Federal Trade Commission: Study Needed to Assess the Effects of Recent Divestitures on Competition in Retail Markets
Released: 2002-09-25T00:00:00

Letter

Background

FTC is an independent agency headed by five Commissioners appointed by the President and confirmed by the Senate, each serving staggered 7-year terms. FTC’s mission is, in part, to prevent business practices that are anticompetitive, deceptive, or unfair to consumers. It acts to prevent business practices that restrain competition and attempts to ensure that the marketplace continues to provide a full range of product and service options among which consumers can choose. The Bureau of Competition is FTC’s antitrust arm. FTC’s Bureau of Competition and Bureau of Economics have the responsibility for merger review. The Bureau of Economics helps to ensure that FTC considers the economic impact of its actions. To achieve this, the Bureau of Economics provides economic analysis and support to the Bureau of Competition and the Commission in carrying out FTC’s antitrust responsibilities.

FTC generally shares responsibility for enforcing the federal antitrust laws with the Department of Justice’s (DOJ) Antitrust Division. The federal antitrust statutes are the Sherman Act, as amended (15 U.S.C. 1-7); the Clayton Act, as amended (15 U.S.C. 12-27), which includes the Robinson- Patman Act; and the FTC Act, as amended (15 U.S.C. 41 et seq.). The acts’ objectives are to prevent anticompetitive behavior and preserve and promote competition in the marketplace. FTC is solely responsible for enforcing the FTC Act, while DOJ is solely responsible for enforcing the Sherman Act. Both FTC and the Antitrust Division are responsible for enforcing Section 7 of the Clayton Act, which prohibits mergers and acquisitions that may substantially lessen competition or tend to create a monopoly in any market. FTC and the Antitrust Division have clearance procedures to determine which agency will investigate a potential antitrust violation. The agencies decide which one will conduct a particular investigation primarily by examining current agency expertise in the industries at issue.

The HSR Act, which added Section 7A to the Clayton Act, requires certain parties to provide premerger notification of proposed acquisitions and mergers prior to consummation to assist FTC and the Antitrust Division in investigating whether a proposed acquisition would violate Section 7 of the Clayton Act, in that the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly. The premerger notification provisions of the HSR Act require companies exceeding certain thresholds of company size and value of the transaction to notify FTC and the Antitrust Division of the proposed merger transaction, submit documents and other information to the agencies concerning the transaction, and refrain from closing the transaction until a specific waiting period has expired, or their request for early termination of the waiting period has been granted. FTC and the Antitrust Division then have up to 30 days (15 days for cash tender offers and bankruptcy sales) from the time of the filing of the proposed merger to review the filing and determine whether to send the parties a request for additional information (a second request). A second request extends the waiting period to enable further review. If FTC or the Antitrust Division sends a second request to the parties, the parties have to wait 30 days (10 days for cash tender offers and bankruptcy sales) from the date the parties substantially complied with the request before consummating the acquisition to allow the agencies time to complete the investigation and to determine whether to take law enforcement action. If the reviewing agency does not send a second request, or the parties have substantially complied with a second request, and the waiting period has expired, or if the parties’ request for early termination of the waiting period has been granted, the parties can consummate the merger or acquisition.

For merger investigations conducted by FTC, prior to the expiration of the waiting period, FTC staff are to seek to complete the analysis of likely competitive effects of the transaction and prepare recommendations to the FTC Commissioners on whether enforcement action is warranted. If FTC staff determine that a merger is likely to be anticompetitive, FTC has wide discretion in choosing an effective remedy to provide relief that addresses the competitive problems it identified and maintains or restores competition, without unnecessarily limiting the parties’ lawful objectives, such as achieving efficiencies. To meet this challenge, the agency can choose any number of possible actions, including blocking the entire transaction; requiring full or partial divestiture, either broadly or in specific geographic markets; requiring contractual arrangements; or requiring some form of behavioral relief, such as establishing firewalls in vertical transactions to prevent the sharing of competitive information.

In cases where FTC staff and the merging parties have negotiated a remedy and agreed upon a proposed settlement, staff recommend that the Commission accept the proposed order and place it on the public record to enable the public to comment. The public is given the opportunity to provide comments for the record about the proposed consent order. FTC staff are to analyze the public comments received and may recommend appropriate changes to the final complaint and order issued by FTC. FTC also may terminate the HSR waiting period and allow the merging parties to begin to consummate the transaction, including any divestitures, if the buyer is identified in the proposed order. However, for consent orders in which FTC has required a divestiture(s), and the buyer(s) of the divested asset(s) is not identified in the proposed order, the merging parties must subsequently submit an application to FTC requesting approval to divest the assets to a proposed buyer(s) and await FTC approval before consummating the divestiture. These applications also must be placed on the record for public comment generally for 30 days. The staff analyze the comments received and make recommendations to the Commission on whether it should approve the divestiture application. (Appendix IV provides additional information on the merger review process.)

The number of mergers reported annually to FTC and the Antitrust Division pursuant to the HSR Act more than doubled from 2,262 transactions in fiscal year 1990 to 4,926 transactions in fiscal year 2000. During this same period, FTC announced 192 consent orders involving mergers, of which 153 (about 80 percent) were divestiture orders. (Appendix V provides information on the 153 divestiture orders FTC announced for public comment during fiscal years 1990 through 2000).

FTC Developed Preferences for Clean Sweep Divestitures, Single Buyers, and Up- Front Buyers During the Mid-1990s

According to FTC staff, FTC decisions to use particular divestiture approaches are (1) based on the unique facts of each case and do not readily translate into written guidelines or systematic aggregation and (2) tied to proprietary company information that FTC is statutorily prohibited from disclosing to the public. Accordingly, FTC does not systematically compile and make publicly available data that show under what circumstances clean sweep divestitures, single buyers, and up-front buyers should be or have been used. However, available information from FTC staff, speeches, and other public documents reveal that during the mid-1990s, based on lessons learned from past divestitures, FTC began to develop preferences for divestiture approaches designed to restore competition more quickly and reduce the likelihood that assets would deteriorate while awaiting final action on the proposed merger. These preferences may include clean sweeps, single buyers and up-front buyers. However, according to FTC staff, it depends on the industry whether they are appropriate.

History of Divestiture Approaches Is Difficult to Chronicle

The history of FTC's clean sweep, single buyer, and up-front buyer divestiture approaches is difficult to chronicle because FTC does not have readily available public data that show under what circumstances they should be or have been used. Our review of divestiture orders and related public documents, such as FTC’s analysis to aid public comment, revealed that FTC provides limited information on the rationale for the use of particular divestiture approaches. FTC staff told us that the staff who worked on the order can readily provide information on the basis for using the approaches based on their knowledge of the case and their personal case files. FTC staff acknowledged that public documents typically do not provide detailed, meaningful information on why a particular approach was used. However, they said that staff document information on the rationale for the approaches and provisions used in a divestiture order in internal, confidential documents, such as staff memorandums to the Bureau Directors and Commissioners. They also told us that because FTC’s decisions are largely tied to companies’ trade secret information, which FTC is statutorily prevented from disclosing to the public, FTC can provide to the public only limited information on the basis for its decisions. “Our approach to remedies evolves, as does our approach to merger enforcement generally. We learn from each case what works and what doesn't work. Our past actions provide guidance, but there are no absolute rules. We evaluate remedies based on the facts in each individual case. We also go back and evaluate our remedy process…to see if expectations are borne out and the remedies are effective.” “One aspect of our merger relief that might bear scrutiny is the FTC’s insistence in most of its divestiture orders that the merging firm locate an up-front buyer for the divested assets. I believe that this requirement has been warranted in a number of the orders that I’ve reviewed in more than three years at FTC, but I would be concerned if the agency became too rigid and unflinching in its insistence on this element of an order.”

Speeches and Articles Provide Insights into Recent Changes to FTC’s Approach to Divestitures

Although it is not always clear under what circumstances FTC has used one or a combination of divestiture approaches, recent speeches and articles and our discussions with FTC staff do provide some insight into the evolution of these approaches during the mid 1990s. Specifically, it appears that in 1996, based on lessons learned from past divestitures, FTC developed preferences for how to structure divestitures and began to modify its divestiture approaches.

According to an April 1997 speech by the then Senior Deputy Director of the Bureau of Competition, FTC had not been satisfied with the effectiveness of past divestiture orders. He said that FTC began a retrospective study of nine divestiture orders selected to assess the effectiveness of particular types of divestiture orders, which showed the need for changes to the way FTC approached merger remedies. He further said that FTC staff had found that the divestiture process was less effective than they would have hoped and “came to appreciate better the difficulties in creating a viable divestiture package of assets that had not previously been a stand-alone business”—a business that contains all the assets needed to enable a buyer to be operational the day after purchasing the assets, selling to all the same customers.

By 1996, according to an October 1996 speech by the then Director of the Bureau of Competition, FTC had begun to take steps to shorten the time that it took to complete a divestiture because of FTC’s desire to fashion remedies that (1) restored competition more quickly and (2) reduced the likelihood that assets would deteriorate while awaiting final action on the proposed merger. These steps included, among others, the identification of up-front buyers and the requirement for the divestiture of "broader asset packages" where assets are grouped into one divestiture package to ensure continued marketability, viability, and competitiveness following the merger. In an April 1997 speech, the then Senior Deputy Director of the Bureau of Competition noted that because of these and other steps, the average time between the date a divestiture order is provisionally approved and the ordered divestiture is approved dropped from 15 months in fiscal year 1995 to 7 months in fiscal year 1996.

FTC Developed Preferences for Clean Sweeps, Single Buyers, and Up-front Buyers in the Mid-1990s

FTC staff acknowledged that they have developed a preference for certain practices in negotiating some divestiture orders, particularly among retail industries, like grocery stores and gas stations. Regarding clean sweeps, single buyers, and up-front buyers, FTC staff said that all three approaches tend to provide them greater assurance that the divestitures will help restore or maintain competition at levels existing before the merger. “Although the Division has not adopted this as a policy, we do consider clean sweep as an option when we look at a divestiture package. The obvious advantage to requiring a clean sweep is that the sale of an ongoing business, as opposed to various stand-alone assets pieced together, may provide greater assurance that the assets will be viable in the hands of a suitable purchaser. Such a policy also prevents the parties from choosing the least attractive assets from each company for divestiture…The potential disadvantage for requiring a clean sweep is that it prevents the parties from realizing possible efficiencies by integrating the different assets of both companies.”

Regarding up-front buyers, which FTC also refers to as buyers up-front, FTC staff said that they have made greater use of up-front buyers because the approach reduces the time for the divestiture(s) to take place and gives them the opportunity to evaluate the marketability of the assets to be divested with more concrete evidence. According to FTC staff, the up-front buyer approach also enables staff to better determine whether, among other things, there is a viable buyer(s) for the proposed divestiture assets. Additionally, as pointed out in various speeches by FTC staff, the up-front buyer approach reduces the amount of time needed for the assets to be divested because a buyer can be identified before the merger transaction occurs—a factor in grocery store divestitures and those of other retail operations, where assets may quickly deteriorate during the search for a buyer. FTC staff also said that whether an up-front buyer will be required is dependent upon the circumstances of each individual case and generally not on the industry in which the merging parties operate.

Clean Sweep Divestitures, Single Buyers, and Up-Front Buyers Have Been Used Across Retail Industries, but Have Been Increasingly Used in Grocery Store Divestitures Since Fiscal Year 1996

During fiscal years 1990 through 2000, clean sweep divestitures, single buyers, and/or up-front buyers were used in the 31 divestiture orders in the four industries we reviewed—grocery stores, drug stores, funeral services, and gas stations—although up-front buyers were not used at all prior to fiscal year 1996. The three approaches were used most frequently in the 16 grocery store divestiture orders, particularly in 1996 or later. During the 11-year period, there was a wide variation in the use of these approaches in the 15 divestiture orders covering the other three industries. According to FTC staff, the remedies approved in each of the 31 divestitures were based on the unique facts of the case, with the goal of remedying an otherwise unlawful acquisition, and only after FTC determined the remedy would achieve that objective.

FTC Used Clean Sweeps, Single Buyers, and Up-Front Buyers in Grocery Store Divestitures with Greater Frequency Since Fiscal Year 1996

FTC used clean sweeps, single buyers, and/or up-front buyers to remedy anticompetitive concerns for 16 grocery store mergers throughout fiscal years 1990 through 2000, but used these approaches with increased frequency during the latter part of the period. We analyzed the use of clean sweeps, single buyers, and up-front buyers in grocery store divestitures over the 11-year period. Because FTC speeches about its merger remedies indicated that FTC began to make changes in its divestiture approaches during fiscal year 1996, we focused on two periods—the period from fiscal years 1990 through 1995, before FTC started to make these changes, and fiscal years 1996 through 2000, the period during which FTC staff announced that FTC had begun to make these changes.

Clean Sweep Divestitures

Clean sweep divestitures were used about three-fourths of the time in the latter period, compared with one-third of the time in the earlier period. We examined each of the 16 grocery store divestiture orders to determine how many geographic markets were covered under the order and determined that, in total, FTC had delineated 131 geographic and product markets. Because FTC's divestiture orders and related documents, such as the analysis to aid public comment, typically do not indicate whether a divestiture is a clean sweep, we asked FTC to designate which of the 131 markets involved clean sweep divestitures. FTC provided data on 128 markets that showed that the number of clean sweep divestitures involving grocery store mergers had become much more prevalent during fiscal years 1996 through 2000, the period in which FTC staff said that they had initiated reforms. Whereas about 33 percent (3 of 9) of the markets defined in divestiture orders announced during fiscal years 1990 through 1995 involved clean sweep divestitures, about 75 percent (89 of 119) of the markets involved clean sweep divestitures during fiscal years 1996 through 2000. Table 1 shows the extent to which clean sweeps were used for the 6 divestiture orders announced during fiscal years 1990 through 1995, the 10 divestiture orders announced during fiscal years 1996 through 2000, and for the entire period.

FTC staff said that the increased use of clean sweeps occurred because FTC’s past experience with grocery store mergers and divestitures taught staff that individual stores might not be as competitive as chains and packages containing all of the assets of one of the merging parties are easier to sell. Additionally, they said that this type of divestiture gives FTC staff greater confidence that they are preserving competition in the affected geographic market.

Single Buyers

For the 16 grocery store divestiture orders, the use of single buyers more than tripled between the periods. As shown in table 2, single buyers were used in 20 percent (1 of 5) of the geographic markets with multiple divested assets during fiscal years 1990 through 1995, but in 72 percent (36 of 50) of the geographic markets in fiscal years 1996 through 2000.

According to FTC staff, their preference for single buyers started when the nature of grocery store mergers began to change. They said that recent mergers include mergers of chains that are direct competitors in the same geographic market, whereas in past years, merging parties purchased certain stores from one another, not the entire chain. They added that because of chain-wide distribution efficiencies of divested stores, a single buyer can operate divested assets more efficiently and easily. FTC staff told us that if the stores of the merging parties were competing directly throughout the geographic market, a single buyer who can operate all the assets will give FTC greater confidence that competition will be replicated in the market.

Up-Front Buyers

Up-front buyers were not included in any of the six grocery store divestiture orders issued during fiscal years 1990 through 1995. However, about 76 percent of the buyers for divestiture orders announced during fiscal years 1996 through 2000 were up-front buyers. Table 3 shows the extent to which up-front buyers were used in grocery store divestiture orders announced during fiscal years 1990 through 1995, fiscal years 1996 through 2000, and for the entire period.

FTC staff told us that as FTC became more familiar with grocery store mergers and the potential effect of long divestiture periods on the viability of the grocery store assets to be divested, it became apparent that up-front buyers were a material factor in making divestitures successful. They said that, in the early to mid-1990s, merging parties were given up to 12 months, and sometimes longer, to find a buyer(s) for the divested assets after a divestiture order became final, regardless of the industry in which the merger was taking place. Additionally, in a March 2002 FTC document titled, “Frequently Asked Questions About Merger Consent Order Provisions,” FTC staff noted that “...supermarkets and other retail operations (e.g., retail pharmacies) are particularly vulnerable to having their assets deteriorate during the search for a post order buyer; this affects the ability of the assets to be operated in a manner that maintains or restores competition in the relevant market.” FTC staff told us that once FTC determined with respect to grocery store mergers that, among other things, the longer the merging parties have control of the assets, the more likely it is that the assets will deteriorate, FTC established a preference for up-front buyers, particularly in the retail sector.

In our discussions with FTC staff about their use of clean sweeps, single buyers, and up-front buyers, they said that grocery store divestitures that were accepted by FTC 10 years ago had long divestiture periods and no up-front buyers, but these divestitures would not likely be accepted today. FTC staff told us that, in recent years, generally FTC’s starting point for settlement discussions with the merging parties in a grocery store merger is a clean sweep divestiture with a single, up-front buyer. According to FTC staff, such a remedy ensures restoration of the status quo before the merger. Additionally, FTC staff told us that it would take additional time and considerable amount of evidence to convince FTC that competition could be restored through selling a combination of the merging parties’ assets to multiple buyers in a single geographic market. In such cases, FTC staff said they would have to analyze information on each individual store and its role in the merging parties’ overall operations. FTC staff also noted that the grocery store mergers in more recent years tended to be much larger and involve more extensive geographic overlaps than previous mergers.

