# COMMISSION’S DIVESTITURE

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

PUBLIC VERSION

A STUDY OF THE
COMMISSION’S DIVESTITURE
PROCESS
Prepared by the
Staff of the Bureau of Competition
of the
Federal Trade Commission
William J. Baer
Director
1999

The views expressed herein are those of the Staff of the Bureau of Competition
and do not necessarily reflect the views of the Commission
or of any individual Commissioner.

Acknowledgements
The on-going Divestiture Study is a joint project of the Federal Trade Commission’s
Bureau of Competition and Bureau of Economics. The following individuals have had
primary responsibility for the design and conduct of the study:
For the Bureau of Competition: Assistant Director Daniel P.
Ducore, Kenneth M. Davidson, Naomi Licker, and Tonya
Williams.
For the Bureau of Economics: Harold E. Saltzman, Deputy
Assistant Director Charissa P. Wellford, and then Deputy
Assistant Director R. Michael Black.
The Divestiture Study has benefited from comments and review by Professor David J.
Ravenscraft of the Kenan-Flagler Business School at the University of North Carolina;
Assistant Director David Balto and Deputy Assistant Director Roberta S. Baruch of the
Bureau of Competition; and Kenneth Kelly, then Assistant Director Timothy Daniel,
Assistant Director Denis A. Breen, and Associate Director Paul A. Paultler of the Bureau of
Economics. In addition, the conduct of the study has received assistance from research
analysts Eileen Kiely and Elizabeth Autry, law students Gianluca Bracchiocchi, Angela
Gaddis and Ian Otto, and economics students Edward Burns, William Cohen, Michael
Girondo, Kelley Martin, Maren Mikkelsen, MaryKathryn Robinson Joshua Wright, and
Austin Zeiderman. The Staff Report was written by Kenneth M. Davidson and Naomi
Licker.

ii

Executive Summary
This Report1 discusses the Commission’s on-going Divestiture Study. It evaluates the
results of numerous interviews, conducted in a case-study format, for insights into the
Commission’s divestiture orders and divestiture process. It discusses the enforcement policies
reflected in those orders and in the divestiture contracts undertaken between the respondents and
proposed buyers. This description of divestiture policy and practice is intended to give persons
inside and outside the Commission a common framework in which to discuss both general
divestiture policies and their application to specific cases. That policy will continually evolve in
response to the facts of specific cases and the Commission’s conclusions about the effectiveness
of its orders.
Since passage and implementation of the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, 15 U.S.C. § 18a (“HSR Act”), the Commission’s on-going Divestiture Study is the first
systematic review of orders requiring divestiture that seeks to determine how well buyers of
divested assets have fared operating the assets they acquired as a result of the Commission’s
order. The Study was designed to investigate whether there were systemic reasons why some of
the post-HSR divestitures failed to achieve the Commission’s remedial objectives.
The Study includes the Commission’s orders, issued from 1990 through 1994, that
required divestiture to remedy anticompetitve effects resulting from a merger or acquisition. It
focuses primarily on the buyers of divested assets, because divestiture orders are fundamentally
different from both other orders imposed by the Commission and remedies commonly ordered by
courts or other agencies. Typically an order requires the respondent or defendant to perform
certain actions. Although a divestiture order mandates that the respondent perform an action
(divestiture of identified assets), disposal of the assets is not sufficient by itself to accomplish the
objectives of a Commission order. The divestiture must be to a suitable entity -- one that can
replace the competition lost as a result of a merger -- and the Commission must be able to
approve both the buyer and the manner of divestiture. This post-order approval process is
required because maintaining or restoring competition is as much a function of who the buyer is
and the circumstances under which it is acquiring the assets from the respondent as it is a
function of what assets are divested. Consequently, insights from the on-going study (and the
policies they have fostered) concern the effects on the buyer of provisions in divestiture orders
and provisions in divestiture contracts, and the business plans of the buyers of divested assets.
The Study has suggested some rules of thumb about what kinds of divestiture orders are
most likely to be successful. The Study also provides a picture of the dynamics of the divestiture
process. The case studies describe an informational and bargaining imbalance between the

1

This Report is a public version of the report on the Divestiture Study submitted by
staff to the Commission. The Commission determined to make the results of the Divestiture
Study public and invite comments from the public to facilitate a discussion of the results. In
order to maintain the confidentiality of the participants in the Study, the Report does not identify
buyers of divested asset or respondents by name. Buyers are, instead, identified by a randomly
assigned number and are referred to as “Firm [Number].”
iii

respondents on the one hand and the staff and the buyers of divested assets on the other hand,
particularly where the buyers have never operated in the industry and never operated the to-bedivested business. The buyer’s disadvantage translates into an obstacle to creating effective
remedies because the staff has relied to a large extent on buyers and potential buyers to inform
itself about the adequacy of the assets that are included in the divestiture package. This
imbalance is exemplified by the many buyers that told of similar mistakes, of difficulties with
technology transfers, and of inadequate assistance from respondents. In addition, the interviews
have produced examples of how buyers have overcome problems with their divestitures in
unique ways.
The Report recommends that the Commission include a variety of order provisions and
divestiture procedures to correct the informational and bargaining imbalance. Thus, negotiations
between staff and respondents may focus more on the question of whether risks of a failed
divestiture will be reduced than on whether a particular provision was included in a previously
issued order. With this greater understanding of the incentives of respondents and buyers of
divested assets, the discussion of order provisions and divestiture contracts can focus on the
issues that are inherent in the divestiture process without impugning the integrity of any party.
Partly as a result of the Study, staff has begun recommending provisions that may provide
greater assurances that the divested assets will be viable and that they will be able to compete in
the market in which the Commission has found a competitive problem. In more recent orders,
the Commission has, among other things:
!

reduced the time it allows for respondents to complete their divestiture obligation;

!

required the divestiture of related assets to ensure the viability of the divested
business;

!

limited the scope and duration of any on-going relationships between the buyer of
the divested assets and the respondent;

!

limited the rights of respondents to revoke rights granted under the divestiture
contracts;

!

relied less on the assessment of potential buyers about the viability of assets
included in a divestiture order;

!

required persons acquiring assets to submit an acceptable business plan for those
assets;

!

required that respondents facilitate the transfer of knowledgeable staff to the
buyer;

!

used auditor trustees to monitor the transfers of technology to the buyer and the
technical assistance provided by the respondent;

iv

!

provided for the redivestiture of certain types of assets where the buyer fails to
exploit them; and

!

provided for the divestiture of additional assets by a divestiture trustee where the
respondent has failed to fully divest assets within the time required by the order.

