Summary of Commission Decision of 5 March 2008 declaring a concentration to be compatible with the common market and the functioning of the EEA Agreement (Case COMP/M.4747 — IBM/Telelogic)
Date: 2008-08-01
Institutions: European Commission
Subjects: computer systems, economic concentration, information technology, merger control, restrictive-practice authorisation, software

C 195/6

EN

Official Journal of the European Union

1.8.2008

Summary of Commission Decision

of 5 March 2008

declaring a concentration to be compatible with the common market and the functioning of the
EEA Agreement

(Case COMP/M.4747 — IBM/Telelogic)

(Only the English version is authentic)

(2008/C 195/05)

On 5 March 2008,
the Commission adopted a Decision in a merger case under Council Regulation (EC)
No 139/2004 of 20 January 2004 on the control of concentrations between undertakings, and in particular
Article 8(1) of that Regulation. A non-confidential version of the full decision can be found in the authentic language
of the case and in the working languages of the Commission on the website of the Directorate-General for Competition,
at the following address:

http://ec.europa.eu/comm/competition/index_en.html

1. INTRODUCTION

refer the case to the Commission, the decision concludes
that it is deemed to have a Community dimension.

1. On 29 August 2007, the Commission received a notifica-
tion of a proposed concentration pursuant to Article 4 and
following a referral pursuant to Article 4(5) of Regulation
(EC) No 139/2004 (‘the Merger Regulation’) by which the
undertaking International Business Machines Corporation
(‘IBM’) acquires within the meaning of Article 3(1)(b) of the
Merger Regulation control of the whole of Telelogic AB
(‘Telelogic’) by way of purchase of shares.

2. After examination of

the notification,

the Commission
concluded on 3 October 2007 that it raised serious doubts
as to its compatibility with the common market and the
functioning of the EEA agreement. The Commission there-
fore initiated proceedings in accordance with Article 6(1)(c)
of the Merger Regulation.

2. THE PARTIES

4. THE RELEVANT MARKETS

4.1. Relevant Product Market

6. The proposed transaction has an impact on the software
development
tools
are used to create new and to develop existing software
applications. Both IBM and Telelogic are suppliers of soft-
ware development tools.

tools industry. Software development

7.

In a previous decision, the Commission left open the ques-
tion of whether an overall market for software development
tools exists, or whether distinct product markets within the
area of software development tools have to be defined.

3.

IBM (‘the notifying party’), a US company, is active world-
wide in the development, production and marketing of a
variety of information technology (‘IT’) products, software
and services.

8. The decision concludes that the relevant product markets in
which the proposed concentration might have a significant
competitive impact are the following:

4. Telelogic is a Swedish company active in the development

and sale of software development tools (1).

— the market

for Modelling tools, whether or not

this
market is further subdivided between UML (2) and non
UML tools,
tools for IT applications and tools for
systems software and for different customer groups,

3. ARTICLE 4(5) REFERRAL

5. On 28 June 2007,

the Commission received a referral
request from the notifying party pursuant to Article 4(5) of
the Merger Regulation. Since the notified concentration is
capable of being reviewed under the national competition
laws of 10 different Member States and no Member State
expressed its disagreement with respect to the request to

— the market for Requirements Management tools, whether
or not this market is further subdivided between tools
for IT applications and tools for systems software and
for different customer groups.

9. However, due to the heterogeneous nature of Modelling and
Requirements Management tools the two product market
definitions only can provide a broad framework for the
competitive analysis of the proposed transaction.

(1) Occasionally, Telelogic and IBM are collectively referred to as ‘the

(2) UML (Unified Modelling Language) can best be characterised as a

parties’.

general-purpose, open, and standardised modelling language.

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4.2. Relevant Geographic Markets

10. The in-depth investigation indicated that, apart

from
language customisation, suppliers offer the same Modelling
and Requirements Management tools throughout the world,
and customers tend to buy the same products for their
different divisions or business units regardless of
their
geographic location.

11. The decision leaves the exact definition of

the relevant
geographic markets open in the present case, as the conclu-
the competitive assessment remains unchanged
sion of
under a worldwide or an EU-wide definition.

5. COMPETITIVE ASSESSMENT

12. The decision to initiate proceedings identified three theories
of harm: (i) unilateral price increases; (ii) decreased incen-
tives for innovation; and (iii) decrease in interoperability of
software tools.

5.1. Unilateral price increases

13. For Modelling tools, the industry analyst Gartner estimates
the parties' combined ‘market share’ at 68 % worldwide
(IBM: 48 % and Telelogic: 20 %), and 69 % in Europe
(IBM: 45 % and Telelogic: 25 %). According to corrected
market share data submitted by IBM the merged entity
would arrive at a joint worldwide market
share for
Modelling tools of [30-40] %.