While FTC staff have said that FTC typically prefers up-front buyers in divestiture orders involving grocery stores and sometimes in other retail operations, they told us that they are willing to diverge from their preference for clean sweep divestitures and single buyers when the proposed divestiture will restore or maintain competition. A key example is the Albertson’s, Inc., and American Stores Company divestiture order, which at the time it was announced for public comment in fiscal year 1999 was the largest retail divestiture ever required by FTC. The order differed from many recent divestiture orders in the grocery store industry in that many of the markets involved the divestiture of a combination of selected assets from both of the merging parties—a practice sometimes referred to as “mix and match”—versus clean sweeps, and there were several multiple buyer markets, that is markets in which several buyers were purchasing the assets FTC ordered to be divested. According to FTC staff, mix-and-match divestitures require a more careful analysis of each retail location than does the divestiture of only one of the merging parties stores because staff must examine more closely whether the mixed assets can compete effectively. FTC must determine, for example, whether the mixed assets will be capable of producing efficiencies and economies of scale and scope comparable to those existing in the market before the merger. FTC staff estimated that the Albertson’s and American divestiture order took at least 6 additional months to negotiate with the merging parties because of the need to assess the mix and match approach and the geographic markets where assets were divested to multiple buyers as well as to the buyers purchasing assets in multiple geographic markets.

FTC’s Use of Divestiture Practices Varied in Other Retail Industries

There was a wide variation in the use of clean sweeps, single buyers, and/or up-front buyers in the 15 divestiture orders FTC announced in the drug store, funeral services, and gas station industries during fiscal years 1990 through 2000.

Drug Store Divestitures

For the five drug store divestiture orders FTC announced during fiscal years 1990 through 2000, all of the divestitures were to single buyers, but the use of clean sweep divestitures and up-front buyers varied. Three of these orders involved 11 geographic markets between fiscal years 1990 through 1995 and two involved 7 geographic markets between fiscal years 1996 through 2000. In terms of clean sweep divestitures, single buyers, and up-front buyers: All of the 11 geographic markets in the three drug store divestiture orders announced during fiscal years 1990 through 1995 involved clean sweeps of drug store assets within those markets. By contrast, 4 of the 7 (57 percent) geographic markets in the two orders announced between fiscal years 1996 through 2000 involved clean sweeps of drug store assets.

All five drug store divestiture orders involved the divestiture of a total of 294 assets from fiscal years 1990 through 2000, and all of the divestitures were to single buyers. For the two divestiture orders announced during fiscal years 1996 through 2000, FTC explicitly required single buyers in 4 of the 7 geographic markets to ensure that buyers were large enough and had the coverage to serve as an alternative anchor pharmacy chain for a pharmacy benefit management firm’s retail pharmacy network.

While there were no up-front buyers designated among the 10 buyers of drug store assets in the three divestiture orders announced during the earlier period, 2 of the 3 buyers of drug store assets for the two divestiture orders announced from fiscal years 1996 through 2000 were up-front buyers.

Funeral Services Divestitures

Our analysis of funeral services divestitures showed that the use of clean sweeps, single buyers, and up-front buyers remained relatively unchanged for the seven funeral services divestiture orders FTC announced during fiscal years 1990 through 2000. FTC announced four divestiture orders requiring the divestiture of funeral services assets in 8 geographic markets between fiscal years 1990 through 1995, and three requiring the divestiture of funeral services assets in 19 geographic markets between fiscal years 1996 through 2000. Specifically: The divestitures in 6 of the 8 (75 percent) geographic markets designated in the four funeral services divestiture orders announced during fiscal years 1990 through 1995 were clean sweep divestitures and 14 of the 19 (about 74 percent) geographic markets for the three funeral services divestiture orders announced during fiscal years 1996 through 2000 were clean sweep divestitures.

In all cases, a single buyer purchased the assets in each of the multiple asset markets. Uniquely, in six of these seven divestiture orders, a single buyer (although not the same buyer in all six cases) purchased all of the divested assets in all of the geographic markets. For example, in the Service Corporation International and Equity divestiture order announced in fiscal year 1999, there were 14 geographic markets in which FTC ordered divestitures; a single buyer purchased all of the assets in all of the geographic markets.

Over the 11-year period, only one of the eight buyers of funeral services assets was an up-front buyer—this occurred in a divestiture order announced in fiscal year 1999.

Gas Station Divestitures

For gas station divestiture orders, we could not analyze differences in the use of clean sweeps, single buyers, and up-front buyers between the two periods—fiscal years 1990 through 1995 and fiscal years 1996 through 2000—because there were no divestiture orders requiring the divestiture of gas stations announced in the first period. However, FTC announced three divestiture orders requiring the divestiture of gas stations during the latter period. In terms of the use of clean sweeps, single buyers, and up-front buyers in fiscal years 1996 through 2000, we found that: The three divestiture orders involved 14 geographic markets, and 13 of the 14 (about 93 percent) geographic markets had clean sweep divestitures. Two of the divestiture orders involved clean sweep divestitures in all of the markets in which gas stations were divested.

All three orders required single buyers to purchase the assets. (In total, approximately 980 assets were divested across the 14 geographic markets.) According to FTC, the divestiture of large packages of retail gasoline assets should allow the buyer to efficiently advertise a brand, develop credit card and other marketing programs, persuade distributors to market the buyer’s brand and otherwise compete in the sale of branded gasoline.

Only one of seven buyers that purchased divested assets in the three divestiture orders was an up-front buyer.

FTC staff told us that the remedy approved in each of the divestitures covered in our review was based on the unique facts of that case—not on any formula. Instead, FTC staff said that they examined each market in order to determine how most effectively to remedy the anticompetitive effects of the particular merger. They said that in one case, FTC may have ordered divestiture of all of the assets of one of the merging parties relating to a particular product market in every affected geographic market because FTC determined that any buyer would need a minimum scale and/or scope of operations. In another case, FTC may have ordered divestiture of all of the assets of one of the merging parties relating to a particular product market in most, but not all, of the geographic markets because the buyer had demonstrated that the remaining assets of that merging party were not profitable and, therefore, were undesirable. They added that FTC may have ordered divestiture of carefully selected assets in each geographic market without regard for which of the merging parties owned the assets, but only after an extensive and time-consuming financial analysis of each asset.

According to FTC staff, in all cases, FTC’s objective has been to remedy the anticompetitive effects that FTC concluded would result from an otherwise unlawful acquisition, and the remedy was accepted only after a demonstration that it would achieve that objective.

Smaller Businesses Were Significantly Less Likely To Purchase Divested Grocery Store Assets after Fiscal Year 1996

Although we did not have enough observations to analyze statistically the differences in the level of smaller business participation in purchasing divested drug store, funeral services, and gas station assets from fiscal years 1990 through 2000, our analysis of the buyers of divested grocery store assets showed that smaller buyers, including those that met SBA’s definition of a small business, were significantly less likely to directly purchase divested grocery store assets after fiscal year 1996. However, when we account for divested assets that were initially purchased by grocery wholesalers then, per the divestiture order, sold to other businesses—which reflects the level of indirect participation—the decline in the level of smaller business participation between the two time periods is not as great. Our discussions with FTC staff and antitrust practitioners indicated that the decline in the level of smaller business participation in purchasing divested assets occurred for a variety of reasons, including FTC divestiture practices and consolidation in the grocery store industry, specifically a significant difference in the type and size of mergers during the 1990s.

Some Difficulties Arose Determining the Level of Small Business Participation

Because there were so few buyers of divested assets in the drug store, funeral services, and gas station industries during the period, we were unable to determine if there was a statistically significant difference in the level of smaller business participation in purchasing these assets. While there were sufficient numbers of buyers of divested assets in the grocery store industry to enable us to analyze changes in the profile of the buyers over the 11-year period, there appeared to be no generally accepted definition of a small grocery store business. FTC staff, grocery industry officials, and representatives of relevant small business associations, told us that there was not a generally accepted standard by which one could measure the relative size of businesses using revenues. They acknowledged that SBA’s definition of a small business, which ranged from $13.5 million to $20 million in receipts from 1990 to 2000 for the grocery store industry, might be one indicator. However, industry members told us that SBA's threshold for a small grocery store business is too low given the relative size of grocery store businesses.

Because there appeared to be no generally accepted definition of a small grocery store business, we used two approaches to determine the level of smaller business participation in purchasing divested grocery store assets in fiscal years 1990 through 1996 and fiscal years 1997 through 2000. First, we analyzed the median of the average annual revenues of the buyers. Specifically, we calculated the average annual revenues of each of the buyers of divested grocery store assets using the buyers’ 3 years revenues prior to their purchase of the divested assets, when available, in constant 2000 dollars. The average annual revenues ranged from about $5 million to about $35 billion, with 9 of 41 direct buyers having average annual revenues greater than $15 billion. We then computed the median of the average annual revenues for all the buyers for the two periods and for fiscal years 1990 through 2000. We used the overall median of the buyers’ average annual revenues for fiscal years 1990 through 2000 as a benchmark and determined the number of buyers in each of the periods that were below the overall median. We considered buyers below the overall median to be “smaller.” Second, we used SBA’s size standard for a small grocery store business. However, we used the buyers’ average annual revenues in constant 2000 dollars before they purchased the divested assets as a proxy for receipts, because we were unable to obtain data on the buyers’ receipts. We also adjusted SBA’s size standards to constant 2000 dollars. (Appendix II provides information on the adjusted SBA size standards.) We then determined the number of buyers in each of the periods that were below the adjusted SBA size standard. Additionally, to examine changes in the size of the buyers, we compared the median of the average annual revenues of the buyers for the two periods. Regardless of the approach we used, the results were similar—there were fewer smaller buyers purchasing divested grocery store assets after fiscal year 1996.

Smaller Businesses Were Significantly Less Likely to Directly Purchase Divested Grocery Store Assets after Fiscal Year 1996

Our analysis showed that significantly fewer smaller businesses directly purchased divested assets after fiscal year 1996, the first full fiscal year after which FTC began showing preferences for certain divestiture approaches, such as up-front buyers, in the grocery store industry. (Appendix II shows the results of our statistical test for the grocery store industry.) We calculated that the median of the average annual revenue of 41 direct buyers of divested grocery store assets, using constant 2000 dollars, was about $1.8 billion. Figure 1 shows that using less than $1.8 billion as a benchmark for a smaller business, 80 percent (12 of 15) of the buyers of the divested grocery store assets during fiscal years 1990 through 1996 were smaller, compared with about 31 percent (8 of 26) in the latter period.

We also looked at the level of smaller business participation in directly purchasing divested grocery store assets from another perspective—small businesses as defined by SBA—and found that, when comparing the two periods, there was a significant decline in the number of smaller businesses that purchased divested grocery store assets. We used buyers' revenues before they purchased the divested assets as a proxy for receipts and determined the extent to which buyers in both periods did or did not meet SBA's thresholds (in 2000 constant dollars). Our analysis showed that, using SBA’s definition of a small grocery store business, smaller business participation in purchasing divested grocery store assets declined significantly from about 27 percent (4 of 15) in the period from fiscal years 1990 through 1996 to about 4 percent (1 of 26) in the latter period.

Not only did the percentage of smaller businesses purchasing divested grocery store assets decline, but the size of businesses that purchased divested grocery store assets grew significantly over time as well as, according to FTC staff, the size of the parties to the acquisition and the acquisition value. We calculated the median of the average annual revenues of the buyers in each period and found that the typical buyers in the latter period were significantly larger than buyers in the earlier period. Specifically, the median of the average annual revenues of the buyers in the earlier period was about $89 million. By contrast, the median of the average annual revenues of the buyers in the latter period was about $3.3 billion.

Wholesalers Were a Key Factor in Enabling Smaller Businesses To Purchase Divested Grocery Store Assets after Fiscal Year 1996

In recent years, grocery wholesalers have been a key factor in enabling smaller businesses to purchase divested assets in the grocery store industry—75 percent of the smaller buyers after 1996 purchased the divested assets from wholesalers. Under this practice, some grocery wholesalers, per the divestiture agreement reached with FTC, have purchased divested grocery store assets directly from the merging parties and under the order provision, in turn, sold them to grocery store operators. Thus, a direct buyer (the wholesaler) sells the asset(s) to indirect buyers (the grocery store operators). According to grocery wholesalers we interviewed, this practice has occurred in part because wholesalers were losing market share due to increasing consolidation in the grocery store industry.

To determine if reselling the assets had an effect on the extent to which smaller businesses participated in purchasing divested grocery store assets, we performed a separate analysis. Whereas in the analysis of direct buyers, we considered the wholesalers as the buyers of divested assets, in our analyses that included indirect buyers, we replaced the revenues of the wholesalers with those of the buyers to which they resold the assets. When we accounted for the effect of indirect buyers, there was still a significant decline in smaller businesses participation in purchasing divested assets after fiscal year 1996; however, the extent of the decline was not as great. Specifically, when the buyers who purchased the divested assets indirectly from wholesalers were included in our analysis, the overall median of the average annual revenues of 54 buyers of divested grocery store assets for the fiscal years 1990 to 2000 time period was about $208 million—about 88 percent less than the overall median (about $1.8 billion) for direct buyers. Figure 2 shows that using less than $208 million as a benchmark for a smaller business, about 73 percent (11 of 15) of the buyers of the divested grocery store assets during fiscal years 1990 through 1996 were smaller buyers, compared with 41 percent (16 of 39) during fiscal years 1997 through 2000.

We also examined the level of smaller business participation in indirectly purchasing divested grocery store assets using SBA’s definition of a small grocery store business. Again, we found that even though there continued to be a decline in the extent to which smaller businesses purchased these assets, the decline was not as great when we included indirect buyers in the analysis. Specifically, using SBA's definition, as in our earlier analysis, we found that about 27 percent (4 of 15) of the businesses that purchased divested grocery store assets during fiscal years 1990 through 1996 (including indirect buyers) were smaller businesses. By contrast, about 15 percent (6 of 39) of the buyers of divested assets during fiscal years 1997 through 2000 were smaller businesses.

As in the case of the direct buyers, we found that in addition to the percentage of smaller businesses purchasing divested grocery store assets declining between the two periods, the size of the businesses that purchased the assets grew significantly over time. However, the median size of the buyers in the latter period was substantially less than that of the direct buyers. The median of the average annual revenues of the buyers in the earlier period was about $78 million, compared with about $288 million in the latter period—about 91 percent below the approximately $3.3 billion median for the direct buyers in the latter period.

Several Factors May Have Contributed to the Decline in the Level of Smaller Business Participation as Direct Buyers of Divested Grocery Store Assets in the Latter 1990s

Through interviews with FTC staff, antitrust practitioners, and smaller buyers of divested grocery stores, we identified factors that may have contributed to the decline in the level of smaller business participation in purchasing divested assets in the grocery store industry. First, FTC’s clean sweep, single buyer, and up-front buyer divestiture practices and the merging parties’ desire to close the deal quickly may have impacted the ability of smaller businesses to purchase divested assets. However, FTC staff told us that FTC’s role is to protect competition and consumers, not particular competitors or businesses, whether large or small. Second, growing consolidation in the grocery store industry has resulted in fewer smaller businesses because many have either been acquired by larger companies or have gone out of business.

FTC’s Divestiture Practices and Desire of Merging Parties to Consummate the Merger Quickly

According to FTC staff and antitrust practitioners, FTC’s divestiture practices and the desire of the merging parties to consummate the merger quickly may impact the ability of smaller buyers to purchase divested assets. Regarding FTC’s divestiture practices, FTC staff told us that FTC’s preference in retail industries for clean sweep divestitures combined with its preference for single buyers could impact the ability of smaller businesses to purchase divested assets, particularly in larger markets where there may be a greater number of assets to be divested, especially where economies of scale exist. FTC staff also said that it is easier and quicker for the merging parties to convince FTC that a clean sweep divestiture to a single buyer will be successful than a clean sweep divestiture to multiple buyers within a geographic market. They acknowledged that a larger package of divestiture assets may make it difficult for smaller buyers to purchase the divested assets because they might not have the financial strength to purchase all of the assets that have to be divested in a geographic market.

FTC staff and antitrust practitioners also told us that negotiating a divestiture order is generally easier and quicker with a single, well- established chain as the buyer because FTC has to analyze the financial, managerial, and operational strength of only one buyer, and the merging parties have to negotiate with only one buyer. Similarly, antitrust practitioners said that FTC’s up-front buyer preference may create a bias against smaller businesses because the merging parties cannot consummate the merger until a viable buyer(s) has been identified, reviewed, and provisionally approved by FTC. Antitrust practitioners told us that because the merging parties want to consummate the merger quickly and it may take longer to (1) convince FTC that a smaller business is a viable buyer and (2) negotiate with a smaller business, the merging parties generally would prefer larger, well-established buyers. Additionally, the practitioners said that for these reasons they are likely to advise their clients to select a strong, well-established buyer that would clearly be acceptable to FTC. They added that the cost of delaying a merger while the merging parties are waiting for FTC to approve a buyer can be very expensive to the merging parties because of the delay in achieving the potential efficiencies they sought through the merger.