v

Table of Contents
I. Divestitures Since the HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A. Objectives of the HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
B. Implementation of the HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1. Early post-HSR divestiture policies at the FTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2. Divestiture orders in the mid-1980s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3. Licensing remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
C. Authorization of the Divestiture Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
II. Findings from the Divestiture Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
A. Background of the Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
B. The Study supports the view that divestitures have been successful remedies for
anticompetitive mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1. Almost all required divestitures occurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2. Three-quarters of the divestitures studied appear to have been successful . . . . . . . . . 9
3. Divestitures of on-going businesses succeeded at a higher rate than divestitures of
selected assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4. Continuing relationships with respondents post divestiture may increase the
vulnerability of buyers of divested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5. Smaller firms appear to succeed at least at the same rate as larger firms . . . . . . . . . 14
6. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
C. The Study presents a new view of the dynamics of the divestiture process, identifying
obstacles to effective divestitures as well as ways to overcome the obstacles . . . . . . . . 15
1. A new view of the dynamics of the divestiture process . . . . . . . . . . . . . . . . . . . . . . . 15
2. Obstacles to effective divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
a. Respondents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(1) Respondents urge limited divestiture packages . . . . . . . . . . . . . . . . . . . . . . . 16
(2) Respondents may propose weak buyers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(3) Respondents may engage in strategic behavior to impede the success of the
buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(4) Respondents have adverse incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
b. Buyers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(1) Buyers lack information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(2) Buyers perceive a lack of bargaining power . . . . . . . . . . . . . . . . . . . . . . . . . 24
(3) Buyers do not often communicate with the Commission regarding difficulties
in their dealings with respondents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
(4) Buyers’ interests are different from the FTC’s . . . . . . . . . . . . . . . . . . . . . . . 27
c. Complexities of technology transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
d. Difficulties in defining viability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3. Recommendations to increase the effectiveness of divestiture remedies . . . . . . . . . 29
a. Increase respondents’ incentives to achieve an effective divestiture . . . . . . . . . . 29
(1) Appoint auditor trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(2) Require divestiture of a crown jewel if respondent fails to divest during the
divestiture period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
(3) Require consequential damages for failure to deliver supplies . . . . . . . . . . . 32
b. Facilitate the success of the buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
(1) Assure that the buyer has access to accurate information . . . . . . . . . . . . . . . 32
vi

(2) Select appropriate buyers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
(a) The knowledge and experience of the buyer makes a difference . . . . . . . 34
(b) The degree of the buyer’s commitment to the market may make a
difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
(c) The size of the buyer may make a difference, such that smaller buyers
should not be presumed to be less competitive buyers . . . . . . . . . . . . . . 35
c. Facilitate the transfer of business information . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
d. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
III. Innovations in More Recent Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
A. Shortening the divestiture period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
B. Orders in pharmaceutical cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
IV.
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

vii

I.

Divestitures Since the HSR Act

Prior to the passage of Title II of the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (“HSR Act”),2 the federal antitrust agencies were often unaware of corporate mergers
before they occurred and were frequently unable to fully restore competition following
anticompetitive mergers. Thus, despite the many litigated victories by the antitrust agencies
following the passage of the Cellar-Kefauver Amendments to the Clayton Act in 1950, doubts
were raised about the efficacy of the remedies obtained in these post-merger lawsuits.3
Congress sought to address the problem of failed divestitures through the premerger
notification required by the HSR Act. This section of the Report begins with a description of the
Congressional objectives that led to passage of the Act and is followed by a description of how
the antitrust agencies developed remedial policies that are responsive to the various concerns
outlined in the legislative history.
A.

Objectives of the HSR Act

The legislative history of the HSR Act identifies two types of problems that were
addressed by the HSR Act: interim harm to competition and the inability to fully restore
competition.4 The first is the loss of competition that follows an unlawful merger. Elzinga and
2

The premerger notification program was established by Title II of the Hart-ScottRodino Antitrust Improvements Act of 1976, section 7A of the Clayton Act, 15 U.S.C. § 18a. It
is commonly known and referred to in this Report as the "HSR Act" or "Act." The regulations
that implement the Act became effective on August 30, 1978.
3

Elzinga's classic study showed that 35 of 39 pre-HSR orders, issued in cases
involving mergers that occurred prior to 1960, did not establish an independent competitor in a
timely fashion. Kenneth G. Elzinga, "The Antimerger Law: Pyrrhic Victories?" 12 J. LAW &
ECON. 43 (1969). Rogowsky came to the same conclusion after examining 104 divestiture orders
that were issued between 1969 and 1980. R. Rogowsky, An Economic Study of Antimerger
Remedies, Dissertation Thesis, U. Va. (1982). He ranked over 80 percent of the orders as
unsuccessful. Both studies found, on average, the divestitures occurred more than five years after
the anticompetitive acquisition had been consummated.
4

The Senate Report on the proposed legislation emphasized the need for a more
effective antitrust remedy than post- acquisition divestitures in merger cases when it quoted then
Assistant Attorney General Thomas Kauper:
[D]ivestiture of stock or assets after an illegal merger is consummated is frequently an
inadequate remedy for a variety of reasons:
Assets may be scrambled, making re-creation of the acquired firm impossible.
Key employees may be lost. The goodwill of the acquired firm may be dissipated,
making it a weaker competitive force after divestiture.
(continued...)
1

Rogowsky’s studies of merger orders issued prior to the HSR Act found that divestitures
typically occurred more than five years after the anticompetitive merger transaction.5 In such
cases, a lawsuit successfully challenged the transaction and relief was ordered and obtained, but
consumers and the market were damaged by the loss of competition until the remedy became
fully effective. This interim competitive harm is likely to occur as a result of any unlawful
transaction and therefore the public cannot be fully protected unless the transaction is prevented.
The legislative history also catalogs a second problem in its litany of difficulties in
reestablishing competition after a merger of competing firms. Some mergers result in the
destruction of productive resources: for example, a glass making furnace, if turned off because it
was redundant in the merged entity, must be reconstructed before a divestiture remedy can be
effective because the furnace immediately becomes inoperable as a result of cooling. Other
mergers result in the firing of employees because their knowledge is duplicative. Once
dispersed, these employees may be impossible to rehire, and important knowledge may be
unavailable to any entity that buys the divested assets.
Even worse than the loss of particular elements of a business is the destruction of the
organic nature of an ongoing business acquired in the merger. In some cases, this destruction can
be readily identified as the loss of credentials as a “qualified” supplier to specific customers. In
other cases, it is the loss that relates to the more general notion of customer acceptance and
reputation or goodwill that is attached to an ongoing business. In still others, the terminated
business may be impossible to reconstruct by a buyer of the divested assets if the business
depended on complex operations that included evolved procedures that no one had specified. In
such instances, even former employees may have failed to realize the significance of these
procedures and could not help recreate them.6
4

(...continued)
Moreover, divestiture is normally a painfully slow process, and in some cases
might never occur. Locating an appropriate buyer willing to purchase at a reasonable
price is frequently difficult. Firms under divestiture orders may deliberately delay to reap
the benefits of the unlawful merger. During these delays, anticompetitive consequences
grow.
Senate Report No. 94-803, 94th Cong., 2d Sess (1976), "The Antitrust Improvements Act of
1976," Report of the Committee on the Judiciary to Accompany S. 1284, Part 1 ("Senate
Report") at 65.
5

See note 3, supra.

6

Even when all the employees remain on the job and the machinery is moved to a
new location, firms sometimes find it very difficult to reestablish effective production. See, e.g.,
the description of difficulties the Borden company faced when it transferred the manufacturing of
Liedekrantz cheese in V. Marquis and P. Haskell, THE CHEESE BOOK 23 - 24 (1965); and the
similar story when R. J. Reynolds attempted to expand its aluminum foil division by buying
Archer Products, a gift wrapping firm, in R. Miles, COFFIN NAILS AND CORPORATE STRATEGIES
(continued...)
2

The Congressional committees did not try to grapple with the difficulties posed by
divestiture orders. Rather, their solution -- offered by the HSR Act -- was "to detect and prevent
illegal mergers prior to consummation."7 Thus, the Senate Report suggests that problems
associated with divestiture -- interim competitive harm and reconstituting competition -- might
disappear as a result of prior notice under the Act.
B.

