[Federal Register Volume 62, Number 196 (Thursday, October 9, 1997)]
[Notices]
[Pages 52773-52775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26828]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF JUSTICE

Antitrust Division
[Civil Action No. 1:97CV01515]


Public Comments and Response on Proposed Final Judgment United 
States v. Raytheon Company, et al.

    Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. 
16(b)(h), the United States of America hereby publishes below the 
comments received on the proposed Final Judgment in United States v. 
Raytheon Company, et al., Civil Action No. 1: 97CV01515, filed in the 
United States District for the District of Columbia, together with the 
United States' response to the comments.
    Copies of the comments and responses are available for inspection 
in Room 215 of the U.S. Department of Justice, Antitrust Division, 325 
7th Street, N.W., Washington, D.C. 20530, telephone: (202) 514-2481, 
and at the office of the Clerk of the United States District of 
Columbia, United States Courthouse, Third Street and Constitution 
Avenue, N.W., Washington, D.C. 20001. Copies of any of these materials 
may be obtained upon request and payment of a copying fee.
Constance K. Robinson,
Director of Operations Antitrust Division.

U.S. Department of Justice

Antitrust Division, 1401 H Street, City Center Building, 
Washington, DC 20530.

September 26, 1997.
John Heston, Senior MMIC Designer,
David Heston, Technical Director Space Programs,
Texas Instruments, Inc., 13510 North Central Expressway, MS 209, 
Dallas, Texas 75265

Re: United States, et al. v. Raytheon Company, et al.; Civil Action 
No.: 1:97CV01515 (District of Columbia, July 2, 1997)

    Dear Messrs. John Heston and David Heston: This letter responds 
to your letter of August 4, 1997, commenting on the proposed Final 
Judgment in the above-captioned civil antitrust case challenging the 
acquisition by Raytheon Company of Texas Instruments' Defense 
Systems and Electronics Unit. The Complaint alleges that the 
acquisition violates Section 7 of the Clayton Act, as amended, 15 
U.S.C. Section 18, because it is likely substantially to lessen 
competition in the manufacture and sale of gallium arsenide 
monolithic microwave integrated circuits (MMICs) in the United 
States. Under the proposed Final Judgment, the defendants are 
required to divest Texas Instruments' Defense Systems and 
Electronics Unit MMICs business located in Dallas, Texas.
    In your letter, you expressed concern that the proposed Final 
Judgment may degrade national security, cause prices of MMICs to 
increase substantially, eliminate efficiencies, slow technological 
development of MMICs as well as transmit and receive modules (TR 
modules), which house the MMICs, and harm synergies between the 
development of MMICs and TR modules. Your letter recommended 
approval of the proposed acquisition, or in the alternative, that 
Texas Instruments' Defense Systems and Electronics Unit TR module 
business be divested along with the MMICs business.
    With regards to the national security issue, the U.S. Department 
of Justice and the Department of Defense (DoD) found no evidence 
that challenging this transaction would compromise national 
security. After a thorough investigation, the Antitrust Division and 
DoD concluded that the proposed transaction, if not blocked, might 
lead to higher prices for MMICs. In addition, access to these 
critical components of advanced radar systems might be foreclosed to 
Raytheon's radar competitors, thereby, increasing DoD's costs for 
new radar programs. These radars are an important part of our 
nation's defense.
    The MMIC cost increases you project, should the acquisition not 
occur, are not supported by the evidence obtained in the 
Department's investigation. Indeed, the very MMIC and TR module 
synergies you hypothesize that would be obtained from the 
acquisition will likely also be obtained by an alternative 
purchaser. For example, if the alternative purchaser is a commercial 
MMIC and/or TR module supplier, the design and capacity utilization 
efficiencies you discuss should accrue to that purchaser as well. 
Under these circumstances, the costs of MMICs will not increase and, 
ultimately, may decline. Moreover, there is little incentive for the 
commercial alternative purchaser to spurn military business, as you 
claim, especially in view of the excess capacity in the industry.
    This same rational applies to the likelihood of advancement of 
the MMIC and TR module technology. As you point out, DoD programs 
require state-of-the-art MMICs and TR modules. First, technological 
advancements should be enhanced by maintaining competition in the 
industry not by eliminating it. Second, ``cost plus'' contracts, 
which are common in military procurement, by themselves will not 
ensure low costs or more technological development without ample 
competition in the marketplace. Without competition, there is little 
incentive to keep costs down or innovate in MMICs or TR modules. 
Third, Raytheon, by acquiring the Texas Instruments' TR module 
business, likely will achieve efficiencies in the research and 
development and production of its TR modules and MMICs making the 
achievement of ``cross functional technology breakthroughs'' 
possible.
    Finally, because our investigation found that competition in the 
TR module industry is robust and that the MMIC business could easily 
be segregated for purposes of divestiture, sale of the entire R/F 
Microwave Unit, as you propose, is not required.
    The Antitrust Division appreciates you bringing your concerns to 
our attention and hopes that this response will alleviate them. 
While the Department understands your positions, we believe that the 
proposed Final Judgment will adequately address the competitive 
concerns created by the Raytheon's acquisition of Texas Instruments' 
Defense Systems and Electronics Unit. Pursuant to the Antitrust 
Procedures and Penalties Act, a copy of your letter and this 
response will be published in the Federal Register and filed with 
the Court.
    Thank you for your interest in the enforcement of the antitrust 
laws.