FTC staff and antitrust practitioners also told us that factors other than clean sweeps, single buyers, and up-front buyers may impact the ability of smaller buyers to purchase divested assets. For example, antitrust practitioners said that FTC’s preference for buyers that do not already have a presence in the geographic market as well as FTC’s definition of the product and geographic markets may also impact the ability of smaller businesses to purchase divested assets. They told us that smaller businesses interested in purchasing divested assets may be more likely to be located in the geographic market where the assets are being divested. According to FTC staff, if any business, large or small, interested in purchasing the divested assets already has a significant presence in the geographic market where the assets are being divested, it reduces the chances of FTC approval because divesting to a market incumbent does not replace the acquired firm and thus reduces the competitive effectiveness of the divestiture. Thus, according to FTC staff, FTC may not approve proposed buyers that already have a significant presence in the geographic market because this raises concerns about the anticompetitive effects of the divestiture transaction, including an increase in concentration and failure to maintain the number of market participants. For example, in fiscal year 1996, FTC did not approve a proposed buyer for a grocery store in the Stop and Shop and Purity Supreme merger, because the proposed buyer already had two stores relatively close to the store being divested. However, FTC staff said that in certain instances smaller businesses operating within the same geographic and product markets have been found to be acceptable buyers. Additionally, FTC staff and antitrust practitioners told us that the size of the divestiture package and FTC staff’s definition of the geographic and product markets may affect the opportunity for smaller businesses to purchase divested assets. They said that the larger the geographic market, as defined by FTC, the less opportunity there may be for smaller businesses to purchase the divested assets.

The Food Marketing Institute (FMI) and the National Grocers Association (NGA)—the two largest associations that represent grocers—have submitted comments to FTC stating that FTC’s clean sweep, single buyer, and up-front buyer divestiture practices have hindered the ability of small businesses to purchase divested assets. Additionally, they said that FTC’s strong preference for buyers located outside the geographic market in which the assets are to be divested have disadvantaged small businesses, which are struggling to expand and keep pace with large corporations. Several smaller buyers of divested grocery store assets also told us that other factors, such as the merging parties’ bidding process, create additional challenges for smaller businesses in purchasing and maintaining the viability of divested assets. (Appendix VII provides information on the public comments that FTC received regarding all 31 divestiture orders included in our review as well as the results of our discussions with several smaller buyers of divested grocery store assets, selected associations that represent smaller businesses, and SBA officials.)

FTC staff told us that the antitrust statutes are designed to protect competition and consumers, not particular competitors or businesses, whether large or small. They also said that in several public statements, FTC staff have noted that FTC does not have a preference in favor of large- chain buyers, or a preference against small chains, independents, or wholesalers that will eventually spin off stores to other buyers. For example, in a March 2001 speech before the American Bar Association, the then Acting Director of FTC’s Bureau of Competition said that FTC neither favors nor disfavors any particular category of purchaser. According to the speech, “...the Commission’s approach to supermarket divestitures has not precluded smaller or local grocery stores from participating as buyers because it believes that effective competitors come in all shapes and sizes.” Additionally, the then Acting Director said that FTC is sensitive to the fact that small supermarket chains often offer greater product variety and choice than other supermarkets. However, FTC staff told us that the size of a possible buyer is a factor in determining the acceptability of that buyer, but only to the extent that size affects the buyer’s financial viability and ability to operate the divested assets competitively.

Some antitrust practitioners we interviewed also told us that they do not perceive FTC as having a role in protecting small businesses. Like FTC, they said FTC’s mandate is to protect and preserve competition and consumers, not to protect or promote small businesses. They told us that protecting competition and promoting small businesses are not always completely consistent goals.

Growing Consolidation in the Grocery Store Industry

Growing consolidation in the grocery store industry has resulted in fewer smaller businesses because many have either been acquired by larger companies or have gone out of business. An article by the U.S. Department of Agriculture’s (USDA) Economic Research Service states that in recent years, the U.S. food retailing industry has undergone unprecedented consolidation and structural change through mergers, acquisitions, divestitures, internal growth, and new competition. Widespread consolidation in the grocery store industry, driven by expected efficiency gains from economies of size, has had a significant effect on the share of total grocery stores sales accounted for by the largest food retailers. The concentration levels of the industry have also increased. According to a August 1999 American Antitrust Institute (AAI) article, in 1992, the top five supermarket chains had 19 percent of the national market. In 1999, that share had increased to at least 33 percent. According to FMI data, the number of chain supermarkets increased from 17,460 in 1990 to 20,825 in 2000. Over the same period, the number of independent supermarkets declined from 13,290 to 11,005. The Progressive Grocer 2001 annual report, reports that market share continues to be consolidated among a handful of traditional players, including Kroger Company; Safeway, Inc.; Albertson’s, Inc.; and Royal Ahold. According to the report, larger chains will acquire smaller and mid-size independents to solidify their market share and increase their buyer power. However, the report also notes that the closings of grocery stores resulting from larger chains that are rejecting leases on older, smaller stores when they come up for renewal will afford independents and smaller chains the chance to expand by acquiring those stores.

FTC Has Not Measured the Impact of Its Divestiture Practices Since Announcing Changes in the Mid- 1990s

FTC has not systematically measured the success or failure of the divestitures it has approved since it developed preferences for approaches like clean sweep and up-front buyers. In 1999, FTC reported the results of the Bureau of Competition staff’s study of divestiture orders made final during fiscal years 1990 through 1994 that, according to FTC staff, confirmed the need to make the changes that FTC had made starting in the mid-1990s. The report was drafted by FTC’s Bureau of Competition. Although the study had some methodological limitations, it appears to have been instrumental in helping FTC staff better understand the divestiture process. Nonetheless, antitrust practitioners and representatives of the grocery store industry have questioned key aspects of FTC's study, including whether the approach used supported the conclusions drawn and whether the study went far enough in measuring the impact of its divestiture practices on buyers of divested assets and the markets in which they operate.

FTC Staff’s Divestiture Study Was Based on Divestitures that Were Finalized in the Early 1990s and Had Some Methodological Limitations

To perform its study, FTC staff examined 35 divestiture orders made final during fiscal years 1990 through 1994 to identify problems with the divestiture process and determine whether buyers of divested assets were able to begin operating in the relevant market relatively quickly and maintain operations. The study found that the acquirers of divested assets generally were viable competitors in the markets of concern and found, among other things, that across all orders studied divestitures of ongoing businesses succeeded at a higher rate than divestitures of selected assets; parties to a potential merger that were required to divest assets sometimes looked for buyers who were not the strongest competitors and sometimes engaged in strategic conduct to impede the success of the buyer; many buyers of divested assets did not have sufficient information to prevent mistakes in the course of their negotiations and subsequent acquisitions, particularly where the buyers had never operated in the industry or the to-be-divested business; and smaller buyers succeeded at least at the same rate as larger buyers and, therefore, should not be presumed to be less competitive buyers than larger firms.

The study confirmed much of what FTC staff had suspected and discussed in earlier speeches and recommended a number of consent provisions and approaches designed to mitigate some of the problems FTC staff identified. According to FTC staff, the recommendations were designed to correct the informational and bargaining imbalance that had occurred in previous divestitures.

We were unable to fully assess the divestiture study because, according to FTC, the nonpublic version of the study contained proprietary financial information about the merging parties and the buyers of the divested assets. However, our analysis of the public version of the study showed that it had some key limitations. For example, The study discussed the advantages of up-front buyers, and in speeches, FTC staff used the study as a basis for articulating FTC’s preference for up-front buyers. However, the study did not provide information on the number of up-front buyers it examined, nor does it discuss what factors made those buyers successful.

A finding in the report is that smaller firms across all orders studied succeeded at least at the same rate as larger firms and, therefore, should not be presumed to be less competitive buyers than larger firms. The study does not define “smaller” nor does it provide information on the industries in which the smaller businesses operated. FTC staff told us that the divestiture study did not use quantitative criteria for categorizing firms as smaller or larger. Instead, FTC staff looked at (1) the size of buyers on a continuum of smaller revenues to larger revenues for the sample of businesses surveyed and/or (2) whether the firm was a single product firm, often a newly formed company, operating in a fairly localized area, as opposed to an established, multiproduct, highly capitalized, multinational company. FTC staff told us that it was clear to them which buyers were smaller and which were larger.

The study covered divestitures to 50 buyers that were approved by FTC, but FTC staff were only able to interview 37 of the buyers, and the study does not provide information on the distribution of the 13 buyers (26 percent) that did not participate in the study. If these buyers are mostly smaller or larger, or fall into the same industry, the results could potentially be skewed.

The methodology for the study published in the Federal Register stated that FTC would interview 147 third parties, such as customers, suppliers, and trustees. However, the final report only reports on interviews with two third parties, both of which were trustees. According to FTC staff, due to resource constraints, they were limited in the number of interviews they could complete. They told us that the study focused on the buyers and the merging parties, and although it would have been useful to obtain information from third parties, it would have been costly, and would have diverted Commission resources from pressing merger enforcement activities. Nonetheless, FTC staff told us that in reviewing a proposed merger, they rely heavily on information provided by third parties to determine whether a merger is likely to result in price increases or reduction in quality or output.

FTC staff told us that they recognize that the divestiture study had limitations. Nevertheless, they said that the study provided them sufficient information to adjust their approaches to working on divestiture orders. For example, FTC staff said that they learned that buyers of divested assets often did not know all of the assets they needed to effectively operate a business. As a result, FTC staff stopped relying as heavily on buyers of divested assets to inform them of the assets that should be included in the divestiture packages. FTC staff said that while the divestiture study is not the ultimate competitive analysis, it is an important step in determining whether the divestiture orders are satisfying FTC’s mission.

Antitrust Practitioners and Representatives of the Grocery Store Industry Have Questioned Various Aspects of the Study

Antitrust practitioners have praised FTC for taking the initiative to do the divestiture study, but have also questioned key aspects of the study, including its design and methodology. For example, some antitrust practitioners we spoke with said that FTC should be commended for undertaking the study, but questioned whether the methodology employed was sufficient for drawing conclusions. They suggested that the study should have been designed in a way to enable FTC to reach conclusions about how the divestiture(s) impacted the availability, quality, and price of products because these are the market factors that ultimately affect the consumer. “…the Divestiture Study has taken on a significance, in terms of justification of Commission policies, that was not foreseen at the time it was issued, especially since it was never formally adopted by the Commission. In addition, it is not clear from the description of the Study whether the authors, in evaluating the apparent failure of a remedy, considered whether this was consistent with the lack of a need for a remedy in the first place.” "Studies such as this would be more useful contributions to the dialogue between the agencies and the private bar if their methodology was fully discussed and disclosed prior to the study, and the study included the participation (with appropriate confidentiality constraints) of outside academics and practitioners.”

Given questions that have been raised about FTC’s divestiture study, we spoke with FTC staff about the benefits and cost of an updated, more comprehensive study. They acknowledged that another study might be beneficial because FTC has not studied the effect of its recent approaches on the viability of buyers of divested assets or on competition in the marketplace. Although they could not pinpoint the actual cost of doing another study, they said that it could be labor-intensive and burdensome on businesses. FTC staff told us that the 1999 study was extremely labor intensive and another study, especially one attempting to assess market competition in each market, would require extensive resource allocations. FTC staff said that they do not currently have resources to commit to such a study at this time. For example, in doing the 1999 study, FTC staff had to first manually review all FTC actions, during the fiscal years 1990 through 1994 time period, to identify consent orders involving mergers and then, determine which orders required divestitures. They said that it might be easier today because recent divestiture orders are more readily available through FTC’s Web site. However, our review of divestiture orders announced for public comment during fiscal years 1990 through 2000 revealed that the Web site does not provide a way to readily identify all of the divestiture orders FTC announced or made final each year.

Additionally, FTC staff told us that they would be concerned that such an effort could be burdensome on businesses. For example, they said that they would have to rely on buyers of divested assets to obtain information post-divestiture, and currently, buyers are not parties to divestiture orders. Thus, currently buyers are not required to provide information to FTC post- divestiture. In performing the 1999 study, FTC staff relied on the cooperation of buyers to collect information for its divestiture study and, as noted previously, 13 of the 50 buyers (26 percent) did not participate in the study. However, FTC is currently examining whether it should take steps to overcome this problem. In June 2002, FTC began holding a series of public workshops to obtain insights into its merger remedy process. The workshops are designed to address, among other things, whether FTC should require the buyers of divested assets to report on their operations of the divested assets to permit FTC to better determine whether its remedy provisions have achieved the objective of maintaining or restoring competition in the relevant market. The workshops also will consider what any such reporting requirements should entail, how long they should be in place, and the impact of any such obligations on potential buyers’ interest in acquiring divestiture assets.

FTC officials have frequently noted in speeches that if a merger does not result in restored competition, the remedy is not a success. For example, in a March 2001 speech, the then Acting Director of the Bureau of Competition said that consumers should not bear the risk of an inadequate or ineffective remedy. “A merger is forever… and, therefore, so is the harm caused by an incomplete remedy.” These views are consistent with the then Chairman’s statement in a February 2000 speech: “The law is clear that divestiture and other restructuring remedies should not be adopted unless they are likely to restore fully the competition lost as a result of the merger.” He further said, “Enforcement agencies should not be expected and would not be justified in making the same mistake over again. If restructuring in a particular industry and in similar circumstances has been unsuccessful, enforcement officials have a responsibility to determine why.” Moreover, FTC in explaining antitrust laws has said that a merger that lessens competition can lead to higher prices, reduced availability of goods or services, lower quality of products, and less innovation. Despite this recognition, FTC has not fully evaluated whether the divestitures it has approved have achieved its goal of maintaining or restoring competition in the marketplace.

Conclusions

FTC’s mission is, in part, to prevent business practices that are anticompetitive, deceptive, or unfair to consumers. FTC attempts to achieve its mission through preventing anticompetitive mergers from taking place. FTC’s approaches to merger remedies have evolved over time. In fiscal year 1996, based on past experiences and preliminary findings of its divestiture study, FTC developed preferences for how to structure divestitures and began to modify its divestiture approaches. FTC has not studied the effect of its recent approaches on the viability of buyers of divested assets or on competition in the marketplace. For example, in the grocery store industry, clean sweep divestitures, single buyers, and up- front buyers have been used with greater frequency in the late 1990s—a period not covered in FTC’s 1999 divestiture study. Because FTC has not systematically reviewed divestiture orders made final after fiscal year 1994, FTC does not know how these practices have impacted the viability of the buyers of divested assets or prices and/or innovation in the marketplace— key factors FTC uses to measure competition. Consequently, FTC cannot state that recent divestiture orders have, among other things, maintained or restored competition in the affected markets, or that smaller buyers continue to be as competitive as their larger counterparts in operating the divested assets.

Although the cost of doing a study of its recent divestiture orders could be considerable, such a study would give FTC the opportunity to develop and design a methodology to (1) overcome some of the limitations encountered during the earlier study; (2) provide greater insights into the impact of its divestiture preferences on potential buyers, including smaller businesses; and (3) better examine the short and long-term effects of various divestiture preferences on the markets in which divestitures take place. FTC staff acknowledged the benefit of conducting a more rigorous and comprehensive study to determine whether recent merger remedies are achieving their intent—to adequately maintain or restore competition and protect consumers so that consumers have the benefit of low prices and good product variety. Similarly, antitrust practitioners have said that collecting relevant economic data and including the data within the scope of future studies would place FTC in a better position to reach firm conclusions regarding the success or failure of its divestiture practices and to shape future divestiture orders.

We recognize the difficulties and costs inherent in conducting an evaluation that assesses the impact of FTC’s divestiture practices on the marketplace. However, the more that economic data are brought to bear on the questions of how FTC’s divestiture practices impact the marketplace, including smaller businesses, the more confident FTC can be that divestitures are having the intended effect of maintaining or restoring competition. We also recognize that the need for and benefits of conducting the analysis must be balanced against the costs of collecting the data as well as balanced against any logistical and legal implications. FTC could not provide us with an estimate of the costs to perform a more comprehensive divestiture study, nor could we estimate the costs. While we are aware that the costs could be significant, we believe that the lack of a more rigorous and comprehensive study places FTC at risk of not being in the position to fully understand the effects of its divestiture practices, including possible negative effects, on competition in the marketplace—a risk that FTC officials have said that FTC cannot afford to take.

Recommendation

To ensure that FTC has complete and up-to-date information on the effectiveness of divestitures in industries in the retail sector, we recommend that the Chairman of FTC direct the Bureaus of Competition and Economics to undertake a study of the impact of divestiture orders made final since fiscal year 1994 that require divestitures in the retail sector on (1) the viability of buyers of divested assets and (2) competition in the marketplace. If the findings show that FTC's intended results have not been achieved, we further recommend that FTC explore expanding the study to include divestiture orders for other sectors of the economy that have been impacted by changes to FTC divestiture practices during the mid-1990s.

Agency Comments and Our Evaluation

In commenting on our report, FTC said that the report adds important information about the Commission’s role in enforcing antitrust laws related to mergers and should lead to further improvement in the Commission’s merger enforcement efforts. In its comments, which are included as appendix VIII, FTC said that our recommendation is consistent with the Commission’s own objectives and its most recent Government Performance and Results Act report, which states that the Commission plans to “study and evaluate the remedies used in past antitrust cases, particularly divestiture orders used to resolve merger cases.” FTC noted that it currently has two related studies underway concerning hospital and petroleum mergers.

FTC also provided additional information on the history of the Commission’s divestiture and remedy practices. This information describes the impetus for Congress’ passage of the HSR Act and reiterated that FTC is taking certain actions to seek public input on merger remedy issues, as discussed in our report. Additionally, FTC previously provided technical comments, which have been incorporated in this report where appropriate.

We are sending copies of this report to the Chairman of the Federal Trade Commission and interested congressional committees. We will also provide copies to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact John F. Mortin at 202-512-5727 or me at 202-512-4636.