Implementation of the HSR Act

The HSR Act did not end the use of divestitures as antitrust remedies in merger cases; to
the contrary, divestitures have continued to be the most common remedy in merger orders. These
orders, however, differ from pre-HSR orders in several respects. Unlike their predecessors,
Commission orders arising out of a merger reported pursuant to the HSR Act are almost always
negotiated and entered prior to consummation of the reported merger. The requirement of
premerger notification enables the antitrust agencies to insist that parties agree to remedies,
including divestitures, before they permit the parties to consummate their transactions. And the
agencies insist that divestitures be subject to their prior approval. Thus, for the large class of
mergers subject to the HSR premerger notification requirements, the Act largely reversed the
unfortunate history of merger enforcement in which the agencies had been unable to prevent or
remedy anticompetitive mergers.
Furthermore, with experience, the agencies improved techniques to prevent the
commingling of business operations that made pre-HSR divestitures so difficult. As Congress
had noted, commingling operations creates problems. It sometimes destroys the possibility of
future competition based on trade secrets or it can establish a basis of coordinated marketing that
might not necessarily disappear with divestiture. Requirements that respondents divest assets
quickly, and that they maintain viability of or hold separate the to-be-divested business address
some of the remedial difficulties identified in Congressional hearings.
However, passage of the HSR Act did not eliminate entirely problems associated with
commingling in merger cases. Divestiture orders typically require the sale of only a portion of
the acquired or acquiring firm to a third party. Separating that set of assets, or portion of a firm,
may be like separating the commingled assets in pre-HSR divestitures if the to-be-divested assets
were never operated as a stand-alone business. These problems can be exacerbated when the tobe-divested assets are units of the acquiring firm rather than parts of the acquired firm. It is
likely that the acquiring firm will retain competitively important information about the unit as a
result of having operated it. Separating out portions of companies for divestiture may destroy the
organic integrity of competing businesses that Congress sought to preserve when it passed the
HSR Act. For example, the transfer of less than the entire business may result in the buyer of the
divested assets having to requalify as a supplier, or the buyer may obtain full production assets
but lack the experienced work staff and thus not obtain the know-how to operate as efficiently as

6

(...continued)
132 (1982).
7

Senate Report at 65.
3

the business eliminated by the merger. Accordingly, for these divestitures of less than an entire
business, there is less assurance that the purchaser will acquire a viable business entity, much less
one that will be able to maintain fully the competition that existed prior to the merger.
1.

Early post-HSR divestiture policies at the FTC

In fiscal 1979, the Commission began the HSR Act era by requiring ten divestitures in
eight orders. A review of these orders shows the following:
!

All of the divestitures were subject to the prior approval of the Commission.

!

The time permitted the respondent to divest varied from one year to two years
from the date the order became final with an average time of more than 16 months
from the date the order became final.

!

Six of the ten divestitures expressly required the respondent to maintain the
viability of the assets to be divested.

!

Only one of the sets of assets to be divested was required to be held separate by
the respondent pending the divestiture.

!

None of the orders authorized the Commission to appoint a trustee to divest the
assets if the respondent failed to divest within the period required by the
Commission.

!

None of the orders authorized the Commission to require the divestiture of
additional (crown jewel)8 assets if the respondent failed to divest within the period
required by the Commission.

Respondents successfully divested within the required time period in seven of the eight cases;
however, in the two orders requiring two sets of assets to be divested, the respondent in each case
failed to make a timely divestiture in one of the two. Thus, three of the ten divestitures were late.
In the following six years, fiscal year 1980 through fiscal year 1985, the Commission
entered an additional 37 final orders in merger cases. Eleven of the ordered divestitures were
completed after the time required in the Commission’s orders. All of these divestitures
eventually occurred, however, including one that was subject to lengthy litigation and the

8

Crown jewel provisions are provisions in an order that provide authority to divest
additional assets if the defendant fails to divest within the time period required by the order. In
general, the additional assets supplement those in the initial divestiture provision to ensure the
saleability of the divestiture package by potentially enlarging the pool of acceptable buyers. For
example, where only a product line is required to be divested, the crown jewel provision might
require the divestiture of the entire division that makes that product and other products.
4

payment of a $4 million civil penalty.9 Overall, this was a dramatic success when compared with
the federal antitrust merger enforcement efforts prior to the passage of the HSR Act.10
2.

Divestiture orders in the mid-1980s

In addition to the 47 final orders that the Commission entered between 1979 and 1985, it
also authorized 17 preliminary injunction actions to prevent consummation of proposed
mergers.11 As early as 1980, the Commission included a crown jewel provision in an order that
transferred to a Commission-appointed divestiture trustee the right to sell the assets and allowed
the trustee to add assets to make the package more saleable. With more experience, the
Commission required the respondent:12
!

to maintain the assets to preserve the viability of the divestiture package pending
completion of the divestiture;

!

to hold assets separate and to refrain from exercising any control over the acquired
entity until the divestiture was complete;

9

Louisiana Pacific Corp., FTC Docket No. C-2956, 93 F.T.C. 308 (1979)
(Decision and Order), enforced, 554 F. Supp. 504 (D. Ore. 1982), civil penalty award vacated,
754 F.2d 1445 (9th Cir. 1985), remanded, 654 F. Supp. 962 (D. Ore. 1987) (Commission ordered
to reopen order and consider modification), appeal dismissed, 846 F.2d 43 (9th Cir. 1988)
(district court’s order not appealable), pet. to modify order denied, 112 F.T.C. 547 (1989)
enforced, 1990-2 Trade Cas. (CCH) ¶ 69,166 (D. Ore. 1990) ($4 million civil penalty
reimposed), civil penalty award affirmed, 967 F.2d 1372 (9th Cir. 1992).
10

The total effect of the Commission’s merger enforcement effort under the HSR
Act was presumably much greater than is reflected in these numbers. In 1979, for example, 14
transactions were abandoned after the Commission issued a request for additional information
pursuant to the HSR Act. Moreover, the requirement of premerger notification is likely to have
deterred still other parties from undertaking mergers that would receive premerger scrutiny and
would be likely to be blocked. See also W. Baer, “Reflections on Twenty Years of Merger
Enforcement under the Hart-Scott-Rodino Act,” 65 Antitrust Law Journal 825 (1997).
11

Some of these injunctions matters were ultimately resolved by final Commission
orders requiring divestitures, others were either prohibited by the court or abandoned by the
parties either before or after litigation of the preliminary injunction action.
12

See, e.g., Texaco, Inc., FTC Docket No. C-3137, 104 F.T.C. 241 (1984) (Decision
and Order); Chevron Corp., et al., FTC Docket No. C-3147, 104 F.T.C. 597 (1984) (Decision
and Order), modified, 105 F.T.C. 228 (1985) ; L’Air Liquide, SA, FTC Docket No. C-3216, 110
F.T.C. 19 (1987) (Decision and Order), modified, 111 F.T.C. 135 (1988), further modified, 117
F.T.C. 473 (1994), set aside, 121 F.T.C. 95 (1996); Supermarket Development Corp., FTC
Docket No. C-3224, 110 F.T.C. 369 (1988) (Decision and Order), modified, 117 F.T.C. 473
(1994), further modified, 130 F.T.C. 613 (1995).
5