      Sincerely yours,
J. Robert Kramer II,
Chief, Litigation II Section.

To: J. Robert Kramer
From: John Heston, Senior MMIC designer RTIS, David Heston, 
Technical Director Space Programs RTIS

    Claim: We claim that the July 2 order of the Department of 
Justice (97 1515) to break up the R/F Microwave business unit of 
Raytheon TI Systems (i.e. divestiture of the `MMIC Business') will 
degrade the national security in both the short term and long term. 
It is our premise that the Department of Justice made a premature 
decision due to time pressures, political pressures, and lack of 
complete information. This paper presents additional information 
relevant to the Department of Justice decision and asks for 
reconsideration.

[[Page 52774]]

    Our perspective of the July 2 consent decree: On January 6, 1997 
Raytheon proposed to purchase the Defense Systems and Electronics 
Group of Texas Instruments for <difference>$3B. In clearing the 
anti-trust issues with the proposed acquisition the technology used 
to manufacture radar components (i.e. GaAs MMIC circuits and 
microwave modules) became an issue. Several months were spent in an 
investigation of this technology and both Raytheon and Texas 
Instruments provided information on microwave power amplifiers and 
modules to the Department of Justice. With direction from the Office 
of the Secretary of Defense the Department of Justice issued a 
consent decree to allow the acquisition of TI's defense group 
provided the `MMIC Business' of Texas Instruments RF/Microwave 
Department be divested. The RF/Microwave Department employees 
<difference>800 people and had annual sales of <difference>$125M in 
1996. The RF/Microwave department is comprised of: GaAs operations 
(MMIC fabrication), module manufacturing, MMIC and module design 
groups, and program management. The `MMIC business' as decreed by 
the Department of Justice comprises <difference>300 of these people 
(all of GaAs operations, a portion of the MMIC design and program 
management capabilities, and the microwave GaAs research lab) and 
had equivalent revenues of <difference>$50M in 1996.
    The goal of the Department of Justice decision was to keep 
Northrop Grumman and other military system suppliers competitive in 
the microwave module business by ensuring it a supply source of 
outstanding GaAs MMICs. It was the underlying assumption that this 
competition was necessary to drive down the cost of military-use 
MMICs.
    However, there are four facts that need to be reviewed again 
before the consent decree is issued. The conclusions previously 
reached regarding the impact of this consent decree need to be 
reconsidered.

Fact 1

    The `MMIC Business' spin-off company will have to raise MMIC 
costs.
    Reasons for FACT 1: The same fabrication overhead will now be 
spread over a much smaller revenue and people. Short term MMIC costs 
will soar. Initial estimates provided to the programs from the now 
`fire-walled' MMIC Business group indicate a 50% to 100% price 
increase for MMIC devices. This price increase is effective August 
1, 1997. The price increase does not include GNA or profit since 
they are still part of RTIS.
    Also, the synergy existing and being developed between the 
module and MMIC business will be broken. This synergy includes 
sharing office space, test equipment, printer/copiers, secretarial 
support, financial support, prototype parts stock, design seminars, 
and profit. As a result of eliminating this synergy, the long term 
cost of the `MMIC Business' spin-off will remain higher than they 
would have been regardless of the Buyer.

Revised Conclusion 1A

    Northrop Grumman and other military system suppliers will not be 
able to compete against Raytheon at the microwave module level in 
cost since it will be purchasing higher priced MMICs from the `MMIC 
Business' spin-off. Raytheon will still have access to their own 
MMICs which will not change in price. Raytheon will also be able to 
lower module costs due to synergy between the two module factories 
(i.e. its own module factory and the one acquired from Texas 
Instrument's RF/Microwave department.

Revised Conclusion 1B

    Short term cost to F-22 and all other RTIS microwave military 
(cost plus) programs will increase.

Fact 2

    The commercial market (not military competition) dominates the 
volume and cost of every GaAs fabrication plant and thus the cost of 
military radar MMICs.
    Reasons for FACT 2: The bulk of the fab cost is fixed. 
Therefore, volume drives the cost/die down and allows profits to 
grow. Military programs have low volumes. Even a military phased 
array such as F-22 only requires an estimated 500 wafers/year of 
high yielding power amplifier MMICs [estimate based on 440 planes 
produced in a 10 year period]. By contrast, cellular phones require 
millions of units per year (<difference>7000 wafers/year for every 1 
million phones.) And the potential commercial telecommunications 
phased array market (Teledesic, Motorola, Alcatel) is also much 
larger than the military market. To place this in perspective, in 
1996 Texas Instrument's GaAs facility produced only 414 wafers of 
high power X-band MMICs for all of its microwave customers (military 
and commercial). The only way to achieve low cost military use MMICs 
without allowing commercial volume to set the price would be to 
operate a very tiny GaAs fab.