Objectives, Scope, and Methodology

Our objectives were to describe (1) the history of Federal Trade Commission’s (FTC) clean sweep divestiture, single buyer, and up-front buyer practices within the context of FTC’s overall merger remedies, and the circumstances under which these practices have been used; (2) the extent of FTC’s use of these practices in the grocery store, drug store, funeral services, and gas station industries; (3) the level of small business participation in purchasing divested assets in the four industries and the factors that may explain the level of small business participation; and (4) FTC’s efforts to gauge the success or failure of these divestiture practices and the impact of these practices on the marketplace, especially small businesses. We also obtained information on the nature of comments FTC received pertinent to these practices in the four industries as well as comments on how they impacted the ability of small businesses to purchase divested assets. As agreed with your staff, we focused on divestitures required by consent orders that FTC announced for public comment between fiscal years 1990 through 2000 for four industries— grocery store, drug store, funeral services, and gas station industries—that sell products and/or services directly to consumers. We focused on proposed consent orders that were announced for public comment during fiscal years 1990 through 2000, rather than consent orders made final during this period, because in most cases, at the point that FTC accepts a proposed consent order for public comment, the parties are allowed to consummate their merger. Our work was limited to publicly available information because, according to FTC, under the Hart-Scott-Rodino Act (HSR Act) of 1976, FTC is prohibited from disclosing information provided by parties to merger transactions.

To address these objectives, we performed our work at FTC headquarters in Washington, D.C. We also contacted officials from various associations that represent or deal with small and/or independent businesses—the National Grocers Association (NGA), the Food Marketing Institute (FMI), the National Community Pharmacists Association (NCPA), the National Funeral Directors Association (NFDA), the Petroleum Marketers Association of America (PMAA), the National Federation of Independent Business (NFIB), the National Business Association (NBA), the National Small Business United (NSBU), the SCORE Association (SCORE), and the U.S. Chamber of Commerce. In addition, we obtained and reviewed relevant documents prepared by and discussed FTC’s divestiture practices with antitrust practitioners—attorneys and economists in private practice who specialize in antitrust issues—academicians and officials with the Small Business Administration (SBA).

To address the first objective concerning the history of FTC’s clean sweep divestiture, single buyer, and up-front buyer practices within the context of FTC’s overall merger remedies, and the circumstances under which these practices have been used, we met with staff from FTC’s Bureaus of Competition and Economics and its Office of General Counsel and interviewed a former FTC Commissioner and former staff. We also reviewed relevant FTC public speeches, articles, and documents prepared by current and former FTC Commissioners and staff between the years 1995 and 2002 pertaining to FTC’s divestiture practices. Furthermore, we obtained and reviewed relevant documents prepared by and talked with antitrust practitioners, academicians, associations that represent small and/or independent businesses, and officials from SBA to obtain their views of FTC’s divestiture practices. In addition, we met with an official of the Department of Justice’s (DOJ) Antitrust Division to obtain general information on DOJ’s merger remedies.

To address the second objective concerning the extent of FTC’s use of the clean sweep divestiture, single buyer, and up-front buyer practices in the grocery store, drug store, funeral services, and gas station industries, we analyzed FTC consent orders that required a divestiture(s), also called divestiture orders, that were announced for public comment during fiscal years 1990 through 2000. Because FTC did not have a publicly available listing of the divestiture orders announced for public comment during fiscal years 1990 through 2000, we reviewed several sources of information. To identify divestiture orders FTC announced for public comment during fiscal years 1990 through 1995, we reviewed FTC decision books for calendar years 1989 through 1995 to identify all divestiture orders issued by FTC during that period. We then reviewed FTC press statements announcing each of the proposed divestiture orders to determine the fiscal year in which FTC announced the order. To identify divestiture orders FTC announced for public comment during fiscal years 1996 through 2000, we reviewed a summary of FTC’s Bureau of Competition activity for fiscal year 1996 through March 31, 2000. We then reviewed FTC monthly actions announced for public comment and posted on FTC’s Web site for the period April 1, 2000, through September 30, 2000, to identify the divestiture orders FTC announced for public comment during April 2000 through September 2000. Finally, we reviewed FTC’s HSR Act annual reports to Congress for fiscal years 1990 through 2000.

After we identified the 153 divestiture orders that were announced for public comment during fiscal years 1990 through 2000, we reviewed them to determine which ones required divestitures in the grocery store, drug store, funeral services, and gas station industries. We determined that during the 11-year period, FTC announced for public comment 33 divestiture orders that required divestitures in the four industries. However, we eliminated two funeral services divestiture orders from our review because, according to FTC staff, as of June 30, 2002, the divestitures had not taken place.

After we identified the divestiture orders for the four industries, we used a structured data collection instrument to gather information from each of the 31 divestiture orders and related documents, such as press releases announcing a proposed divestiture order, complaints, analyses to aid public comment, final divestiture orders, modifications to the orders, divestiture applications, and FTC letters approving divestiture applications. Specifically, we collected information on, among other things, (1) the date FTC announced the divestiture order for public comment; (2) the geographic market in which FTC required a divestiture; (3) the buyer(s) of the divested assets in each geographic market, both the “direct” buyers— buyers that purchased the divested assets directly from the merging parties—and the indirect buyers—third parties that purchased the assets from direct buyers of divested assets, generally a wholesaler; (4) whether the buyers were identified in the divestiture order at the time FTC announced it for public comment; and (5) whether the divestiture order required a single buyer and/or an up-front buyer. Because FTC's divestiture orders and related documents typically do not indicate whether a divestiture is a clean sweep, we relied on clean sweep data provided by FTC.

Because FTC speeches about its merger remedies indicated that FTC began to make changes in its divestiture practices during fiscal year 1996, we focused our analysis of the use of clean sweeps, single buyers, and up-front buyers on two periods—the period from fiscal years 1990 through 1995, before FTC started to make these changes, and fiscal years 1996 through 2000, the period during which FTC staff announced that FTC had begun to make changes. We determined the extent to which these practices were used in each of the two periods for the 31 divestiture orders included in our review. Additionally, because according to FTC staff each industry operates differently, we performed separate analyses for each of the four industries.

To address the third objective concerning the level of small business participation in purchasing divested assets in the four industries and the factors that may explain the level of small business participation, we obtained revenue data for the buyers of the divested assets, both the direct and indirect buyers. Because according to FTC staff, due to confidentiality restrictions, they could not provide us with the revenue data for the buyers of the divested assets, we obtained the revenue data from several sources. For publicly held buyers, we obtained the data from public sources, such as the Securities and Exchange Commission filings and Valueline Magazine. For privately held buyers for which we could not locate the data through publicly available sources, we contacted the buyers directly to obtain the data. When possible, we obtained the revenue data for the 3 most recent completed fiscal years prior to the buyers being identified in the proposed divestiture orders or in the divestiture applications. If revenue data were not available for the 3 most recent completed fiscal years, we obtained the data for the prior 2 years or year. For the direct buyer analyses, we were not able to obtain revenue data for 3 of the buyers of divested grocery store assets, and for the analyses that included direct and indirect buyers, we were not able to obtain revenue data for 5 of the buyers.

Because there were so few buyers of divested assets in the drug store, funeral services, and gas station industries during the period, we limited our analysis to the grocery store industry. According to FTC staff, SBA officials, grocery industry officials, and representatives of relevant small business associations, there is no generally accepted standard by which one could measure the relative size of businesses using revenues. They acknowledged that SBA's definition of a small business, which ranged from $13.5 million to $20 million in receipts from 1990 through 2000 for the grocery store industry, might be one indicator. However, they told us that SBA's threshold for a small grocery store business is too low given the relative size of grocery store businesses.

Because there appeared to be no generally accepted definition of a small grocery store business, we used two approaches to determine the level of smaller business participation in purchasing divested grocery store assets in fiscal years 1990 through 1996 and fiscal years 1997 through 2000. We used these two time periods for the size of buyers analyses, instead of the fiscal years 1990 through 1995 and fiscal years 1996 through 2000 time periods that we used in our analyses of FTC’s divestiture practices, primarily because fiscal year 1997 is the first full fiscal year after FTC began altering its approach to divestitures. Additionally, there were too few observations in the fiscal years 1990 through 1995 period. Our analyses of the size of the buyers is based on the dates of the merging parties’ divestiture applications or, in the case of up-front buyers, the dates of the proposed divestiture orders—generally the point at which FTC receives the revenue data for the proposed buyers to include in its review of the viability of the proposed buyers. Because FTC did not start to use up-front buyers in grocery store divestitures until fiscal year 1996, divestitures in the earlier period took much longer to occur. Additionally, fiscal year 1997 is the first full fiscal year after FTC began altering its approach to divestitures.

In regard to the two approaches we used to determine the level of smaller business participation in purchasing divested assets, we first analyzed the median of the average annual revenues of the buyers. Specifically, we calculated the average annual revenues of each of the buyers of divested grocery store assets using the buyers’ 3 years revenues, when available, prior to their purchase of the divested assets in constant 2000 dollars. We then computed the median of the average annual revenues for all the buyers for the two periods and for fiscal years 1990 through 2000. We used the overall median of the buyers’ average annual revenues for fiscal years 1990 through 2000 as a benchmark and determined the number of buyers in each of the periods that were below the overall median. We considered buyers below the overall median to be “smaller.”

Second, we used SBA’s size standard for a small grocery store business at the time the buyers of divested assets were either identified in the divestiture order or in the divestiture application to determine the extent to which buyers in both periods did or did not meet SBA's thresholds. However, we used the buyers’ average annual revenues in constant 2000 dollars before they purchased the divested assets as a proxy for receipts, because we were unable to obtain data on the buyers’ receipts. We also adjusted SBA’s size standards to constant 2000 dollars. We then determined if there was a statistically significant change in the number of buyers that met the adjusted SBA thresholds for the two periods.

Additionally, to examine changes in the size of the buyers, we compared the median of the average annual revenues of the buyers for the two periods and determined whether differences in the medians were statistically significant. (Appendix II provides more detailed information on our approaches for determining the level of smaller business participation in purchasing divested assets in the grocery store industry.)

As part of our work addressing the factors that may explain the level of small business participation in purchasing divested assets in the four retail industries included in our review, we interviewed staff from FTC’s Bureaus of Competition and Economics and its Office of General Counsel. We also interviewed antitrust practitioners and academicians to obtain their views on factors that may explain a decline in the level of small business participation in purchasing divested assets. In addition, we reviewed relevant articles to determine factors that may explain the level of small business participation. Unless provided in a public comment, we could not obtain information on small businesses that may have attempted to purchase divested assets but were not selected or approved as a buyer.

To address the fourth objective concerning FTC’s efforts to gauge the success or failure of its divestiture approaches and the impact of its approaches on the marketplace, especially small businesses, we reviewed FTC’s 1999 Divestiture Study and interviewed and reviewed relevant speeches and documents prepared by current and former FTC Commissioners and staff and antitrust practitioners. Specifically, we reviewed the study to determine whether it was methodologically sound and contextually sophisticated. We also interviewed and reviewed documents prepared by economists who consult merging parties and academic experts to obtain their views on FTC’s 1999 Divestiture Study and how FTC should measure the success of its divestiture approaches.

To obtain information on the nature of comments FTC received pertinent to its clean sweep divestiture, single buyer, and up-front buyer practices and how these practices impact the ability of small businesses to purchase divested assets, we reviewed FTC public case files for the 31 divestiture orders included in our review to identify the public comments FTC received concerning the divestiture orders and divestiture applications. FTC staff told us that in some cases, the commenter requests that their comments be kept confidential. FTC keeps the confidential comments in nonpublic files. We did not review the nonpublic files nor did we verify that the public files contained all of the nonconfidential public comments received by FTC. We relied on FTC to provide us with the information. We reviewed each of the 1,902 public comments contained in the files and, when available, FTC’s responses to the comments to determine if they related to the ability of small businesses to purchase divested assets due to FTC’s divestiture practices.

In addition, we interviewed FTC staff to obtain information on their process for obtaining public comments and to determine whether FTC had received any complaints, outside of the public comment process, concerning its clean sweep divestiture, single buyer, and up-front buyer practices and how these practices impact the ability of small businesses to purchase divested assets. To determine if associations that represent small and independent businesses had concerns related to the impact of FTC’s divestiture practices on the ability of small businesses to purchase divested assets, we also interviewed representatives from 10 associations whose membership in general, consists of the following: NGA is the national trade association representing retail and wholesale grocers that comprise the independent sector of the food distribution industry.

FMI conducts programs in research, education, industry relations, and public affairs on behalf of 2,300 food retailers and wholesalers in the United States and around the world. Its retail membership comprises of independent supermarkets, large multistore chains, and regional firms.

NCPA represents the pharmacist owners, managers, and employees of nearly 25,000 independent community pharmacies across the United States. The independent community pharmacists are small business entrepreneurs and multifaceted health care providers.

NFDA provides advocacy, education, information, products, programs, and services to help funeral directors enhance the quality of service to families. Ninety-three percent of its members are small business owners/operators with an average of four full-time employees.

PMAA is a federation of 42 state and regional trade associations representing approximately 7,850 independent petroleum marketers nationwide. It seeks to further the common business interest of the petroleum marketing industry.

NFIB is an advocacy organization representing 600,000 small and independent businesses. Its membership includes independent professional, retailers, service providers, manufacturers, farmers, and wholesalers.

NBA is a nonprofit organization that supports and educates the small business community and the self-employed.

NSBU is an advocacy organization representing over 65,000 U.S. members. It informs small business owners about legislative and regulatory issues that affect them.

The U.S. Chamber of Commerce is a nonprofit business federation representing businesses of all sizes. More than 96 percent of its members are small businesses with 100 or fewer employees.

The SCORE Association is a national, nonprofit association with 11,500 volunteer members and 389 chapters throughout the United States and its territories. It provides general business advice to small businesses and to persons interested in starting a business.

We also reviewed comments provided to FTC for its June 2002 workshop on merger remedies. In addition, we met with officials from SBA’s Office of Advocacy to determine if the agency has received any complaints from small businesses about their ability to purchase divested assets due to FTC’s divestiture practices. Finally, while obtaining revenue data from buyers of divested assets, representatives of 11 grocery store businesses with average annual revenues of $200 million or less provided anecdotal comments about the challenges that smaller businesses face in purchasing divested assets and maintaining their viability.

We did our work between April 2001 and August 2002 in accordance with generally accepted government auditing standards.

GAO Methodology to Determine the Level of Smaller Business Participation in Purchasing Divested Grocery Store Assets

As discussed in appendix I, to address our objective to determine the level of smaller business participation in purchasing divested assets in the grocery store, drug store, funeral services, and gas station industries, we collected publicly available data on the revenue of buyers of divested assets, both the direct and indirect buyers, for the four industries and, when public data were not available, from the buyers of divested assets. We did not have enough buyers in the drug store, funeral services, and gas station industries to analyze statistically the differences in the level of small business participation in purchasing divested assets in these industries from fiscal years 1990 through 2000. Therefore, we limited our analysis to the grocery store industry.

We used two approaches to determine the level of smaller business participation in purchasing divested grocery store assets in fiscal years 1990 through 1996 and fiscal years 1997 through 2000. The analysis was done using these two time periods primarily because fiscal year 1997 was the first full fiscal year after FTC began altering its approach to divestitures and began increasingly using clean sweep, single buyer, and up-front buyer divestiture practices in the grocery store industry—practices that may impact the level of smaller business participation in purchasing divested assets. We did our analysis for the direct and indirect buyers of divested grocery store assets.

First, we analyzed the median of the average annual revenues of the buyers. Specifically, we calculated the average annual revenues of each of the buyers of divested grocery store assets using the 3 years revenues prior to the purchase of the divested assets, when available, in constant 2000 dollars. We then computed the overall median of the average annual revenues for all the buyers for fiscal years 1990 through 2000. Using the overall median of the buyers’ average annual revenues for fiscal years 1990 through 2000 as a benchmark, we determined the number of buyers in each of the two periods—fiscal years 1990 through 1996 and fiscal years 1997 through 2000—that were below the overall median. We considered buyers with average annual revenues below the overall median to be “smaller.”

To determine if the changes in the level of smaller business participation in purchasing the divested assets in the two time periods were statistically significant, we used the Fisher Exact test (in MegaStat, by J.B. Orris, Butler University), which compares the percentage of smaller buyers in each time period. The results, presented in table 4, indicate that the percentage of smaller buyers FTC approved to purchase divested assets in the grocery industry during fiscal years 1997 through 2000 was significantly less than the percentage of smaller buyer approved during fiscal years 1990 through 1996, when smaller businesses were both direct buyers and indirect buyers of divested grocery store assets.

Second, we used the Small Business Administration’s (SBA) size standard for a small grocery store business to identify smaller buyers. We used the buyers’ average annual revenues in constant 2000 dollars before they purchased the divested assets as a proxy for receipts, because we were unable to obtain data on the buyers’ receipts. We also adjusted SBA’s size standard to constant 2000 dollars. Table 5 shows SBA’s size standard in current and in constant 2000 dollars for each year for the fiscal years 1990 through 2000 time period. We then determined the number of direct and indirect buyers of divested grocery store assets in each of the two periods that were below the adjusted SBA size standard for the grocery store industry. The results, presented in table 6, indicate that the percentage of smaller buyers FTC approved to purchase divested assets in the grocery industry during fiscal years 1997 through 2000 was significantly less than the percentage of smaller buyer approved during fiscal years 1990 through 1996 when smaller businesses were both direct and indirect buyers of divested grocery store assets.