!

to agree to the appointment of a divestiture trustee if the respondent failed to
divest within the time required by the order; and,

!

to seek and obtain the prior approval of the Commission before acquiring other
businesses within the complaint market. 13

The structure of the Commission’s orders in this period, however, exhibits a great deal of
variety. In part, this was a consequence of the fact the Commission did not have the experience
to determine which provisions, if any, should routinely be included. Also, the case specific
negotiations provided parties a forum in which to argue that particular provisions should not be
imposed in their case. If a transaction seemed to present a serious threat of competitive harm, but
also included significant elements of litigation risk, and the divestiture appeared as if it could be
readily accomplished, it may have been most effective to accept a consent order even if it did not
contain the most desirable structure. The structure of orders during this period was made more
difficult to understand when parties argued the precedential effect of inconsistent settlements.
Some parties successfully resisted order provisions on the grounds that it was unfair to impose
provisions on them when other orders did not uniformly contain such provisions.
3.

Licensing remedies

In the early 1990s, the Bureau of Competition began experimenting with a new type of
remedy in merger orders that required the divestiture (or license) of intangible rights in order to
facilitate entry by a new competitor. The so-called “licensing remedy” was a departure from
existing policy in two ways. First, the effectiveness of the remedy depended largely on the
resources, technology, and business ability of the licensee to exploit the intangible rights.
Initially, at least, this remedy made no attempt to preserve the "organic integrity" of the business
eliminated by the merger. Second, the remedy did not immediately establish a competitor with
production capability, customers and market share; instead, it facilitated entry into the market.
C.

Authorization of the Divestiture Study

In 1995, the Bureau of Competition and the Bureau of Economics staff developed a
project to analyze the efficacy of the Commission’s existing divestiture orders. This project
combined on-going research efforts by the Compliance Division of the Bureau of Competition
and the Economic Policy and Analysis Division of the Bureau of Economics.14 The limited data

13

Murata Manufacturing Ltd., FTC Docket No. C-3053, 96 F.T.C. 116 (1980)
(Decision and Order).
14

Despite the success of the HSR merger enforcement program, at least a few orders
had not resulted in effective relief. For example, in one case the buyer scrapped the divested
assets and resold them for a profit rather than go into business. Flowers, FTC Docket No. 9148,
102 F.T.C. 1700 (1986) (Decision and Order), modified, 107 F.T.C. 403 (1986), preliminary
injunction granted, 1988-1 Trade Cas. (CCH) ¶ 67,950 (M.D. Ga. 1988), vacated & remanded
(continued...)
6

previously available in the Commission’s records have tracked divestitures only to the point that
the Commission approved the contract and the assets were divested. There was no requirement
that the person acquiring the assets report on its success with the assets, and there is little public
data that allow calculating the impact of the divestitures on the markets affected by the mergers.
As a result, most of the earliest efforts focused on identifying divestiture orders and the
provisions included in those orders, and determining whether the divestitures occurred within the
times required by the orders.
In 1995, the staff recommended that the Commission undertake a systematic study of the
Commission’s divestiture process that would expand the information obtained about
Commission-ordered divestitures by, for the first time, questioning buyers of divested assets
about the results of the divestiture process. The Study was undertaken in two parts: a pilot study
undertaken to test the methodology, followed by an expanded study of divestitures from a
selected time period.15 The pilot study established that useful information could be obtained
from a case study method, and the Commission then obtained authorization from the Office of
Management and Budget to conduct the expanded study of divestitures.16
II.

Findings from the Divestiture Study
A.

Background of the Study

The Study covers divestiture orders entered from fiscal year 1990 through fiscal year
1994, and includes 35 orders in which the Commission required the divestiture of assets,
including licensing of intellectual property. This time period was chosen because it is long
14

(...continued)
for dismissal, 849 F.2d 551 (11th Cir. 1988), pet. for reh’g denied, 858 F.2d 746 (11th Cir.
1988). In Rhone-Poulenc S.A. et al., FTC Docket No. C-3287, 113 F.T.C. 329 (1990) (Decision
and Order), Rhone-Poulenc was required to offer a license to any applicant, but no applicants
came forward. In another case, the respondent failed to find an acceptable licensee as required by
the order. Institut Merieux S.A., FTC Docket No. C-3301, 113 F.T.C. 742 (1990) (Decision and
Order), modified, 117 F.T.C. 473 (1994).
15

Pursuant to the Paperwork Reduction Act, 44 U.S.C. § 3501 - 3520, the
Commission could contact only nine participants before obtaining authority from the Office of
Management and Budget to conduct a more extensive study. The pilot study was designed as a
case history study, based primarily on open-ended telephone interviews with the buyers of
divested assets in each of the nine cases selected for the study. The buyers were cooperative and
forthcoming, providing helpful details about the divestiture process from their perspective. See
W. Baer, “Report from the Bureau of Competition,” American Bar Assn, Section of Antitrust
Law, 1998, for a discussion of the results of the pilot study.
16

The Commission published its request to conduct the expanded study in the
Federal Register on October 31, 1996. In March 1997, OMB granted approval to conduct the
study for an initial period through July 1998. In August 1998, OMB granted a renewal of that
approval for a period ending on December 31, 1999.
7

enough ago for effects to have been felt in the market, but recent enough for memories to be
fresh. The Study included the fifty buyers to whom respondents divested assets pursuant to these
orders. Staff interviewed 37 out of the fifty buyers. Staff interviewed an additional eight
respondents and two third parties. One additional buyer and one additional respondent declined a
request for an interview. Staff was not able to schedule interviews with the remaining buyers and
respondents.
The orders included in the Study represent a broad sampling of industries and asset
packages, including retailing, services, end-use goods, and various inputs. The orders in the
Study required divestiture of a variety of packages of assets, ranging from virtually autonomous
subsidiaries to non-exclusive licenses to particular patents and know-how. In addition, the
buyers appear to have been just as varied, running the gamut from large international, multidivisional firms to individual entrepreneurs seeking new business opportunities. The price paid
for the assets range from one dollar to more than a hundred million dollars. And the success that
the buyers had after acquiring the assets to be divested also varied widely, from firms that had an
almost immediate impact by growing share, introducing new products, and lowering prices to
firms that were never able to sell the first widget.
B.

