FTC may appoint a trustee to divest them in a manner consistent with the order.

In examining the proposed transaction, the Commission also investigated the parties' product overlap in quinacridones, another class of red-shade high-performance organic pigment. Unlike the market for perylenes, the acquisition would not increase the likelihood that consumers would pay higher prices for quinacridones, or that service and innovation for these products would decrease. Two companies, Ciba and Clariant AG (Clariant), are by far the largest manufacturers of quinacridones in the world, and they are the top two choices for many consumers. With respect to quinacridones, Sun Chemical and Bayer are each less than half the size of Ciba or Clariant. Unlike the market for perylenes, where Sun Chemical and Bayer often vigorously compete head-to-head for business, the parties are less likely to face each other in head-to-head competition for quinacridone business. Accordingly, many customers believe that after the proposed acquisition, the combined Sun Chemical/Bayer organic pigments business will become a stronger quinacridone competitor, able to more effectively compete against Ciba and Clariant. In addition, several new quinacridone suppliers recently have entered the market, providing increased competition.

The Commission vote to accept the proposed consent order and place a copy on the public record was 5-0. The proposed consent order will be subject to public comment for 30 days, until March 3, 2003, after which the Commission will determine whether to make it final. Comments should be sent to: FTC, Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, D.C. 20580.

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 complaint, proposed consent order and an analysis to aid public comment 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 Commission enforces, the FTC 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.

(FTC File No.: 021-0100)