Additionally, to examine changes in the size of the buyers, for both the direct and the indirect buyers, we calculated the overall medians of the average annual revenues for fiscal years 1990 through 1996 and fiscal years 1997 through 2000. We then compared the overall medians of the annual revenues of the buyers for the two time periods. To determine if the changes in the sizes of the buyers of the divested assets in the two time periods were statistically significant, we used the Wilcoxon-Mann/Whitney test for two independent samples (in MegaStat, by J.B. Orris, Butler University), which compares the locations (medians) of two independent samples. The results, presented in table 7, indicate that the sizes of the buyers have increased significantly from the fiscal years 1990 through 1996 to fiscal years 1997 through 2000, for both the direct and indirect buyers.

FTC Divestiture Orders in the Grocery Store, Drug Store, Funeral Services, and Gas Station Industries, Fiscal Years 1990 through 2000

Product market(s)

Retail sale of food and grocery items in supermarkets.

The Vons Companies, Inc. & Williams Bros. Markets, Inc.

Retail sale and distribution of food and grocery items in supermarkets.

Red Apple Companies, Inc. + John A. Catsimatidis + Supermarket Acquisition Corp. + Designcraft Industries, Inc. & Sloan’s Supermarkets, Inc.

Retail sale of food and grocery products in supermarkets.

Retail sale of food and grocery products in supermarkets.

Schnuck Markets, Inc. & National Holdings, Inc.

Retail sale of food and grocery products in supermarkets.

Schwegmann Giant Super Markets, Inc. & National Holdings, Inc.

Retail sale of food and grocery products in supermarkets.

The Stop and Shop Companies, Inc. & Purity Supreme, Inc.

Retail sale of food and grocery products in supermarkets.

Koninklijke Ahold nv + Ahold USA, Inc. & The Stop & Shop Companies, Inc.

Retail sale of food and grocery products in supermarkets.

Jitney-Jungle Stores of America, Inc. + Delta Acquisition Corporation & Delchamps, Inc.

Retail sale of food and grocery products in supermarkets.

Albertson’s, Inc. + Locomotive Acquisition Corporation & Buttrey Food and Drug Store Company, Inc.

Retail sale of food and grocery products in supermarkets.

Koninklijke Ahold nv & Giant Food Inc.

Retail sale of food and grocery products in supermarkets.

The Kroger Co. & Fred Meyer, Inc.

Retail sale of food and grocery products in supermarkets.

Retail sale of food and grocery products in supermarkets.

Product market(s)

Shaw’s Supermarkets, Inc. + J Sainsbury plc & Star Markets Holdings, Inc.

Retail sale of food and grocery products in supermarkets.

The Kroger Co. & The John C. Groub Company, Inc.

Retail sale of food and grocery products in supermarkets.

Delhaize America, Inc. (Food Lion) + Etablissements Delhaize Freres et Cie "Le Lion" S.A. & Hannaford Bros. Co.

Retail sale of food and grocery products in supermarkets.

Revco D.S., Inc. & Hook-SupeRx, Inc.

Sale of prescription drugs in retail stores.

Sale of prescription drugs in retail stores.

Rite Aid Corporation & LaVerdiere’s Enterprises, Inc.

Sale of prescription drugs in retail stores.

Retail sale of pharmacy services to third-party payors.

CVS Corporation & Revco D.S., Inc.

Retail sale of pharmacy services to third-party payors.

Sentinel Group, Inc.

Provision of funeral services.

Service Corporation International & Sentinel Group, Inc.

Provision of funeral services.

Provision of funerals.

Provision of funerals and provision of perpetual care cemetery services.

Provision of funerals, the provision of perpetual care cemetery services, and the provision of crematory services.

Product market(s)

The Loewen Group Inc. + Loewen Group International, Inc. & Garza Memorial Funeral Home, Inc. + Thomae-Garza Funeral Directors, Inc. (Texas)

Provision of funerals.

Funeral services; cemetery services.

Shell Oil Co. & Texaco Inc.

Refining, transportation, terminaling, wholesale sales, and retail sales of conventional unleaded gasoline, CARB-II gasoline; diesel fuel, kerosene jet fuel, and asphalt; and the transportation of undiluted heavy crude oil to the San Francisco, Cal. area.

Terminaling of gasoline and other light petroleum products; wholesale sale of gasoline.

Marketing of motor gasoline; refining and marketing of CARB gasoline; bidding for and refining of jet fuel for the U.S. Navy; terminaling of gasoline and other light petroleum products; pipeline transportation of light petroleum products; pipeline transportation of crude oil; refining and marketing of paraffinic base oil; production and sale of jet turbine oil.

Excludes two divestiture orders in the funeral services industry. The Service Corporation International and LaGrone divestiture order (C-3959; 981-0108) announced for public comment on May 18, 2000, required a divestiture of a funeral home only if the corporation acquired a particular funeral home. As of June 30, 2002, the corporation had not acquired the funeral home; therefore, it had no obligation to divest the funeral home. The Loewen Group Inc., and Loewen Group International, Inc., and Heritage Family Funeral Services, Inc., divestiture order (C-3678; 931-0084) announced for public comment on May 14, 1996, required a divestiture of a funeral home. As of June 30, 2002, the merger had not taken place; therefore, it had no obligation to divest the funeral home.

Overview of FTC’s Merger Review and Merger Remedy Processes

Merger Review

The Hart-Scott-Rodino Act (HSR Act) of 1976 reviews usually begin with the parties filing for a proposed merger or acquisition. The premerger notification provisions of the HSR Act require companies exceeding certain thresholds of company size and value of the transaction to notify the Federal Trade Commission (FTC) and the Department of Justice’s (DOJ) Antitrust Division of the proposed merger transaction, submit documents and other information to the agencies concerning the transaction, and refrain from consummating the transaction until a specified waiting period has expired or their request for early termination of the waiting period is granted by the appropriate antitrust enforcement agency.

Table 8 shows that the number of transactions reported has more than doubled from 2,262 in fiscal year 1990 to 4,926 in fiscal year 2000, and the percent of early terminations granted has ranged from 65.8 percent to 81.3 percent over the same time period. In fiscal 2001, however, after the filing thresholds and filing fees were raised, there were only 2,376 filings. The HSR Act was amended in late 2000 to significantly increase the filing thresholds.

FTC and the Antitrust Division also may become aware of mergers that are not subject to HSR Act requirements but that are potentially anticompetitive, using techniques such as (1) monitoring the trade press and Internet resources; (2) responding to and following up on case leads from congressional offices, other executive branch agencies, and state and local governments; and (3) encouraging consumers, businesses, and the bar to notify the FTC and the Antitrust Division of possibly anticompetitive mergers. FTC’s Performance Plan for fiscal years 2002 through 2003 states that after the reporting thresholds were increased on February 1, 2001, the FTC began to devote more effort to identifying mergers that may harm (or have harmed) competition but are not subject to HSR Act requirements.

Reporting Requirements and FTC’s Review of HSR Act Filings

There are three tests, all of which must be met, in order for a transaction to be reportable. The first test is the commerce test, which requires that either the acquiring party or the acquired party must be engaged in commerce or in any activity affecting interstate commerce, as defined by Section 1 of the Clayton Act. The second test is the size-of-person test, which is based on the annual sales or assets of the merging parties. For the period we reviewed, one party to the transaction had to have annual sales or assets of at least $100 million and the other party of at least $10 million. The third test is the size-of-transaction test. Under this test, for the period we reviewed, as a result of such acquisition, the acquiring party had to hold (1) voting securities or assets worth in the aggregate more than $15 million or (2) voting securities that confer control (50 or more percent) of an issuer with annual sales of $25 million or more.

FTC has 30 days (15 days for cash tender offers and bankruptcy filings) from the date the filing for the proposed acquisition is accepted to review the filing and to determine whether to seek additional information and documents from the merging parties and thereby extend the waiting period to enable further review. If FTC’s initial review does not indicate a need for further investigation, the merging parties can consummate the merger at the end of the waiting period, or when their request for early termination has been granted. If FTC’s initial review indicates a need for further review, a second request may be issued to the parties. A second request extends the waiting period for an additional 30 days (20 days prior to February 1, 2001, and 10 days for cash tender offers) after the parties have substantially complied with the request.

The Assistant Directors in the Bureau of Competition offices have the authority to request clearance to investigate a merger under the FTC-DOJ liaison agreement and to open an initial phase investigation, even before an HSR Act filing is actually received. Obtaining clearance to investigate and open an initial phase investigation allows FTC staff to contact third parties as well as the parties to the merger. The Bureau Director has the authority to authorize a full phase investigation and to approve or reject staff’s recommendations to the FTC to authorize the use of compulsory process. The Commissioner assigned to the matter must approve the issuance of particular subpoenas to the merging parties or to others. While the full Commission acts on recommendations to authorize compulsory process, the Chairman approves, rejects, or modifies staff’s second request recommendations as approved by the Bureau Director.

After FTC issues its second request to the merging parties, the parties begin assembling their responses. In the meanwhile, FTC staff are to employ other appropriate investigative techniques to obtain additional information relevant to determining the legality of the transaction and to evaluate the possible effects of the proposed transaction, such as concerns of third parties that may be affected by the merger. The third parties may include, among others, competitors, customers, and suppliers. In addition, when appropriate, staff may consult with state attorneys general, other U.S. governmental officials, and foreign antiturst authorities. When the parties comply with the second requests by submitting their responses to FTC, a second statutory waiting period is triggered. During that time, FTC staff are to review the material submitted by the parties, continue assembling third-party information, and complete staff’s evaluation and recommendations to FTC on whether enforcement action is warranted. According to FTC staff, parties often agree to extend the statutory time limits for FTC action to permit settlement negotiations. Antitrust practitioners and FTC staff told us that the merger investigation work generally is done with both the parties and FTC preparing for potential litigation. Table 9 shows the number of adjusted HSR Act transactions in which a second request could have been issued and the number of second requests issued by the FTC and the DOJ for fiscal years 1990 through 2000.

According to FTC staff, generally at least two conditions are necessary for a merger to have a likely anticompetitive effect. The market must be substantially concentrated after the merger, with the merger substantially increasing concentration, and it must be difficult for new firms to enter the market in the near-term to provide effective competition. The majority of mergers that raise antitrust concerns are horizontal mergers. According to FTC staff and Antitrust Division officials, the joint Horizontal Merger Guidelines accurately outline how the agencies generally conduct their analysis of proposed mergers. The guidelines were originally developed by DOJ in 1968 and were updated in 1982 when FTC and DOJ issued separate statements and again in 1984 by the DOJ. The DOJ and the FTC issued joint Horizontal Merger Guidelines in 1992. In 1997, the agencies amended and expanded the efficiencies section of the guidelines. The unifying theme of the guidelines is that mergers should not be permitted to create or enhance market power or facilitate its exercise. The guidelines define a seller’s market power as the ability to profitably maintain selling prices above competitive levels for a significant period of time. Similarly, a buyer’s market power is defined as the ability to profitably maintain buying prices below competitive levels for a significant period of time.

FTC’s Analysis of Proposed Mergers in Certain Retail Industries

The Horizontal Merger Guidelines outline the five-step analytical process the FTC and the Antitrust Division use to determine whether a merger is likely to substantially lessen competition and, ultimately, whether to challenge a merger. FTC staff are to: (1) define the relevant product market and geographic market, identify the market participants, assign market shares, and assess whether increased market concentration from the proposed merger raises concern about potential adverse competitive effects, that is, increase in prices or a decrease in quality or output; (2) assess the potential competitive effects of the proposed merger, and the factors in addition to market concentration relevant to each; (3) assess whether entry into the market would be timely, likely, and sufficient either to deter or to counteract the competitive effects of concern; (4) assess any efficiency gains that cannot be reasonably achieved by the parties absent the proposed merger; and (5) if the parties have raised the “failing firm” as an affirmative defense, determine whether, but for the merger, either party to the transaction would be likely to fail and result in its assets exiting the market.

According to FTC staff, while the analytical framework for merger analysis is generally the same regardless of the industry in which the merger is taking place, the particular facts of each merger are unique and outcome determinative. FTC staff told us that investigations are extraordinarily fact- specific. For example, supermarkets constitute a differentiated product market. No two supermarkets or chains are the same. Each store sells similar or the same products, but each store competes differently on price, level of service, and has different direct competitors. Similarly, FTC staff told us that the size of a geographic market also varies based on the facts of the case and the location of the merging parties’ and competitors’ assets.

Merger Remedies

Once it is determined that a merger is likely to be anticompetitive, FTC may take action designed to prevent an anticompetitive result from a proposed merger by: (1) conducting successful litigation to block the merger; (2) negotiating a settlement to resolve anticompetitive aspects of the merger while allowing the underlying transaction to go forward; or (3) identifying antitrust concerns sufficient to cause the parties to abandon the transaction without court action. As FTC staff are reviewing the transaction, they are to invite the merging parties to discuss the competitive problem(s) and potential remedies to address the problem(s).

FTC may decide that no remedy, short of blocking the transaction, will fully and effectively resolve the competitive concerns. FTC may also decide that to resolve the competitive concerns one of the merging parties must divest all of its assets in a single geographic market, or that a partial divestiture would be acceptable. Additionally, the anticompetitive effects of a merger may be remedied through contractual arrangements, such as the licensing of intellectual property or a short-term supply agreement. Alternatively, FTC may decide to use some form of behavioral relief, such as establishing firewalls in vertical mergers, to prevent the sharing of competitive information. Finally, the anticompetitive effects of some mergers may be addressed with a combination of these remedies. According to FTC staff, the remedy is based on the particular facts of the case.

In response to FTC’s concerns, the merging parties might attempt to solve the competitive problem(s), abandon the transaction, or pursue the case through litigation. If an effective consent order cannot be negotiated and the merger has not yet been consummated, FTC staff are to recommend, in appropriate cases, that FTC authorize the filing of an action in federal district court for a preliminary injunction to stop the merger. If authorized, staff litigate preliminary injunction actions and appellate review proceedings.

According to FTC staff, the team responsible for a merger investigation and consent negotiations typically includes the Bureau of Competition staff investigating the merger; staff from the Bureau of Competition’s Compliance Division, who are experienced in order drafting and enforcement; Bureau of Economics staff; and staff from FTC’s Office of the General Counsel. The team is to work together to develop and negotiate a consent agreement containing a proposed order with the merging parties. According to FTC staff, the parties may not agree with how the agency has defined the competitive harm, but they are aware of FTC’s concerns. FTC staff told us that generally the merging parties come forward with the first set of proposed remedies. FTC staff advised us that the merging parties often have extensive information about their industry and the effect of the proposed remedy. They also told us that FTC staff’s job is to make clear what their concerns are about the proposed transaction, to be available for constructive dialogue on how the problem can be adequately addressed, and to evaluate the adequacy of proposed remedies.

Factors FTC Considers in Evaluating a Remedy

According to a March 2000 speech by the then FTC General Counsel, FTC generally considers several factors in evaluating a proposed restructuring remedy. Specifically, she said that FTC staff generally consider whether the remedy is likely to protect, promote, or restore competition in the affected market. For example, in the case of a remedy involving divestiture of assets, FTC determines whether the buyer is obtaining sufficient assets, and the right kind of assets, to be able to create and operate a successful, competitive business, and whether that buyer has sufficient expertise, experience, incentives, and resources to accomplish its goal of maintaining or restoring competition in the relevant markets; whether efficiencies justify restructuring, rather than condemning, a the complexity of a proposed remedy; and whether its acceptance of a restructuring remedy might have implications for future matters. For example, according to the March 2000 speech, when FTC accepts a restructuring remedy, parties to subsequent proposed mergers tend to insist on a similar resolution to the competitive problems raised by their transactions, although FTC may view the matters as distinguishable on factual or economic grounds.

Approval Process for Proposed Consent Agreement

FTC staff negotiate a proposed consent agreement with the merging parties. Once the merging parties sign the proposed consent agreement and the Director of the Bureau of Competition approves the execution of the draft consent agreement, it is reviewed by the full Commission, which determines if the agency will accept the agreement for public comment. For an agreement containing a proposed order to be approved subject to public comment, a majority of the Commissioners must vote to accept the agreement. In general, if the Commission votes to accept the agreement subject to public comment, the HSR Act waiting period is terminated, and the parties can consummate the merger. In consent agreements that require up-front buyers, the divestitures also may be consummated, but the divestiture must include a clause requiring its rescission if FTC does not give final approval to the proposed consent order. The merging parties generally can consummate the transaction as soon as they are notified of FTC action. This notification occurs before the public announcement, which generally occurs within a few days of the Commission’s vote to accept the agreement.

Although not statutorily required, FTC places the consent agreement along with an analysis to aid public comment on the public record, generally for a 30-day comment period, in which the public is invited to comment on the merger and the proposed relief. At end of the comment period, FTC staff are to analyze the comments received and forward a second set of recommendations to the Commission on whether the agency should issue the final consent order. According to FTC staff, typically the Commission accepts the consent agreement and issues a complaint and decision and order. They told us that it is highly unusual for FTC to receive new antitrust-related information during the public comment period that staff had not already considered as part of their investigation. In addition, they said that after considering public comments, FTC has rarely modified a consent order because in most instances, the complaint and order, as proposed, provided the most appropriate relief.