The Study supports the view that divestitures have been successful remedies
for anticompetitive mergers

The Divestiture Study has produced three general findings: first, most divestitures appear
to have created viable competitors in the market of concern to the Commission; second,
respondents tend to look for marginally acceptable buyers and may engage in strategic conduct to
impede the success of the buyer; and third, the Study has unexpectedly indicated that most buyers
of divested assets do not have access to sufficient information to prevent mistakes in the course
of their acquisitions. Evidence that most Commission-ordered divestitures have contributed to
the maintenance or reestablishment of a competitor supports the usefulness of the Commission’s
divestiture remedies. Staff had assumed that respondents would seek marginal buyers and might
engage in strategic conduct, but it had relied, in part, on the assistance of the buyers in defining
the package of assets to be divested and the terms of the divestiture contract as a counterbalance
to the respondents’ conduct. Evidence of widespread mistakes by buyers of divested assets has,
however, changed how the staff examines proposed divestiture orders and prospective buyers.
Even though the methodology of the Study is based on case studies, the interviews
support some numerically based findings about divestitures. Those findings include: (1) threequarters of the divestitures included in the Study succeeded to some degree; (2) divestitures
involving on-going businesses tended to succeed more frequently than divestitures of selected
assets; (3) continuing entanglements and relationships between buyer and respondent postdivestiture often presented unexpected problems for some buyers, increasing their vulnerability,
but may have been critical to the success of other buyers; and (4) smaller firms succeed at least at
the same rate as larger firms and, therefore, should not be presumed to be less competitive buyers
than larger firms.
In addition to these numerically based findings, the case studies also illustrate why
particular orders were or were not successful and what provisions in the orders or divestiture
8

agreements helped or hurt the particular buyers. The case studies allow the staff to refine its
identification of order and contract terms and buyer characteristics so as to increase the
likelihood that a divestiture remedy will succeed.
1.

Almost all required divestitures occurred

Divestitures occurred in each of the 35 orders included in the Study. In some of the
orders, multiple buyers were involved. For example, in cases where retail locations were ordered
to be divested, there might have been a different buyer for each site. In a case where the assets to
be divested included more than one product line, there might have been a different buyer for each
line. As a result, in the 35 orders covered by the study, the Commission approved fifty
divestitures.17 As noted, we were able to study 37 of the fifty.
2.

Three-quarters of the divestitures studied appear to have been
successful

The Study also examined whether, after acquiring the assets, the buyer was able to
operate in the relevant market and what effect, if any, the buyer has had in that market. The
Study was not designed to conduct a complete competitive analysis of the relevant markets or
draw definitive conclusions about how any of these markets are performing. Instead, it attempted
to draw conclusions about whether the buyer of the divested assets was able to enter the market
and maintain operations.18 As a result, the interviews focused on more immediate questions:
how quickly was the buyer able to begin operations in the market, what was the sales volume of
the buyer at the time of divestiture and afterwards, what prices was the buyer charging, has the
buyer introduced new products, does the buyer believe that the respondent has reacted to the
buyer’s entry in the market, and does the buyer consider the divestiture successful. The Study

17

In a few orders, there were additional divestitures required that never occurred.
In Promodes, the order was reopened and modified to eliminate the requirement that the
respondent divest five out of the six retail outlets identified in the order. Promodes, FTC Docket
No. 9228, 113 F.T.C. 372 (1990) (Decision and Order) (modified May 21, 1993; January 28,
1994). The S.C. Johnson order was reopened and modified on November 8, 1993, to eliminate
the requirement that respondent divest rights to the Renuzit air freshener business outside the
United States. Dial, the buyer of the U.S. business, had no operations outside the United States
and did not want or need the foreign assets. Following a showing that no other firm was
interested in purchasing solely the foreign rights and in consideration of the complaint’s
allegation of a United States geographic market, the Commission relieved S.C. Johnson of its
obligation to divest those foreign rights. S.C. Johnson & Son, Inc., FTC Docket No. C-3418, 116
F.T.C. 184 (1993) (Decision and Order), modified, 116 F.T.C. 1290 (1993). But these are
certainly exceptions, not the rule. Most required divestitures happened in the manner approved
by the Commission.
18

Staff has, however, been mindful of the fact that the success or lack of success of
a particular divestiture may be attributable, at least in some part, to competitive conditions that
existed at the time the relief was ordered.
9

sought to confirm the effect of the buyer’s entry and the
nature of the effect by interviewing the buyer and, where
possible, the respondent. Where the buyer was able to
begin operating in the relevant market relatively quickly
and had the ability to compete effectively in that market,
the operations were considered viable and the purposes of
the divestiture were deemed to have been achieved.
Of the 37 divestitures that were studied, 28 appear
to have resulted in viable operations in the relevant
market. In each case, the approved buyer acquired the
assets, began operations, and was operating in the relevant
market within a reasonable period. In some of these
cases, the buyer reported that it introduced new products,
it is pricing below the respondent, or it is taking share
from the respondent. In the remaining nine divestitures,
the buyers are not operating viably in the relevant market. (In one of those nine, the buyer was
operating viably, but not in the relevant market of concern to the Commission; in another, the
buyer was operating viably but not independently of the respondent.). Approximately 75 percent
of the divestitures were successful. This is comparable to the success rate reported for privately
negotiated mergers and acquisitions.19
3.

Divestitures of on-going businesses succeeded at a higher rate than
divestitures of selected assets

The Study indicates that divestiture of an on-going business is more likely to result in a
viable operation than is divestiture of assets selected to facilitate entry. The general notion that
the sale of an on-going business is more likely to be successful in establishing a competitor than
the sale of less than an entire business seems intuitively obvious and is consistent with the
reasons for Congressional concern about a lack of organic integrity of divested businesses. It
was important in the Study to attempt to examine how much of a disadvantage was posed by
partial divestitures, because the Commission has approved in recent years an increasing number
of partial divestitures that are designed to restore competition by facilitating entry rather than by
maintaining a competitive entity.
The definitions of the assets to be divested in the orders studied fall along a continuum:
on one end of the continuum is a package defined to include all the assets necessary to effect an

19

Ravenscraft and Scherer, for example, suggest that “roughly a third” of their
sample of private transactions were viewed as failures by the acquiring firms. D. Ravenscraft
and F.M. Scherer, MERGERS, SELL-OFFS, AND ECONOMIC EFFICIENCY 192-93 (1987). Michael
Porter’s contemporaneous review of the acquisitions puts the failure rate much higher. He found
“more than half” the acquisitions he studied were sold off because they did not meet the
acquiring firm’s expectations. Porter, "From Competitive Advantage to Corporate Strategy,"
HARV. BUS. REV. 45 (May-June 1987).
10

immediate and potentially long-term transfer of the market share attributable to those assets. On
the other end of the continuum is a package defined by carving out only those assets identified as
necessary to facilitate entry. In the first case, the assets include most typically an established
customer base, a fully staffed facility of some sort (a manufacturing facility or a retail operation)
or an otherwise self-contained business unit that may have product contract packed, a
manufacturing and/or sales force, perhaps a research and development team, and other assets that
are included in the business, including ancillary agreements and third-party contracts. This type
of divestiture should result in the almost immediate transfer of market share from respondent to
buyer. Most of the packages of assets labeled as "on-going businesses" had not, however,
actually been operated as autonomous businesses before the divestiture; nevertheless, they were
characterized this way because the market share attributed to the assets could be transferred
immediately and potentially for the long-term. A buyer could buy and be operational the next
day, selling to all of the same customers.
At the other end of the continuum, some divestiture packages contain a set of assets that
are designed to facilitate entry (in the expectation that the competition lost by a merger will
eventually be replaced by the buyer) rather than an on-going business. These assets are typically
intellectual property, technology or know-how, brand names, research and development, and/or
selected pieces of equipment. In these cases, there is no on-going business; thus, there will be no
immediate transfer of market share. Instead, the Commission has required divestiture of those
selected assets that a firm might need to overcome the existing impediments to entry. The buyer
must bring with it whatever else is needed to complete the picture and enter the market. The
buyer may be unable to produce the product itself immediately because it may have to modify its
existing facility independently, qualify the product with customers, or obtain necessary
governmental approvals. Because the buyer is not simply stepping into the shoes of an existing
competitor operating an on-going business, entry may not be immediate and the effects not
immediately known.
Of the 37 divestitures that were
studied, 22 were of assets that comprised ongoing businesses. Of those 22, 19 were
viable in the relevant market virtually
immediately after the divestiture. Of the
three that were not: one involved divestiture
of a business that was not viable at the time
of the divestiture; one involved divestiture of
a business that was not operated independent
of respondent after the divestiture; and one
involved a business that was not really
operating in the relevant market at the time
of divestiture, and the buyer of the business
did not subsequently enter that market. Of
the 15 divestitures of selected assets, nine
resulted in viable firms; five were so
problematic that the results were not viable,