Revised Conclusion 2A

    To provide a good supply of military MMICs, the `MMIC Business' 
spin-off must be viably competitive in the commercial market. The 
increased overhead rate of the `MMIC Business' spin-off may cause it 
to lose business to commercial competitors such as MA/COM, Triquent, 
and RFMD. Unless they are extremely successful in the commercial 
market the long term cost/availability of the military radar MMICs 
from this group is questionable. The `MMIC Business' spin-off will 
also be focusing their resources on commercial MMICs instead of 
military MMICs since they know that their survival is dependent upon 
success in that market.

Fact 3

    Military component costs (i.e. radar MMICs and modules) are 
driven by technology immaturity.
    Reasons for FACT 3: Military programs require the latest MMIC 
technology (0.25um gates, pHEMT material, highest power levels) that 
has been developed. The program costs are typically driven more by 
development of this technology and solving unexpected travails of 
the technology development than by competitive pricing analysis. All 
the process development costs involved in solving technology 
development difficulties are passed onto the government through cost 
plus contracts.
    The GaAs industry is still struggling to solve the two key 
problems that held Silicon growth down until the 1970's: reliability 
and FET pinchoff control. These two issues are not as thorny for 
lower requirement commercial MMICs.

Revised Conclusion 3

    Military MMIC cost and availability will likely be improved more 
by allowing consolidation than by increasing competition. The use of 
cost plus contracts will prevent the consolidated companies from 
arbitrarily raising prices on military programs. Commercial 
competition will keep the MMIC costs low. Teaming agreements between 
military system suppliers (as is the case on F22 where RTIS and 
Northrop Grumman are teamed together) can be used to provide a 
continuous source of microwave components to competitors.

Fact 4

    Divestiture of the `MMIC Business' divides a team that is 
acknowledged as a leader in military microwave solutions and may 
impair technical breakthroughs on future military programs. Cost of 
future military programs will be higher without these breakthroughs.

Reasons for FACT 4

    The RF/Microwave department at Texas Instruments has very good 
synergy between system requirements from government agencies and the 
technology needed to achieve these requirements. There is synergy 
between module and MMIC designers, between MMIC designers and the 
GaAs facility, and between programs and the research lab that has 
developed over the past 25 years. A number of cross functional 
engineering teams are in place to promote technology development and 
minimize re-invention. We have both worked on programs where a 
Government agency had a technology roadmap of desired system 
capability and the year they anticipated this capability becoming 
available. Through a combination of Government research programs and 
internal investments key technical areas in the research lab and 
GaAs facility were targeted for development to achieve specific 
module performance levels. Over a 3 to 4 year period, a number of 
technical breakthroughs occurred at both device (GaAs process and 
material) and design (MMIC and module) levels. These breakthroughs 
enabled system architectures up to 5 years sooner than previously 
anticipated. Hopefully this pull-up has benefited the National 
Security and also provided a lower cost solution. This type of 
technical breakthrough will be much more difficult with the `MMIC 
Business' divestiture and a breakup of the cross functional 
engineering groups developed over many years within the RF/microwave 
department.
    A secondary result of the `MMIC Business' divestiture is an 
increased turnover of personnel. Since the decision, three MMIC 
designers and six process personnel in the `MMIC Business' have 
already given notice of

[[Page 52775]]

their intention to leave the company and many others are openly 
talking of leaving due to career uncertainty created by the Justice 
Department decree. Morale is extremely low and it possibly endangers 
the core team of MMIC design/process expertise that is being 
divested.

Revised Conclusion 4

    The `MMIC Business' divestiture will increase the cost of future 
military microwave components through increased difficulty in 
achieving cross functional technology breakthroughs.

Revised Conclusion 4B

    The `MMIC Business' spin-off could potentially lose critical 
mass of its key personnel due to morale problems associated with the 
Justice Department decree.

Proposed Solution

    Keep the R/F Microwave Business unit intact. This will prevent 
an increase in MMIC costs, keep the company viable for commercial 
business, and allow the company to continue development of advanced 
technology.
    Option 1: Keep the unit with Raytheon. This will provide the 
greatest opportunity for high performance, low cost military MMICs 
and modules. Since RTIS is teamed with Northrop Grumman on the F22 
program they will be provided necessary MMICs for their module build 
as part of that agreement.
    Option 2: Spin off the entire R/F Microwave unit from RTIS. This 
will make Northrop Grumman and other military system suppliers more 
competitive. The downside is a loss of possible maturity for 
advanced MMIC processes that would have occurred with the merger 
(i.e. combination of Raytheon and TI engineers sharing information.)

Regards
John Heston, (972) 995-6051, RTIS, 13510 North Central Expressway, 
MS 209, Dallas, TX 75265
David Heston, (972) 995-6048, RTIS, 13510 North Central Expressway, 
MS 262, Dallas, TX 75265

[FR Doc. 97-26828 Filed 10-8-97; 8:45 am]
BILLING CODE 4410-11-M