Common Provisions Included in Orders

FTC staff have said that every order has the same goal: to preserve fully the existing competition in the relevant market or markets. According to FTC staff, while developing appropriate merger remedies is a very fact-specific process, many provisions have been developed over the years that appear in almost every order. These required provisions are readily apparent from even a cursory review of merger consent orders posted on FTC’s Web site. In March 2002, FTC’s Bureau of Competition posted on its Web site a document that provides responses to frequently asked questions about merger consent order provisions. This document as well as a review of FTC orders, other public documents prepared by FTC staff, and our discussions with FTC staff provide some insight into FTC’s consent order provisions.

Divestitures

Most orders relating to a merger will require a divestiture—the selling of a business or assets by one or both of the merging parties—in order to maintain or restore the level of competition that existed before the merger. During fiscal years 1990 through 2000, FTC announced 192 proposed consent orders involving mergers for public comment, of which 153 required divestitures. FTC has the authority to decide the extent of the divestiture. A divestiture can range from a partial divestiture to a divestiture of an on-going business. Table 10 shows that most (about 80 percent) of the consent orders involving mergers that FTC announced for public comment during fiscal years 1990 through 2000 required divestiture of assets. (Appendix V provides information on the 153 consent orders requiring divestitures that FTC announced for public comment during fiscal years 1990 through 2000.)

According to FTC staff, FTC generally requires divestitures in the geographic and product markets where the merging parties have competitive overlaps and FTC has competitive concerns. However, it is within FTC’s power to require divestiture of a greater set of assets than those which participate in the overlap markets in order to effectively replace competition. According to FTC staff, sometimes the buyers of the divested assets will need other ancillary assets in order to effectively restore competition. Without these ancillary assets the buyer will not be able to replicate the economies of scale of the firm that has been acquired. In other cases, these additional assets will be necessary to give the buyer both the incentive and ability to fully restore competition. FTC staff told us that the merging parties generally are the first to respond to staff’s concerns by proposing appropriate assets to be divested.

According to FTC staff, an acceptable divestiture package is one that maintains or restores competition in the relevant market. FTC staff have said that the divestiture of an entire business of either the acquired or acquiring firm relating to the markets in which there is concern about anticompetitive effects, is most likely to maintain or restore competition in the relevant market, and thus will usually be an acceptable divestiture package. FTC has issued orders that require divestitures of less than the entire business operating in, or producing for, the relevant market. In those cases, FTC concluded that the assets to be divested were sufficient to allow the buyer of the assets to begin to compete in the market immediately and to remedy the likely or actual anticompetitive effects of the challenged acquisition. According to FTC staff, the burden is on the merging parties to provide concrete and convincing evidence that the asset package is sufficient to allow the proposed buyer, whether large or small, to operate in a manner that maintains or restores competition in the relevant market.

FTC also generally requires that a divestiture be absolute. This means that the merging parties are to have no continuing ties to the divested business or assets, no continuing relationship with the buyer, and no financial stake in the buyer’s success. According to FTC staff, divestiture proposals in which the buyer intends to rely on the merging parties to finance the divestiture, or where the proposal includes performance payments by the buyer generally have been rejected.

For consent orders in which FTC has required a divestiture(s), and the buyer(s) of the divested asset(s) is not identified in the proposed order, the merging parties must submit an application to FTC requesting approval to divest the asset(s) to a proposed buyer(s) and await FTC approval before consummating the divestiture. According to FTC staff, the more information the divestiture application contains about the transaction and the proposed buyer, the more likely the approval can be obtained quickly. The application must show how the proposed divestiture will remedy the competitive problem identified in FTC’s complaint and restore competition. Additionally, there must be a final signed contract for a divestiture application to be sufficient. The contract should conform to the requirements of the consent order or, if it does not, explain how the respondent will satisfy the order’s requirements. The divestiture proposal should demonstrate that the proposed buyer will be an effective competitor after the divestiture. The proposed buyers of the divested assets are to provide directly to the FTC information on their (1) financial capability, including the financing in place both to pay for the acquisition and to fund working capital and other needs associated with an on-going business; (2) technical and management skills; and (3) business plans and other evidence of the proposed buyer’s intention and ability to compete.

In evaluating whether a proposed buyer has the financial resources to remain a vigorous competitor in the market, FTC staff are to examine the proposed buyer’s commitment to remain in the market by analyzing its past operations and business plans as well as its future business plans for the divested assets. The staff also will likely talk with industry members familiar with the proposed buyer, such as competitors, suppliers, and customers. The staff also are to evaluate the proposed buyer’s experience and expertise to operate effectively in the market. They also may examine information on the proposed buyer’s debt structure to determine whether the transaction is very risky for the company. However, information on debt structure is not collected for each buyer. FTC staff told us that the information provided by each buyer varies on a case-by-case basis. FTC does not use a standard form or checklist to collect information from buyers because the facts of each case and, thus, the requirements for information from the buyers differ.

FTC frequently requires that the merging parties find an acceptable buyer(s) for the assets to be divested and that it execute an acceptable purchase agreement and all the necessary ancillary agreements with the buyer(s) before the FTC accepts the proposed consent order for public comment. FTC staff refers to such a buyer as an up-front buyer or buyer up-front. According to FTC staff, an up-front buyer may be the best way to ensure a successful divestiture in the supermarket industry because the approach enables staff to evaluate the marketability of the divestiture assets with more concrete evidence and better determine whether, among other things, there is a viable buyer(s) for the proposed divestiture assets. Additionally, FTC staff told us that an up-front buyer reduces the amount of time needed for the assets to be divested because a buyer can be identified before the merger transaction occurs—a factor in supermarket mergers and those of other retail operations, where assets may quickly deteriorate during the search for a buyer; and generally increases the likelihood that a buyer will restore the competition that otherwise would be lost through the merger.

To preserve FTC’s ability to reject an up-front buyer following the public comment period, consent orders accepted subject to public comment require the merging parties to include a rescission provision in any divestiture contracts in which closing on the divestiture will occur before final FTC approval of the consent order. According to FTC staff, as of June 30, 2002, FTC had not ordered rescission of an up-front divestiture. FTC staff told us that there have been instances in which the buyers will purchase the assets only after the final order has been approved. Additionally, they said that one FTC order, not in the retail industry, specified that the assets could not be divested until the order was final.

Amount of Time to Divest Assets Divestiture orders specify the timeframe in which the assets must be divested. The merging parties must find a buyer(s), negotiate a contract(s), submit the contract(s) to the FTC for its approval, and complete the divestiture(s) within that time. If there is an up-front buyer, the divestiture is required almost immediately upon consummation of the subject merger and FTC approves the up-front buyer when it issues the final consent order. In other cases, however, the merging parties must submit their divestiture application(s) to FTC early enough to allow for the 30-day public comment period required by FTC rules. According to FTC staff, to satisfy its obligation to divest by the date required in the order, the merging parties have to actually consummate the sale by that date. Executing an agreement or filing an application for the FTC’s approval by that date does not satisfy the obligation to divest by that date.

FTC may appoint trustees or independent auditors in three situations. First, most orders authorize FTC to appoint a trustee to divest the assets if the merging parties fail to divest them within the time frame required by the consent order. In addition, where there is a hold separate order, FTC appoints an independent auditor to ensure the independence of the assets to be divested when they must be operated separately from the other assets of the merging parties until they are sold. Finally, where there is to be a short-term continuing relationship after the divestiture, FTC may appoint a trustee to ensure that the merging parties fully perform their responsibilities by the order.

Some orders authorize a divestiture trustee to divest a different or larger package of assets, referred to as a crown jewel, if the assets are not divested on time. According to FTC staff, a crown jewel is used where there is risk that, if the respondent fails to divest the original divestiture package on time or if the original divestiture does not take place for any reason, a divestiture trustee may be needed to divest an expanded or alternative package of assets to accomplish the divestiture remedy. FTC staff have said that a crown jewel provision may be particularly valuable when there are some uncertainties about the marketability or viability of the initial divestiture package. FTC staff also have said that a crown jewel provision increases the incentive for the merging parties to accomplish the divestiture within the time required by FTC’s divestiture order, and it provides a bigger, and presumably more attractive, package for the trustee in the event the merging parties are unsuccessful in divesting the assets.

Asset Maintenance and Hold Separate Agreements A consent order may include an asset maintenance agreement that requires the merging parties to maintain the viability, marketability, and competitiveness of the assets. FTC also has included hold-separate agreements to protect all the assets to be divested to prevent interim competitive harm and to preserve the viability and competitiveness of the assets pending divestiture. According to FTC staff, a hold separate agreement is designed to keep the divestiture assets from being intermingled with the divesting party’s other assets pending divestiture by requiring the divestiture assets to be operated separately from and independently of the remaining business. Additionally, a “hold separate” agreement prevents the transfer of competitively sensitive information and, by taking the assets out of the hands of the divesting party, better protects the assets from intentional or unintentional physical or intangible deterioration that would affect their ability to be operated in a manner that maintains or restores competition. According to FTC staff, hold-separate agreements are generally required if there is no up front-buyer.

A provision that required the merging parties to obtain FTC’s prior approval for future transactions in the same product and geographic market(s), usually for a period of 10 years was among the commonly included provisions. However, on June 21, 1995, FTC issued a new policy regarding the use of prior approval requirements in FTC orders. Previously, whenever FTC found reason to believe that the respondent had attempted (or completed) a merger transaction that was anticompetitive, a prior approval provision was included in the order. In some cases, according to FTC staff, FTC also required prior notice of transactions that would not be reportable under the HSR Act. According to FTC staff, under the new policy that is no longer the case. The general rule now is that FTC will not use prior approval or prior notice requirements except in special cases.

In cases in which the merging parties have a post-order divestiture obligation, the merging parties generally are required to keep FTC informed of their divestiture efforts every 30 or 60 days by submitting verified written compliance reports. To the extent there are obligations in the order beyond the divestiture obligation, the merging parties are usually required to submit verified written annual reports to FTC on their continued compliance with those obligations.

Public Comments on Divestiture Orders

In the case of a post-order divestiture requirement, when the merging parties file an application seeking approval of a particular divestiture, that application is also placed on the public record for a 30-day comment period. Again, staff must analyze the comments received and make recommendations to FTC. In some cases, buyers are identified before FTC accepts the consent agreement for public comment. If the buyer is identified early in the consent process and is identified in the proposed consent order, there is no separate comment period because the public is commenting on both the proposed order and divestiture at the same time. Consequently, according to FTC staff, the public comment serves the twin purposes of giving the public a chance to comment on the substance of relief obtained as well as the opportunity to comment on the suitability of the proposed buyers. According to FTC staff, FTC has negotiated with merging parties for divestitures of additional assets based on comments received during the public comment period. They also told us that after considering public comments, FTC has rarely modified a consent order accepted subject to public comment or disapproved an up-front divestiture.

Modification of Consent Orders

FTC can reopen and modify a final consent order when a request to reopen identifies significant changes in circumstances and shows that the changes eliminate the need for the order or make continued application of it inequitable or harmful to competition. FTC also may modify an order when, although changed circumstances would not require reopening, it determines that the public interest so requires. According to standard language in FTC orders reopening and modifying an order, FTC will balance the reasons favoring the requested modification against any reasons not to make the modification. FTC also considers whether the particular modification sought is appropriate to remedy the identified harm.

FTC Divestiture Orders Announced for Public Comment, Fiscal Years 1990 through 2000

Product market(s)

Retail sale of food and grocery items in supermarkets.

The Vons Companies, Inc. & Williams Bros. Markets, Inc.

Retail sale and distribution of food and grocery items in supermarkets.

Red Apple Companies, Inc. + John A. Catsimatidis + Supermarket Acquisition Corp. + Designcraft Industries, Inc. & Sloan’s Supermarkets, Inc.

Retail sale of food and grocery products in supermarkets.

Retail sale of food and grocery products in supermarkets.

Schnuck Markets, Inc. & National Holdings, Inc.

Retail sale of food and grocery products in supermarkets.

Schwegmann Giant Super Markets, Inc. & National Holdings, Inc.

Retail sale of food and grocery products in supermarkets.

The Stop and Shop Companies, Inc. & Purity Supreme, Inc.

Retail sale of food and grocery products in supermarkets.

Koninklijke Ahold nv + Ahold USA, Inc. & The Stop & Shop Companies, Inc.

Retail sale of food and grocery products in supermarkets.

Jitney-Jungle Stores of America, Inc. + Delta Acquisition Corporation & Delchamps, Inc.

Retail sale of food and grocery products in supermarkets.

Albertson’s, Inc. + Locomotive Acquisition Corporation & Buttrey Food and Drug Store Company, Inc.

Retail sale of food and grocery products in supermarkets.

Koninklijke Ahold nv & Giant Food, Inc.

Retail sale of food and grocery products in supermarkets.

Product market(s)

The Kroger Co. & Fred Meyer, Inc. Retail sale of food and grocery products in supermarkets.

Retail sale of food and grocery products in supermarkets.

Shaw’s Supermarkets, Inc. + J Sainsbury plc & Star Markets Holdings, Inc.

Retail sale of food and grocery products in supermarkets.

The Kroger Co. & The John C. Groub Company, Inc.

Retail sale of food and grocery products in supermarkets.

Delhaize America, Inc. (Food Lion) + Etablissements Delhaize Freres et Cie "Le Lion" S.A. & Hannaford Bros. Co.

Retail sale of food and grocery products in supermarkets.

Manufacture and sale of propylene oxide; manufacture and sale of urethane polyether polyol; manufacture and sale of propylene glycol .

Licensing of polypropylene technology; polypropylene technology; licensing, production, and sales of high-yield/high-specificity polypropylene catalysts and catalyst technology; production and sales of polypropylene resin; production and sales of polypropylene impact copolymer resin.

NGC Corporation & Chevron U.S.A., Inc.

Fractionation of natural gas liquids.

Product market(s)

SoftSearch Holdings, Inc.+ Dwight’s Energydata, Inc. & Petroleum Information Corporation + GeoQuest International Holdings, Inc.

Sale or licensing of well data and production data.

Natural gas gathering services.

Shell Oil Co. & Texaco, Inc.

Refining, transportation, terminaling, wholesale sales, and retail sales of conventional unleaded gasoline, CARB-II gasoline (specially formulated gasoline required in California), diesel fuel, kerosene jet fuel, and asphalt; and the transportation of undiluted heavy crude oil to the San Francisco, Cal. area.

Mining, production, and sale of coal; wholesale electricity sales.

The Williams Companies, Inc. & MAPCO, Inc.

Transportation by pipeline and terminaling of propane; transportation by pipeline of raw mix.

Development, manufacture, marketing, and sale of viscosity index improver or viscosity modifiers for motor oil for automobiles and trucks.

Natural gas gathering services.

Product market(s)

Terminaling of gasoline and other light petroleum products; wholesale sale of gasoline.

El Paso Energy Corporation & Sonat, Inc.

Transportation of natural gas out of producing fields; transportation of natural gas into gas consuming areas.

Generation of electric power and the distribution of natural gas.

Marketing of motor gasoline; refining and marketing of “CARB” gasoline (specially formulated gasoline required in California); bidding for and refining of jet fuel for the U.S. Navy; terminaling of gasoline and other light petroleum products; pipeline transportation of light petroleum products; pipeline transportation of crude oil; refining and marketing of paraffinic base oil; production and sale of jet turbine oil.

Duke Energy Corporation & Phillips Petroleum Company & Duke Energy Field Services L.L.C.

Natural gas gathering.

Product market(s)

Production, sale, and delivery of Alaska North Slope crude oil; production, sale, and delivery of crude oil used by targeted West Coast refiners; production, sale, and delivery of all crude oil used by refiners on the West Coast; purchase of exploration rights; pipeline transportation of Alaska North Slope crude oil; development for commercial sale of natural gas; oil pipeline and storage services into and in Cushing.

Product market(s)

Amersham International plc & Medi-Physics, Inc.

Formulating, manufacturing, marketing, and selling radiopharmaceutical brain perfusion imaging agents for use with Single Positron Emission Tomography equipment.

E-Z-EM, Inc. & Lafayette Pharmacal, Inc.

Formulating, manufacturing, marketing, and selling barium diagnostic products and related accessories.

Institut Merieux S.A. & Connaught BioSciences, Inc.

Rabies-vaccines.

Roche Holdings, Inc. + Hoffman- La Roche Inc. + Roche Holdings Ltd. & Genentech, Ltd.

Research and development and production and manufacture of: vitamin C; therapeutics for treatment of human growth hormone deficiency or other short stature deficiency; and CD4- based therapeutics for the treatment of AIDS and HIV infection.

Columbia Hospital Corporation & Galen Health Care, Inc.

Production and sale of acute care inpatient hospital services.

Sale, rental, or lease of oxygen systems.

Sale, rental, or lease of oxygen systems.

Sale, rental or lease of oxygen systems.

Production and sale of acute care inpatient hospital services.

Sale of prescription drugs in retail stores.

Product market(s)

Production and sale of acute care inpatient hospital services.

Revco D.S., Inc. & Hook-SupeRx, Inc.

Sale of prescription drugs in retail stores.

Manufacture and sale of drugs of abuse reagent products.

Rite Aid Corporation & LaVerdiere’s Enterprises, Inc.

Sale of prescription drugs in retail stores.

Columbia/HCA Healthcare Corporation & Medical Care America, Inc.

Production and sale of outpatient surgery services.