11

and one was not operating independently of the respondent in the relevant market.
The Study thus suggests that divestiture of an on-going business is more likely to result in
a viable operation than divestiture of a more narrowly defined package of assets and provides
support for the common sense conclusion that the Commission should prefer the divestiture of an
on-going business. The Study nevertheless indicates that divestitures of selected assets can
succeed. Where the Commission determines that the divestiture of an on-going business is
undesirable because it would destroy the efficiencies of a merger, the case studies indicate ways
that the higher risks associated with a partial divestiture can be reduced. As is discussed in
Section II.C. below, these risks can be reduced by affording greater protection to the buyer of the
divested assets by including provisions requiring the use of auditor trustees, rights to hire
employees, rights to technical assistance, and supply contracts.
4.

Continuing relationships with respondents post divestiture may
increase the vulnerability of buyers of divested assets but may be
critical to the success of some buyers

The case studies indicate that relationships between the buyer of divested assets and the
respondent, which continue beyond the transfer of the divested assets, may increase the
vulnerability of the buyers of the divested assets, particularly in those cases in which the divested
assets comprise less than an on-going business. However, the continuing relationships between
the buyer and respondent may often have been critical to the success of the buyer of the divested
assets. These conflicting results emphasize the complexity of the issues surrounding these
continuing relationships.
Nineteen of the 37 buyers that were interviewed maintained some sort of continuing
relationship with the respondent after the divestiture was consummated.20 Of the nineteen, in six
cases the continuing relationship was so detrimental that it prevented the buyer from operating
competitively in the market. In an additional seven cases, the continuing relationship was
harmful to the buyer, but not so harmful as to prevent the buyer from operating in the market
competitively. In the remaining six cases, continuing relationships such as supply contracts or
technical assistance obligations were not only helpful to the buyer but were critical to the
subsequent success of the buyer.
Based on the numbers alone, it appears that staff should be concerned about cases in
which these relationships continue post-divestiture. But it is also clear from the interviews that
in some cases continuing relationships are necessary to ensure the success of the buyer,
particularly in those cases in which less than an on-going business is divested.21 As described in

20

One additional buyer was entitled to technical assistance post-divestiture but
chose not to use it, relying on its own know-how instead.
21

Of course, those are the very cases in which these continuing relationships were
most responsible for the inability of the buyer to compete viably in the market. In seven out of
(continued...)
12

Section II.C. below, the information obtained from the case studies allows for some
understanding of which types of relationships can be productive and what protections can be
written into the Commission’s orders or required in the divestiture contracts to maximize the
usefulness of the relationships.

21

(...continued)
the nine cases labeled "not viable," some sort of relationship between respondent and buyer
survived post-divestiture and in some way contributed to the nonviability of the divested assets.
13

5.

Smaller firms appear to succeed at least at the same rate as larger
firms
The Study indicates two and perhaps three characteristics of
buyers that increase the chances for success of the divested business:
knowledge of and experience in the business; commitment to the
business; and, for a combination of reasons, the size of the buyers.22

While a large majority of the
divestitures to large and small firms
were successful, the case studies
indicate that smaller, more
entrepreneurial firms have succeeded
at least at the same rate as large,
multi-divisional firms. Of 23
divestitures to smaller firms, three
were found to be not viable.23 Four of
the 14 divestitures to larger firms
were not viable.24 The smaller firms’
failure rate of 14 percent was less
than the more than 30 percent failure rate of the larger firms. It,
thus, seems important not to assume that smaller firms will be
weaker competitors.
6.

Summary

These general findings support useful rules-of-thumb for merger remedies. Divestitures
can restore competition that would be lost as a result of a merger. Divestiture of an entire
business is more likely to be successful than the divestiture of parts of a business. Buyers who
must rely on respondents for continuing support to enter a business with the divested assets are
more vulnerable than buyers who do not need that support. Small entrepreneurial firms have
been at least as successful with divested assets as large corporations.
22

The factors that contribute to the success of any particular buyer – knowledge and
experience, commitment, and size – are discussed in section II.C.
23

An additional divestiture involved assets that the buyer was not operating
independent of the respondent but which the buyer was operating profitably nonetheless. Thus,
although the buyer was satisfied, the divestiture may not have fully restored competition to the
market of concern to the Commission.
24

An additional divestiture in this category involved divestiture of assets that were
not in the relevant market at the time of the divestiture, and the buyer never entered the relevant
market.
14

Although these general findings point toward types of divestitures that should be
preferred, they do not provide specific guidance on how to formulate remedies in individual
cases where more limited relief is pursued. Accordingly, the Study has examined the individual
divestitures to assist in the staff’s understanding of problems faced by the buyers of divested
assets and how specific provisions of orders and divestiture contracts have helped or hurt the
buyers.
C.

The Study presents a new view of the dynamics of the divestiture process,
identifying obstacles to effective divestitures as well as ways to overcome the
obstacles
1.

A new view of the dynamics of the divestiture process

Prior to the Study, staff had assumed that a rough balance of information and bargaining
power existed between respondents and the buyers of divested assets. The Study indicates,
instead, that buyers appear to be at a substantial disadvantage. For example, buyers who have not
operated in the industry are at a severe disadvantage in defining what assets they need and
determining whether they are receiving all the assistance to which they are entitled. Especially in
orders that require the divestiture of less than an entire business, the buyers lack important
information about the business that is being divested. This lack, this industry ignorance, is not
the result of carelessness, of a failure to perform due diligence, or of poor judgment; it is an
inherent characteristic of entering a new business. That disadvantage, and others that are
discussed below, can be mitigated by some changes in the divestiture process.
Staff started the Divestiture Study with the common sense assumption that respondents
do not seek out their strongest rivals to become buyers of the to-be-divested assets but instead
tend to choose the most marginally acceptable buyer. The interviews with buyers of divested
assets support that assumption. Some buyers believe that they were chosen because the
respondents expected them to be weak competitors. It appears that some respondents hope, or
even expect, these weak competitors will fail to successfully exploit the assets. Staff also
assumed that respondents may take actions intended to make the divested assets less competitive,
either as a result of indifference or as part of a planned strategy. The study provides support for
that assumption as well.
Staff further assumed that respondents conduct would be balanced by the self-interest of
those buyers who have the advantage of bidding on a compulsory divestiture that must be
accomplished within a stated period of time at no minimum price. In other words, staff expected
that a buyer’s bargaining power would not be significantly less than that of the respondent in
negotiating the divestiture contract. Furthermore, staff has relied on the fact that buyers were
willing to enter into divestiture contracts as evidence that the divested assets were valuable and
adequate to establish the buyer as a viable competitor to the respondent.
Contrary to these expectations, it appears that buyers generally perceived that they had
much less bargaining power than respondents. Indeed, it appears that buyers tended to handicap
themselves as a result of two factors. First, some seemed to be willing to trade away the
competitive strengths and protection the order was intended to give them because they assumed
15