14. For Requirements Management tools, Gartner estimates the
combined ‘market share’ of the parties at 62 % worldwide
(IBM: 25 % and Telelogic: 37 %) and 65 % in Europe
(IBM: 22 % and Telelogic: 43 %). According to corrected
market
the merged
submitted by
entity would arrive at a joint worldwide market share for
Requirements Management tools of [20-30] %.

share data

IBM,

15. While Gartner's estimates appear to be too large, IBM's esti-
mates would not appear to be entirely correct either, as
they underestimate the parties' own license revenues and
overestimate the importance of small vendors. In the Deci-
sion, the Commission estimates the worldwide combined
market share of
the parties at [30-40] % for Modelling
tools (or at [50-60] %, if only UML tools are considered),
and at [20-30] % for Requirements Management tools.

16. However, given the heterogeneous nature of Modelling and
Requirements Management tools caution is required when
using market shares as a direct proxy for market power in
the present case. In view hereof, the potential anti-competi-
tive effects of the merger have primarily been assessed on
the basis of an analysis of closeness of substitution.

17. An analysis

of

the

respec-
tive Telelogic's and IBM's Modelling and Requirements
Management tools confirms that significant differences exist
between the tools of both companies. The specific quali-

functionalities

the

of

ties
and functionalities of Telelogic's Modelling and
Requirements Management tools make them more suitable
for use by system customers than by IT customers. On the
other hand, a comparison of the qualities and functional-
ities which are of particular interest to IT developers indi-
cate the opposite:
IBM's Modelling and Requirements
Management tools are more suitable than Telelogic's tools
for use by IT customers.

18. The differences in functionalities and commercial

focus
between Telelogic's and IBM's Modelling and Requirements
Management tools are also reflected in the type of custo-
mers each of these companies serve. Telelogic's customers
are primarily active in typical system sectors, such as aero-
space
and automotive
sectors. IBM's customers are more concentrated in the IT,
the financial and public administration sectors.

communications

and defense,

19. The in-depth investigation, which included the sending of
inter-
three rounds of detailed requests for information,
views with customers and competitors and an analysis of
win/loss data, confirmed that Telelogic's Modelling and
Requirements Management tools cannot be considered as
close substitutes to IBM's Modelling tools.

20. Even if some customers would consider Telelogic's and
IBM's offerings as (relatively) close substitutes for certain
uses, the limited number of occasions in which this would
be the case, would not allow the merged entity to increase
prices post merger. There is a sufficiently large group of
suppliers of Modelling and Requirements Management tools
with functionalities close to that provided by IBM's and
Telelogic's tools, which would render such a price increase
unprofitable. The circumstance that a procurement decision
(especially for big orders) is often taken on the basis of a
tender-like procurement process implies that in such cases
market shares of IBM and Telelogic play a less important
role.

5.2. Decreased incentives for innovation

21. In the decision to initiate proceedings,

it was noted that
some customers voiced concerns that there would be less
innovation as a direct consequence of the lack of effective
competition in Requirements Management and Modelling
tools after the proposed concentration. Therefore in the
course of the in-depth investigation, the Commission has
examined whether or not the merged IBM/Telelogic would
have reduced incentives to innovate in comparison to the
incentives of
in the
absence of the notified transaction).

IBM and Telelogic separately (i.e.

22. The in-depth investigation revealed however that competi-
tion between IBM and Telelogic has not been a major driver
for innovation in the recent past. Innovation in the soft-
ware development industry has primarily been spurred by
customer's needs as well as by improved standards for UML.

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23. Further, as demonstrated above with respect

to both
Modelling and Requirements Management tools, IBM's and
Telelogic's products are not close substitutes, as they gener-
ally address different types of customers and different types
of needs. Therefore,
the competition
between IBM and Telelogic as a result of the proposed
transaction would not result in the elimination of a major
factor of
innovation in the markets for Modelling and
Requirements Management tools.

the removal of

24. Therefore, the decision concludes that the proposed transac-
tion is unlikely to reduce the pace of innovation in the
markets for Requirements Management and Modelling tools
in the near future.

5.3. Decrease in interoperability of software tools

25. The decision to initiate proceedings raised concerns that the
merged entity would have less incentive to provide open
interfaces that allow integration with third parties' software
development tools.
the
parties (Microsoft) advanced the argument that the merged
entity would have the ability and the incentive to foreclose
its competitors on the markets (or market segments) for
software,
Integrated Development Environments

In particular, one competitor of

(IDEs)

Software Change and Configuration Management (SCCM)
tools, and Application Server Software Platforms (ASSP).

26. The decision concludes however, that the characteristics of
the markets for Modelling and Requirements Management
tools, especially for high-end tools in these two markets,
rule out a successful foreclosure strategy. While it would be
technically possible for IBM to obscure communication
protocols and file formats to thwart interoperability with
third parties' tools, the merged entity would have no incen-
tive to engage in such a strategy, as the potential costs
would far outweigh the potential benefits.

6. CONCLUSION

27. The Commission concludes

in the Decision that

the
proposed concentration will not give raise to any competi-
tion concerns as a result of which effective competition
would be significantly impeded in the Common Market or
in a substantial part of it. Consequently, the Commission
intends to declare the concentration compatible with the
in accordance
Common Market and the EEA Agreement,
with Article 8(1) of the Merger Regulation and Article 57
of the EEA Agreement.