Manufacture and sale of combined tetanus and diphtheria vaccine (adult Td); manufacture and sale of combined diphtheria and tetanus vaccine (pediatric DT); manufacture and sale of tetanus vaccine (tetanus toxoid); research and development of vaccine against Rotavirus infection in humans; research, development, production, and sale of cytokines for white blood cell and platelet restoration.

Wright Medical Technology, Inc. + Kidd, Kamm Equity Partners, L.P. + Kidd, Kamm Investments, L.P. + Kidd, Kamm Investments, Inc. & Orthomet, Inc.

Manufacture and sale of orthopedic implants used or intended for use in the human hand approved by the Federal Drug Administration; research and development of orthopedic implants used or intended for use in the human hand.

Product market(s)

Healthsouth Rehabilitation Corporation & ReLife, Inc.

Production and sale by rehabilitation hospital facilities of comprehensive, acute inpatient medical rehabilitation services.

Boston Scientific Corporation & Cardiovascular Imaging Systems, Inc. & SCIMED Life Systems, Inc.

Research, development, manufacture, and sale of intravascular ultrasound catheters.

Research and development of noninjectable 5HT-ID agonists.

Production and sale of acute care in-patient hospital services.

Production and sale of psychiatric hospital services.

Hoechst AG & Marion Merrell Dow, Inc.

Research, development, manufacture, and sale of: once a day diltiazem; oral dosage forms of mesalamine; rifampin; drugs approved by FDA for treatment of intermittent claudication.

Research, development, manufacture, and sale of Topoisomerase I inhibitors for the treatment of colorectal cancer.

Manufacture and sale of neurological shunts.

Fresenius AG + Fresenius USA, Inc. & National Medical Care, Inc.

Hemodialysis concentrate.

Retail sale of pharmacy services to third-party payors.

Product market(s)

Gene therapy technology and research and development of gene therapies; research, development, manufacture, and sale of flea control products; research, development, manufacture, and sale of corn herbicide.

Research, development, manufacture, and sale of Factor VIII Inhibitor Treatments; research and development, manufacture, and sale of Fibrin Sealant.

Production and sale of acute care inpatient hospital services.

American Home Products Corporation & Solvay, S.A.

Research, development, manufacture, and sale of canine lyme, canine corona virus, and feline leukemia vaccines.

CVS Corporation & Revco D.S., Inc.

Retail sale of pharmacy services to third-party payors.

Research, development, manufacture, and sale of Cardiac Thrombolytic agents; research, development, manufacture, and sale of drug abuse testing reagents used in workplace testing.

Medtronic, Inc. & Avecor Cardiovascular, Inc.

Research, development, manufacture, and sale of non-occlusive arterial pumps.

Manufacture and sale of Long-Acting Local Anesthetics.

Product market(s)

Research, development, manufacture, and sale of heart-lung machines.

Hoechst AG + RhÔne-Poulenc S.A. & Aventis S.A.

Research, development, manufacture, and sale of direct thrombin inhibitors; manufacture, marketing, and sale of cellulose acetate.

Research, development, manufacture, and sale of over the counter pediculicides; research, development, manufacture, and sale of selective serotonin reuptake inhibitor/selective norepinephrinr reuptake inhibitors drugs for treatment of depression; research, development, manufacture, and sale of drugs for the treatment of Alzheimer’s disease; research, development, manufacture, and sale of EGFr-tk inhibitors for the treatment of cancer.

Litton Industries, Inc. & PRC, Inc. Research, development, manufacture, and sale of Aegis destroyers; Systems Engineering and Technical Assistance Services.

Product market(s)

Research, development, manufacture, and sale of air traffic control systems; provision of Systems Engineering and Technical Assistance services; research, development, manufacture, and sale of commercial low earth orbit satellites; research, development, manufacture, and sale of commercial geosynchronous earth orbit satellites; research, development, manufacture, and sale of military aircraft; research, development, manufacture, and sale of NITE Hawk systems (same as nonpublic military aircraft information); research, development, manufacture, and sale of simulation and training systems; research, development, manufacture, and sale of electronic countermeasures; research, development, manufacture, and sale of mission computers; research, development, manufacture, and sale of unmanned aerial vehicles; research, development, manufacture, and sale of integrated communications systems.

Product market(s)

Research, development, manufacture, and sale of high altitude endurance unmanned air vehicles, research, development, manufacture, and sale of space launch vehicles, research, development, manufacture, and sale of space launch vehicle propulsion systems.

TRW Inc. & BDM International, Inc.

Research, development, manufacture, and sale of a ballistic missile defense system; Systems Engineering and Technical Assistance Services.

Tele-communications, Inc., and Liberty Media Corporation & QVC Network, Inc.

Subscription television program distribution to consumers and/or in cable premium movie channels.

Development and sale of professional illustration software for use on Apple Macintosh and Power Macintosh computers.

Multichannel video programming.

Sale of cable television program services to Multichannel Video Programming Distributors; sale of cable television programming services to households.

Product market(s)

Automatic Data Processing, Inc., and AutoInfo, Inc.

Integrated group of information products and services that form the complete salvage yard information systems network, consisting of an interchange integrated with yard management systems and electronic communications systems; development and sale of automotive parts and assemblies interchanges; development and sale of yard management systems integrated with interchange; development and sale of electronic communications systems used by salvage yards to locate parts through searches of a central database of parts; collection and provision of salvage yard inventory data to customers who provide such data as a part of estimating products sold to insurance companies.

Cablevision Systems Corporation & Tele-Communications, Inc.

Distribution of multichannel video programming by cable television.

Manufacture and sale of high-performance, general purpose microprocessors capable of running Windows NT; manufacture and sale of general-purpose microprocessors; design and development of high- performance, general- purpose microprocessors.

Product market(s)

Emerson Electric Company + Emerson Power Transmission Co. & McGill Manufacturing Company, Inc.

Production and distribution of mounted ball bearings.

Rug cleaning products business.

T&N plc & J. P. Industries, Inc.

Manufacture and sale of thinwall engine bearings; design, manufacture, and sale of tri-metal heavywall engine bearings.

Manufacture and sale of portland cement.

Mannesmann, AG + Mannesmann Capital Corporation & Rapistan Corp. + Lear Siegler Holdings Corp.

Manufacture and sale of high speed, light-to-medium duty unit handling roller and belt conveyor systems for distribution end users.

Acrylic emulsion polymers for exterior architectural coatings.

Premium silver alloy business.

Cooper Industries, Inc.+ Cooper (U.K.) Limited & The Fusegear Group of BTR p.l .c.

Low voltage industrial fuse market.

Consol, Inc. + E.I. du Pont de Nemours + RWE Aktiengesellshaft & Island Creek Coal, Inc.

Coal export terminal services.

Manufacture and sale of acrylic plastic.

Manufacture and sale of coating resins and other markets contained therein.

Product market(s)

Textron, Inc. & Avdel PLC and Banner Industries, Inc.

Design, manufacture, and sale of aerospace blind rivets; design, manufacture, and sale of nonaerospace structural blind rivets.

Alvey Holdings, Inc. + Alvey, Inc. & White Storage & Retrieval Systems, Inc.

Manufacture and sale of horizontal carousels.

The Dow Chemical Company + Marion Merrell Dow Inc. & Rugby- Darby Group Companies, Inc.

Dicyclomine hydrochloride capsules and tablets.

Manufacture and sale of aluminum polyester powder.

Manufacture, distribution, and sale of turbomolecular pumps; manufacture, distribution, and sale of compact disc metallizers.

Reckitt & Colman plc & L&F Products, Inc.

Development, manufacture, marketing, and sale for resale of carpet deodorizer products.

Mustad Connecticut Inc. + Mustad International Group NV & Cooper Horseshoe Nail Co., Ltd.

Manufacture and sale of rolled horseshoe nails.

Praxair, Inc. & CBI Industries, Inc. Manufacture and sale of merchant argon, merchant oxygen, merchant nitrogen.

Industrial power sources, industrial engine drives, battery chargers, and aircraft ground power units.

Fused cast refractories; hot surface igniters; silicon carbide refractory bricks.

Product market(s)

Electronic automotive parts catalogs; management information systems integrated with an electronic catalog.

Mahle GmbH + Mahle, Inc. & Metal Leve, S.A.

Research, development, design, production, and sale of articulate pistons; research, development, design, production, and sale of large bore two-piece pistons.

Large Welded Aluminum Tubes; small Welded Aluminum Tubes.

Research, development, manufacture, and sale of chelants.

S.C. Johnson & Son, Inc. & Dow Brands Inc. + Dow Brands L.P. + Dow Brands Canada Inc.

Research, development, manufacture, and sale of soil and stain removers; research, development, manufacture, and sale of glass cleaner product.

Federal-Mogul Corporation & T&N p.l.c.

Development, manufacture, and sale of thinwall bearings; development, manufacture, and sale of light duty engine bearings; development, manufacture, and sale of heavy duty engine bearings; m- manufacture and sale of aftermarket bearings.

Global Industrial Technologies, Inc. & AP Green Industries, Inc.

Glass-furnace silica refractories.

Nortek, Inc. + NTK Sub, Inc. & NuTone, Inc.

Manufacture, production, and sale of hard-wired residential intercoms.

Product market(s)

Research, development, manufacture, and sale of water-based polymers.

Smelting and refining of lead; recycling of junkers.

Development, manufacture, and sale of Titanium Aerospace Investment Cast Components; development, manufacture, and sale of Large Stainless Steel Aerospace Investment Cast Components; development, manufacture, and sale of Large Nickel-based Superalloy Aerospace Investment Cast Components.

Reckitt + Colman plc & Benckiser N.V.

Research, development, formulation, manufacture, marketing, and sale of hard surface bathroom cleaners; research, development, formulation, manufacture, marketing, and sale of fine fabric wash products.

MacDermid, Inc. & Polyfibron Techonologies, Inc.

Research, development, manufacture, and sale of liquid photopolymers; research, development, and sale of solid sheet photopolymers.

Product market(s)

RHI AG & Global Industrial Technologies, Inc.

Research, development, manufacture, and sale of magnesia-carbon refractory bricks for basic oxygen furnaces; research, development, manufacture, and sale of magnesia- carbon bricks for electric arc furnaces; research, development, manufacture, and sale of magnesia- carbon refractory bricks for basic oxygen furnaces steel ladles; research, development, manufacture, and sale of magnesia chrome refractory bricks for steel degassers; research, development, manufacture, and sale of high-alumina refractory bricks for basic oxygen furnaces steel ladles; research, development, manufacture, and sale of high-alumina refractory bricks for torpedo cars.

Manufacture, marketing, and sale of pure phosphoric acid.

Production, distribution, and wholesale sale of nitrogen- based fertilizer urea; production, distribution, and wholesale sale of Urea Ammonia Nitrogen 32 solution; production, distribution, and wholesale sale of ammonia.

Product market(s)

Branded carbonated soft drinks.

Production and sale of bulk bakery wheat flour.

Rhone-Poulenc & Marschall Dairy Products + Miles Inc.

Manufacture and sale of dairy cultures.

Branded carbonated soft drinks; all carbonated soft drinks.

American Stair-Glide Corporation + Access Industries, Inc. & The Cheney Company, Inc.

Manufacture and sale of curved stairway lifts; manufacture and sale of straight stairway lifts; manufacture and sale of vertical wheelchair lifts.

Production and sale of title plant information; production and sale back plant information.

High-purity alcohol process alumina.

Sentinel Group, Inc.

Service Corporation International & Sentinel Group, Inc.

Provision of funerals.

Continuous action air freshener products business and the instant air freshener products business; furniture care products business.

Product market(s)

Residential nonselective herbicide market.

McCormick & Company, Inc. & Haas Foods, Inc. + John I. Hass, Inc.

Sara Lee Corporation + Kiwi Brands Inc. & Knomark, Inc. + Reckitt & Colman p.l.c.

Sale of chemical shoe care products used in the maintenance, cleaning, and protection of shoes.

First Data Corporation and Western Union Financial Services, Inc.

Consumer money transfer services.

B.A.T. Industries p.l.c. & Brown and Williamson Tobacco Corporation & American Tobacco Company & American Brands, Inc.

Manufacture and sale of cigarettes for U.S. consumption.

Provision of funerals and provision of perpetual care cemetery services.

Scotts Company & Stern's Miracle-Gro Products, Inc.

Water soluble fertilizer for consumer use.

Sale of consumer money wire transfer services.

Provision of funerals, the provision of perpetual care cemetery services, and the provision of crematory services.

Manufacture and distribute collagen sausage casings.

The Loewen Group Inc. + Loewen Group International, Inc. & Heritage Family Funeral Services, Inc. (Virginia)

Provision of funerals.

Product market(s)

The Loewen Group Inc. + Loewen Group International, Inc. & Garza Memorial Funeral Home, Inc. + Thomae-Garza Funeral Directors, Inc. (Texas)

Provision of funerals.

Wesley-Jessen Corporation & Pilkington Barnes Hind International, Inc.

Manufacture and sale of opaque contact lenses.

General Mills, Inc. & Ralcorp Holdings, Inc.

Sale of branded and private label ready-to-eat cereals.

Premium scotch; premium gin.

Sale of timeshare exchange services.

Production and sale of title plant services.

ABB AB + ABB AG & Elsag Bailey Process Automation N.V.

Manufacture and sale of Process Gas Chromatograph; manufacture and sale of Process Mass Spectrometer.

Funeral services; cemetery services.

Provision of fleet card services to over the road trucking companies; development, manufacture, and sale of truck stop fuel desk automation services.

VNU N.V. & Nielsen Media Research, Inc.

Advertising expenditure measurement service.

Provision of title information services.

Product market(s)

FMC Corporation & Solutia, Inc. Manufacture, marketing, and sale of pure phosphoric acid; manufacture, marketing, and sale of phosphorus pentasulfide.

Funeral services.

Antitrust Practitioners’ Comments on FTC’s Divestiture Practices

In recent years, antitrust practitioners have raised concerns regarding certain FTC’s divestiture practices, particularly its preference for up-front buyers. Some practitioners we spoke with also raised concerns that the basis for FTC’s merger remedy practices is not always clear and that the extent of information provided to them on the rationale for FTC’s preferred remedies varies by staff. While interviewees had differing opinions on whether merger remedy guidelines are needed, the commenting practitioners generally agreed that there is a need for greater transparency in the merger remedy process.

Questions Raised about FTC’s Up-Front Buyer Divestiture Practice

“First, it can delay consummation of the transaction while the parties find, and obtain approval for, a buyer. Assuming the transaction has procompetitive components, this delay may have costs in the market. Second, an upfront buyer requirement can lead to strategic behavior by the potential purchasers who are given greater leverage in the negotiations. This may skew the bidding process in a way that is inconsistent with the agencies’ [FTC and DOJ] goal of preserving competition in the marketplace.”

The American Bar Association (ABA) also has questioned FTC’s up-front buyer approach. In 2001, ABA’s Task Force on Federal Antitrust Agencies of the Section of Antitrust Law issued a report on the state of federal enforcement of the antitrust laws. According to the report, there is some uncertainty in the legal and business communities concerning the circumstances under which FTC policy requires an up-front buyer. The report also stated that “The policy needs to be clarified. In addition, the circumstances when up- front buyers should be required should be carefully examined to balance the need to preserve effective competition with the imposition of unnecessary costs on the merging parties.”

Concerns Raised about Lack of Transparency in FTC’s Merger Remedy Process

The lack of transparency in FTC’s merger remedy process was another area of concern. Antitrust practitioners we spoke with told us that while FTC speeches, public workshops, and the 1999 divestiture study provide some information on FTC’s divestiture practices, the basis for the practices is not always clear, and the extent of information provided to the merging parties on the rationale for FTC’s preferred remedy varies by staff. In the 2001 ABA Task Force report, ABA stated that “…press releases issued by FTC explaining its enforcement actions merely highlight the remedies achieved and provide conclusionary reviews of the competitive concerns, but generally do not meaningfully explain the market context, specific competitive concerns, and the mode of analyzing competitive effects.” Similarly, in a recent article entitled Toward Guidelines for Merger Remedies, the President of American Antitrust Institute (AAI) said that FTC's analysis to aid public comment documents do not offer insight into trade-offs accepted during negotiations or reasons for accepting settlements that may differ in important respects from settlements in other apparently similar cases.

FTC staff acknowledged that FTC does not always provide a detailed rationale for its divestiture approaches. They told us that because FTC’s decisions are largely tied to companies’ trade secret information, which FTC is statutorily prevented from disclosing to the public, FTC can provide to the public only limited information on the basis for its decisions. ABA and AAI have concurred that FTC’s lack of explanation of the basis for the remedies included in a divestiture order is due in part to the proprietary nature of the information. Nonetheless, in the AAI article on merger remedies, the President of AAI said that FTC has overused confidentiality as an excuse for not providing more transparency in the merger remedy process.

In fact, both ABA and AAI have said that there needs to be a more transparent approach to the remedy phase of the merger review process. Specifically, ABA has urged FTC to make greater efforts to more meaningfully explain the factors that give rise to competitive concerns, the type of evidence viewed as relevant, the econometric analysis used (if any), and other key considerations that led to the decision to bring a complaint or enter into a consent order. AAI also has recommended that FTC (1) study its enforcement patterns, (2) derive best practices, (3) formalize rules, (4) provide transparency so that the public can understand and evaluate decisions being made, and (5) conduct regular post hoc evaluations to determine how well a program is working.