the divested assets were a bargain and they were afraid some other buyer would be chosen by
respondent if they haggled. Second, many buyers, including large, apparently sophisticated,
multinational corporations, seemed to be unaware of major economic factors in the businesses
they were buying. Accordingly, they sometimes agreed to pay too much for the assets that they
were acquiring or did not insist upon the transfer of necessary additional assets.
The lessons learned from the Study about the dynamics of the divestiture process have led
the staff to alter its role in the process. To a greater or lesser extent, it had assumed a balance of
bargaining power and information existed between the respondents and the buyers of divested
assets. That presumed balance provided the staff and the Commission with a justification for
accepting respondent’s proposal when they were accepted by buyers. If the buyers signed
purchase agreements and did not complain about what they received, that was evidence that the
orders were likely to achieve their intended results. To be sure, the proposed divestiture remedy,
the buyer, and the divestiture contract were examined carefully, but the presumption was that the
buyer was in a position to adequately defend its interests. The Study suggests that the staff must
attempt to balance the bargaining power between the buyers and respondents in order to protect
the remedies that the Commission orders.
2.

Obstacles to effective divestitures
a.

Respondents

Respondents generally did what was required of them by the orders and little more. The
buyers, however, reported three kinds of activity that respondents engaged in that could lessen
the competitiveness of divested assets in the hands of the buyers: (1) respondents urged the
Commission to define too narrowly the package of assets to be divested; (2) respondents urged
the Commission to divest the assets to weak buyers; and (3) respondents took actions that
diminished the viability of the business acquired by the buyers.
(1)

Respondents urge limited divestiture packages

The divestiture package in consent orders is initially defined in a negotiation between the
Commission staff and the respondent. With the benefit of the hindsight offered by the Study, it
appears that some of the divestiture packages were not adequate to fully achieve the remedial
purpose of the Commission’s orders.
!

Firm 5 25 purchased the right to produce three products made by respondent and the
equipment on which the products were made, as the order required. It objected, however,
that the order should have included a fourth product, which would have given Firm 5 a
full line. Firm 5 attempted to negotiate the purchase of the rights to the fourth line from
respondent, but respondent refused because the order did not require it. Firm 5 contended

25

To maintain the confidentiality of the participants in the Divestiture Study, none is
identified by name. Instead, each buyer is referred to by a randomly assigned number.
16

that the order’s failure to assure that the buyer would have access to a full line of products
made it more difficult for the buyer to compete.
!

Firm 14 acquired from the respondent the technological specifications to produce a
product related to Firm 14's product. The order also required respondent to supply critical
raw material to Firm 14, but only on a limited basis. Firm 14 stated that it was fatally
disadvantaged by the order’s limitation on respondent’s supply obligations. The
restricted supply of indispensable materials prevented the buyer from securing a customer
base that might have made the business viable.

!

Firm 22 acquired the assets that respondent was required to divest. The divestiture
package, however, primarily involved assets that operated in a market unrelated to the
complaint market. Firm 22 pursued the unrelated market to the exclusion of the market
the Commission was concerned about.
(2)

Respondents may propose weak buyers

Respondents are responsible for finding and proposing an acceptable buyer of the to-bedivested assets and completing the divestiture by the order’s deadline. They are not required to
choose the person likely to be the strongest buyer, and many buyers reported they had the
impression they were chosen because respondent did not expect them to be a strong competitor.26
!

Firm 9 acquired the rights to manufacture a product from respondent, but was
unsuccessful in its efforts to compete in the sales of that product. Firm 9 believed that it
was chosen in part because it was a start-up company with no operational experience.
Respondent and Firm 9 made a successful divestiture proposal on the grounds that the
president of Firm 9 had significant expertise in the technical aspects of the complex
production process and had the business backing of a successful venture capital firm.
While the fact that Firm 9 failed does not necessarily mean that the Commission should
not have approved the divestiture application, it appears that a firm with more business
experience and more funds could have coped better with the problems that caused Firm 9
to fail.

26

Of course, the Commission is not required to accept whatever buyer respondent
proposes. In fact, the Commission may disapprove a marginally acceptable buyer if a better
buyer might be available. For example, where a proposed divestiture to an incumbent in the
market would reduce concentration some but not enough to remedy the loss of competition, the
Commission has denied the application for divestiture. In reviewing the Commission’s decision
in Internorth, Inc., 106 F.T.C. 312 (1985) to approve a proposed divestiture of a pipeline interest
to Teco instead of Valero, the pipeline partner, the district court in West Texas Transmission L.P.
v. Enron Corp. et al., 1989-1 Trade Cases (CCH) ¶68,424 at 60,334 (W.D. Texas 1988), aff'd on
other grounds 907 F.2d 1554 (5th Cir. 1990), cert. denied 499 U.S. 906 (1991), stated that “the
FTC was entitled to consider which of the competing applications -- Teco’s or Valero’s would
better serve the remedial purposes of the Consent Order.” That is, the Commission could
approve the better applicant.
17

(3)

Respondents may engage in strategic behavior to
impede the success of the buyer

Buyers also reported that actions of respondents undermined the businesses that they
acquired. Some buyers believe these included actions that were intended by respondents to
undermine the buyers’ efforts to establish their businesses.
!

Firm 9 acquired from respondent the rights to manufacture a particular product. Until it
was able to manufacture the product itself, Firm 9 contracted with respondent to supply
the product to Firm 9. Almost immediately after the divestiture, however, respondent’s
production line went down and respondent was unable to supply product to Firm 9 for a
significant period of time. In retrospect, Firm 9 suspects that respondent’s failure to
deliver was intentional because respondents’s production line had never previously been
closed down for that length of time.

!

Firm 17 acquired the rights to produce a line of consumer goods from respondent. Firm
17 reported that, prior to the divestiture, respondent had access to confidential
information about the product it was required to divest and that, after the divestiture,
respondent used that information to undermine Firm 17's introduction of a new product
by simultaneously introducing a similar product.

!

Firm 28, which also acquired rights to produce a line of consumer goods, reported a
similar experience to Firm 17. According to Firm 28, when Firm 28 introduced the newly
acquired product in a regional market, the respondent timed its test marketing of a similar
product so that it disrupted the introduction of Firm 28's product.

Many more buyers reported that they suffered from respondents’ failures to fully provide
required technical assistance.
!

Firm 5 acquired the rights to produce three lines of product from the respondent and the
equipment on which the divested lines of products were made. Respondent was also
required to provide technical assistance to Firm 5. To comply with the technical
assistance provision, the respondent sent an employee who had no prior experience with
the divested equipment.