FTC staff told us that FTC does in fact value transparency and has taken steps to provide the business community with information on FTC’s merger review and merger remedy processes. In a June 10, 2002, speech commemorating the twentieth anniversary of the merger guidelines, which apply to the merger investigation phase of the merger review process, FTC’s Chairman said that “… the Guidelines demonstrated the value of transparency—having public antitrust authorities clearly state their enforcement attentions , even at the risk of relinquishing the capacity to employ enforcement approaches that well-specified guidelines might disavow or disfavor. Experience with the 1982 Merger Guidelines has shown how the quality of policy improve when public officials specify clearly the bases on which they exercise their authority.”

Questions Raised Regarding Whether Merger-Remedy Guidelines Are Needed

There has been some discussion among antitrust practitioners about whether merger-remedy guidelines are needed. Some practitioners have said that merger-remedy guidelines would provide a more structured, coherent, and transparent approach to the remedy phase of the merger review process. In fact, AAI prepared a proposal for merger-remedy guidelines and presented it to FTC in March 2002 for review and discussion at FTC’s merger-remedies workshops. Other practitioners have called for “practice guides” that could be used to educate antitrust practitioners and FTC staff about when and why to use certain divestiture practices, but would allow for greater flexibility in structuring a remedy. Regardless of whether they believed that guidelines are needed, they all agreed that there is a need for greater transparency in the merger-remedy process.

Conversely, FTC staff told us that merger-remedy guidelines are not needed for the following reasons: Because each case is unique and fact-based they draw on their past experiences and advice from experienced senior staff, rather than developing written policies and procedures to guide staff in fashioning merger remedies.

The merging parties have very sophisticated antitrust counsel who are aware of how to structure remedies in order to obtain FTC approval.

FTC speeches, workshops, consent orders, and public documents provide antitrust practitioners and the business community with information on FTC’s merger remedy preferences.

According to FTC staff, in an effort to continue to build on its relationship with antitrust practitioners and other interest groups (such as consumer groups and corporate personnel) and to increase the transparency of its merger review and remedy processes, FTC planned two sets of public workshops, one focusing on merger investigations and the other focusing on remedies. A March 15, 2002, FTC press release announcing the workshops states that the remedies workshops will consider whether the agency’s remedy provisions are necessary or sufficient and if the process through which they are negotiated can be improved. The first remedy workshop was held in Washington, D.C., in June 2002.

Comments on FTC’s Divestiture Practices

Associations that represent grocery store businesses have complained to FTC that its clean sweep, single buyer, and up-front buyer divestiture practices have impaired the ability of small and independent businesses to purchase divested assets. Additionally, several smaller buyers of divested grocery store assets told us that other factors, such as the merging parties’ bidding process, create additional challenges for smaller businesses in purchasing and maintaining the viability of divested assets. However, our review of public comments and discussions with associations that represent small and independent drug stores, funeral services, or gas station businesses (all the businesses we studied except groceries), revealed that few concerns have been raised concerning the impact of FTC’s clean sweep, single buyer, and up-front buyer divestiture practices on the ability of small buyers in these industries to purchase divested assets.

Associations Representing Small Grocery Store Businesses Raised Concerns about FTC’s Clean Sweep, Single Buyer, and Up-Front Buyer Divestiture Practices

The National Grocers Association (NGA) and the Food Marketing Institute (FMI) submitted comments to FTC saying that FTC’s clean sweep, single buyer, and up-front buyer divestiture practices have hindered the ability of small and independent grocery store businesses to purchase divested assets. Both associations told FTC that these practices, described by FTC as preferences, have been interpreted in the business community as inflexible rules or policies. “These policies ignore the dynamics of the industry and the ever changing affects that these policies can have on the competitive environment. The FTC’s criteria of having a single buyer replace things as they are is inherently flawed and plays directly into the hands of power buyers. The FTC criteria do not recognize the inherent difference between the top five multi-billion dollar chains and privately owned regional and community retailers.”

FMI submitted a paper to FTC on June 18, 2002, as part of FTC’s workshops on merger investigations and remedies. According to FMI, since approximately 1996, FTC has applied increasingly rigorous policies to supermarket divestitures. FMI noted that while FTC staff describe these policies as preferences, they often have been interpreted as inflexible rules. Similar to NGA’s comments, FMI said that the most significant policies that make it difficult for small and independent businesses to purchase divested assets are clean sweeps, single buyers, up-front buyers, and no change in market concentration policies. Specifically, FMI said that: FTC’s preference for clean sweep divestitures may prevent small retailers from assembling divestiture packages that best suit their needs. According to FMI, to the extent that FTC’s clean sweep policy is based on concerns about upsetting existing store networks or customer relationships, the concerns are overstated because (1) supermarket chains with a number of stores in a geographic market will inevitably contain some strong stores and some weaker stores and (2) there is no basis for assuming that a package of assets comprised of assets from both merging parties will contain a greater proportion of weaker stores. Additionally, FMI said that FTC’s claim that the risk that divestiture of a mixed package of assets will cause a loss of distribution efficiencies also is exaggerated because there is no basis for FTC’s assumption that an unmixed group of stores can always be supplied more efficiently than a mixed group of stores. FMI noted that “whatever logistical advantage lies in having all of the stores come from one prior owner rather than two generally is modest.” Like NGA, FMI indicated that FTC’s use of clean sweeps reflects the staffs’ desire to avoid the burden of having to evaluate individual stores to examine the viability of each store and determine whether the merging parties may be attempting to divest their least profitable assets.

FTC’s preference for a single buyer limits opportunities for independents and small chains to purchase divested assets. FMI said that FTC staff rarely, if ever, allow stores to be sold to more than one buyer per market. Independents and small chains often are interested in buying, or may only have the ability to buy, a portion of the stores that are being divested in a market, but a single-buyer policy prevents this. According to FMI, a firm does not need to have complete market coverage or engage in marketwide advertising in order to be an effective competitor because no particular scale or degree of market coverage is necessary to compete effectively in grocery retailing. Additionally, FMI said that if more than one buyer is allowed to purchase the divested assets, the buyers of divested assets could seed a market with several growing chains.

Other Concerns Raised by Grocery Associations

NGA and FMI also raised several other concerns about the impact of FTC’s divestiture practices on the ability of small businesses to purchase divested assets.

Both NGA and FMI said that FTC’s strong preference for out-of-market buyers (buyers that at the time of the proposed divestiture, are not already operating within the same product and geographic markets as the assets to be divested) has disadvantaged small businesses by preventing them from expanding to provide increased competition for the merged firm. According to FMI, as long as there is any possibility of a buyer that does not currently operate in the geographic market, FTC staffs’ typical approach has been to warn counsel that securing approval for a buyer within the geographic market would be difficult and time- consuming. FMI said that in response to FTC’s warnings, most counsel have found out-of-market buyers.

NGA indicated that FTC’s definition of the relevant geographic market also impacts the ability of small businesses to purchase divested assets because FTC does not allow buyers already operating in the relevant geographic market to purchase the assets to be divested if their market share would increase above that permitted by the Hortizontal Merger Guidelines. According to NGA’s public comment on the Food Lion and Hannaford merger, FTC should have defined one of the relevant geographic markets—Richmond, Virginia—in which to analyze the competitive concerns differently because there was strong evidence that inner city Richmond was a separate geographic market. NGA claimed that if FTC had defined inner city Richmond as a separate market, the market share of an independent Richmond grocer interested in purchasing the divested assets would have increased only to a level acceptable under the Horizontal Merger Guidelines.

NGA noted that the merging parties’ bidding process for the assets to be divested may disadvantage small businesses. NGA suggested that FTC ensure a fair and open divestiture process by requiring the merging parties to provide FTC with information on the bidding process, such as copies of all expressions of interest in purchasing the assets to be divested and the merging parties’ evaluations of each bid. According to NGA, in numerous meetings with FTC staff and Commissioners, NGA has consistently been told that FTC leaves the divestiture process in the hands of the merging parties, and its role is merely to approve or disapprove the proposed buyer(s). NGA said that FTC should play a greater role in the bidding process for the assets to be divested.

According to FMI, independents and small firms believe they face closer scrutiny of their financial viability, experience, supply arrangements, and business plans than large chains. FMI reported that the additional scrutiny of independents and small firms takes time and brings added uncertainty to the process, usually at a late stage in the investigation, when the parties are becoming increasingly worried that the merger may fall apart. Additionally, FMI noted that given the perception that independents and small chains are subjected to more scrutiny than large chains to be approved as buyers of divested assets, merging parties are likely to seek a buyer that is a “sure thing”—a well-established, out-of- market chain, rather than proposing divestiture to one or more independents.

FMI concluded that in supermarket mergers, as perhaps no other industry, FTC in recent years has imposed a series of increasingly inflexible divestiture policies that place small chains and independent businesses at a disadvantage in the divestiture process, to their detriment and the detriment of consumers. Additionally, FMI said that FTC could go a long way toward dispelling the perception of bias against small chains and independent businesses in part by not insisting on clean sweeps and single buyers and by being open to in-market buyers. These changes, according to FMI, would give small chains and independent businesses realistic opportunities to become stronger and larger competitors.

Smaller Buyers of Divested Grocery Store Assets Raised Concerns about the Challenges They Face in Purchasing Divested Assets and Maintaining Their Viability

While obtaining revenue data from buyers of divested assets, representatives of 11 grocery store businesses with average annual revenues of $200 million or less provided anecdotal comments about the challenges that smaller businesses face in purchasing divested assets and maintaining their viability. Regarding their ability to purchase divested grocery store assets, the buyers provided the following comments.

One representative noted that currently there is limited opportunity for smaller grocery store businesses to purchase divested assets because the merging parties sell the assets as a package to a single buyer. Smaller businesses may have the necessary financing to purchase one or two of the assets, but usually do not have the financial strength to purchase all of the assets.

Four representatives told us that the merging parties usually offer smaller businesses the stores that the larger chains have declined to purchase. They said that they generally have access to some of the least desirable grocery stores being divested in terms of the condition of the stores, and have had to spend a considerable amount of money to refurbish them.

Two representatives indicated that smaller businesses usually do not have an opportunity to express an interest in purchasing divested assets because, in practice, the bidding process is often closed to small businesses. They indicated that typically the merging parties have already identified buyers for the divested assets by the time that small businesses become aware that the merging parties must divest assets. One of the representatives said that FTC may need to play a greater role in the bidding process.

The anecdotal accounts suggested that the current environment, particularly the practices of merger parties, makes it difficult to maintain the viability of divested grocery store assets: Two representatives told us that they received inaccurate or incomplete information from the merging parties or wholesaler. They said that after purchasing the stores, they discovered that the stores generated considerably less sales than reported to them by the merging parties. For example, a buyer of one divested grocery store said that he had to close the store 5 months after purchasing the store because it generated only a fraction of the sales quoted by the merging parties.

Two representatives said that buyers of divested assets, particularly smaller buyers, have faced challenges remaining in business when the merging parties build state of the art supermarkets in the same geographic markets in which they were required to divest assets. They said their sales declined and several supermarkets went out of business because they were unable to compete with the larger, state of the art supermarket.

Two representatives told us that the biggest problem smaller grocers face in maintaining the viability of the divested stores they purchase is competing with grocery chains that have supercenters. They told us that it is becoming extremely difficult for small businesses to compete with supercenters because the supercenters offer one-stop shopping— the convenience of being able to purchase groceries at the same time as other household items, such as clothes, appliances, and other household products. They also noted that while supercenters and large grocery chains are able to purchase and/or sell some products below costs, small businesses cannot afford to sell products below cost and remain profitable.

Public Comments Raised Few Concerns Regarding the Impact of FTC’s Divestiture Practices on Small Businesses in the Drug Store, Funeral Services, and Gas Station Industries

Only one of the 1,902 public comments contained in FTC’s public files for the 31 divestiture orders included in our review raised a specific concern about how FTC’s clean sweep, single buyer, and/or up-front buyer divestiture practices have impacted the ability of small businesses to purchase divested assets. However, we were unable to fully examine the public comments for the 31 divestiture orders included in our review because some of them were confidential and others appeared to be missing from the files. Of the 1,902 public comments, 1,441 related to grocery store divestiture orders, 455 related to gas stations, four to drug stores, and two to funeral services. Our review of the public comments for each of the industries showed that: About 80 percent (1,146 of 1,441) of the comments relating to the grocery store industry were petitions or form letters from individuals expressing objections to the divestiture of a supermarket to a proposed buyer for the Ahold and Stop and Shop divestiture order announced for public comment in fiscal year 1996. Specifically, the customers of an existing local grocery store were concerned that the proposed buyer of the divested supermarket would harm the market share of the existing local grocery store business. Most of the remaining comments concerning grocery store divestitures were from customers who did not want the store where they shopped to close or change ownership. Other comments were from employees of stores being divested that did not want to work for a proposed buyer(s) when the buyer(s) did not have a good history of managing its employees or they feared they would lose their jobs if the stores were divested.

Two of the four drug store industry comments opposed the merger, one requested that a particular drug store be included in the divestiture order and one requested that a specific drug store be sold to an independent drug buyer rather than another drug store chain.

One of the two comments concerning the mergers in the funeral services industry expressed objection to the merging parties’ selection of the funeral homes to be divested. The other comment questioned whether an investigation was made to determine if the required divestiture would restore competition.

About 60 percent (275 of 455) of the comments relating to the gas station industry were petitions from retirees of one of the merging parties who were concerned about their medical coverage after the merger or citizens who wanted to continue the gasoline brands of the 2 merging parties. Most of the remaining comments were from independent gas station dealers or their representatives expressing concerns that the divestiture orders would remove dealers from their business place with no right of first refusal on the purchase of their gas stations.

FTC received only one public comment relating to small businesses that concerned the impact of FTC’s clean sweep divestiture, single buyer, and up-front buyer practices on the ability of small businesses to purchase divested assets. Specifically, in response to the Food Lion and Hannaford divestiture order announced for public comment in fiscal year 2000, NGA, as discussed previously, commented that FTC’s preference for clean sweeps, single buyers, and buyers that do not currently have a presence in the geographic market in which the assets are being divested have tremendously disadvantaged small businesses. Other public comments that related to small business ranged from whether a smaller business could effectively compete in a market dominated by larger companies to how a divestiture will impact supply contacts that small businesses had in place with one of the merging parties prior to the merger.

FTC staff told us that the formal public comment period is not the only opportunity for concerned parties to express their views on an FTC matter. According to FTC staff, it is customary for affected third parties, including smaller businesses, to communicate with Commissioners and staff throughout the merger investigation. As a result, they said that the formal public record of comments on a proposed divestiture order and FTC’s responses do not represent the totality of FTC’s responsiveness to small businesses who have concerns about a pending merger. They cited two instances in which FTC has received comments outside of the public comment process regarding small and independent businesses being unable to purchase divested assets. First, they told us that some time ago, an attorney representing a grocery wholesaler presented arguments for why FTC should accept wholesaler-suppliers as acquirers of supermarkets. They said that FTC has considered those arguments in all matters, as appropriate. Additionally, in regard to the divestitures of gasoline retailing assets in the Exxon and Mobil matter, FTC received communications from a small regional “jobber” who complained that the requirement that all assets be divested to a single acquirer foreclosed the jobber from bidding on the divested assets. In that matter, FTC determined that an effective remedy precluded dividing the assets into smaller packages.

We also talked with associations that represent small and independent businesses as well as SBA officials who generally told us that they were unaware of concerns directly related to the impact of FTC’s clean sweep, single buyer, and up-front buyer divestiture practices on the ability of small businesses to purchase divested assets. Specifically, The Petroleum Marketers Association of America expressed some concern about FTC’s divestiture practices in general. The official we spoke with noted that FTC has the ability to influence the merging parties’ choice of a buyer of divested assets even though FTC does not ultimately choose the buyer.

A National Community Pharmacists Association (NCPA) official told us that NCPA did not have any concerns directly related to FTC’s divestiture practices. However, the official said that he was not aware that in certain situations FTC explicitly required merging parties to divest drug store assets to a single buyer. The official also said that it was his view that this requirement would definitely make it difficult for small businesses to purchase divested drug store assets.

Officials of 4 of the 10 associations we contacted—the National Funeral Directors Association, the National Business Association, the National Small Business United, and the U.S. Chamber of Commerce—said that to their knowledge their members did not have any concerns directly related to the impact of FTC’s divestiture practices on the ability of small businesses to purchase divested assets.

Officials of the National Federation of Independent Business and the SCORE Association told us that their associations do not have an official position on the issue.

We also contacted staff in the Small Business Administration’s (SBA) Office of Advocacy to determine whether any small businesses or associations representing small businesses had raised this issue with SBA. According to SBA staff, SBA had not been made aware of concerns about the impact of FTC’s divestiture practices on the ability of small businesses to purchase divested assets. They noted that the issue that has been raised concerning mergers in the retail sector is whether small businesses will have access to products or services after the merger takes place. For example, they told us that in response to the Exxon and Mobil as well as the British Petroleum and Amoco Atlantic Richfield Company mergers, small businesses raised concerns regarding whether the merged companies would continue to provide them with access to crude oil.

Comments from the Federal Trade Commission

GAO Contacts and Staff Acknowledgments

GAO Contacts

Staff Acknowledgments

In addition to the persons named above, the following persons made key contributions to this report: Brodi L. Fontenot, John A. Karikari, Jan B. Montgomery, Katrina R. Moss, Cheryl M. Peterson, Jerry Sandau, Maria D. Strudwick, Carrie Wilks, and Gregory H. Wilmoth.

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