The experience of Firm 5 seems typical. In many other divestitures where the respondent was
also required to supply inputs or provide technical assistance, buyers reported having had
problems; the supply was late, the quality poor, the technical assistance unhelpful.
(4)

Respondents have adverse incentives

The Study did not find conclusive evidence that respondents violated any of the orders in
the Study. Nevertheless, it is clear that even where respondents take no actions to deliberately
disrupt the buyers’ businesses, the respondents have no natural incentive to help the buyers, and
that lack of incentive may put the divested business at risk. Where the respondent’s assistance is
18

critical, even indifference by the respondent to the buyer’s success may make the divested
business fail.
In contrast to a Commission-ordered divestiture, the buyer and the seller in a commercial
sale of a business either have or can construct incentives that provide both with incentives for a
successful transfer of the business. For example, where the owner of a business is licensing
technology, it has a natural reason to help the buyer successfully enter the business and maximize
its sales. The licensor normally benefits from higher sales of the buyer because the licensor will
realize higher royalties. Even where the seller makes an outright sale of its interests, the buyer
has many ways in which it can tie its payments to the success of the transfer of the business
operations. The buyer can use milestone payments based on the successful transfer of technology
or insist on loans from the seller that are secured solely by the acquired assets. Similarly, the
seller can protect itself by a license termination provision if the buyer does not live up to its
obligations.
Each of these devices creates an on-going and natural community of interest between the
buyer and seller. That community of interest may be critical to the success of the transaction
because it is often difficult to fully specify in a contract all of the kinds of assistance that may be
needed to transfer a business operation, especially if the transfer involves a complex technology
or a business operation that is not fully transferred.
!

Firm 14's experience illustrates this reliance on natural incentives. Firm 14 stated that,
prior to signing the divestiture contract with the respondent, it rarely had entered into
written contracts with its suppliers or customers. All its agreements had been oral. It
assumed for most of its business relationships that the relationships would work only if
the participants had an on-going community of interest.

Divestiture orders and the contracts that implement them, however, are designed to avoid
continuing relationships between respondents and the buyers of the divested assets.
Establishment of a cooperative relationship between the parties would be inconsistent with the
objective of maintaining or restoring competition. Given that respondents will not benefit from
the establishment of a successful competitor, respondents have an incentive to minimize the
assets that they divest and the assistance that they give to the buyers of those assets.
Accordingly, the Commission’s divestiture process must take into account the adverse
incentives of the respondent. Unless respondents’ incentives can be altered, it is likely that most
respondents will do only what is necessary to achieve a consent order and avoid civil penalties.
Given the level of support that is necessary for many orders, that minimal effort may not be
sufficient to obtain the remedies ordered by the Commission. Fortunately, the Study found that
some respondents made special efforts to fully execute their obligations. A later section
discusses suggestions based on these successes and other insights that may create incentives for
respondents to be more helpful during the transitional process.
b.

Buyers

19

This section begins with an extended discussion of transactions in which the buyers’ lack
of information led them to make mistakes when they acquired the divested assets. As noted
earlier, the case studies indicate that the buyers had access to less accurate information about the
to-be-divested assets than staff had supposed, and the buyers’ interests in the assets were not as
fully aligned with the Commission as staff had supposed. This discussion is long because the
tendency of buyers to make mistakes is so counterintuitive that it requires elaboration to
understand the fundamental quality of the errors. The extended discussion of buyer’s knowledge
is also warranted because that lack of knowledge feeds into other problems faced by buyers and
by the staff’s reliance on buyers. Lack of knowledge explains, in part, the findings of the
following two discussions: why buyers bid against their own interests in negotiating
disadvantageous deals with respondents; and why buyers do not complain to the Commission or
the staff about difficulties that they encountered. The final section discusses transactions that
illustrate that buyers may have very different objectives in buying assets than the Commission
has when it orders their divestiture.
(1)

Buyers lack information

Buyers generally lack important information about the to-be-divested assets.
Interviewees (primarily from large corporations) emphasized this fact by stating that one reason
they sought to acquire the assets was to learn about the business; entering a new market with the
assistance of the knowledgeable employees of an established business represented for them a
lower risk strategy than de novo entry. Because buyers lacked information, they made mistakes
in connection with acquiring on-going businesses, as well as transfers of selected assets and pure
technology transfers. Mistakes were made by large diversified corporations that had prior
experience in making acquisitions, and by small entrepreneurial companies that had never made
an acquisition. Only a small minority of these mistakes were fatal, but many may have lessened
the competitive abilities of the buyers. The following examples suggest the range of typical
mistakes.
!

Firm 1 was a large, successful, technologically sophisticated, multi divisional
manufacturing firm that had been considering entry into a product market related to its
own but based on technology with which it was not familiar. The assets that the
respondent was required to divest used similar technology to that of the product market
Firm 1 sought to enter and therefore fit within the firm’s long-range plan. The firm
acquired the fully staffed production facility, negotiated the right to hire some higher
management personnel, and obtained the right to technological assistance for a period of
time. The firm considered its operation of the assets to have been successful. It quickly
learned the new technology, introduced new products without seeking any technological
assistance, and expanded its market share.
Firm 1 also learned after the acquisition, however, that it had paid more than what
it later determined was a reasonable price for the assets. Firm 1 also discovered it
had insisted on signing an uneconomic contract with respondent, under which
respondent agreed to buy some by-products produced at the plant. After taking
control of the plant, Firm 1 realized that the price it would receive for the byproducts was far below the market value. Finally, Firm 1 discovered after the
20

acquisition that respondent had encouraged customers to stockpile products in
advance of the sale to Firm 1 so that for a period of time after the acquisition Firm
1 had no customers.
!

Firm 12, like Firm 1, was a large, successful, technologically sophisticated, multidivisional firm seeking to enter a new, but related market, by acquiring an on-going
operation that used a technology that was unfamiliar to Firm 12. As the order required, it
acquired a production facility from respondent, which was dependent on inputs from
other firms, and had to share costs of other services with these other firms. It therefore
entered into contracts to obtain the inputs and shared services. Firm 12 quickly learned
the technology and maintained the market share of that facility, but Firm 12 was more
equivocal about claims of overall success.
After the divestiture, Firm 12 discovered that the supply contracts and shared
services contracts it had entered into were so disadvantageous that it could not
operate its facility at a profit. Firm 12 stated that it made mistakes in entering into
these contracts because it was inexperienced in negotiating shared costs and did
not realize the complexities that such arrangements presented. It maintained,
nonetheless, that the acquisition may prove to be worthwhile even though this
facility will never be profitable, because it is exploiting the technology at other
facilities that it owns.

!

Firm 4 was a small but diversified manufacturer that viewed its acquisition of the to-bedivested assets as a good opportunity to enter a new product market with an on-going
manufacturing facility. Firm 4 entered into an agreement with respondent to obtain a
supply of a necessary part for the product at a price that was profitable to Firm 4. The
supply agreement was to last for a specified time period, by the end of which Firm 4
expected to have qualified a replacement supplier that was not also a competitor.
At the end of the time period, however, Firm 4 had no replacement supplier and
was therefore required to negotiate a new supply agreement with respondent,
which contained a less favorable price. This higher price made Firm 4's
operations unprofitable.

!

Firm 7 was a large, successful, technologically sophisticated, diversified manufacturing
company. It acquired a brand name, a product formula and a stockpile of a key ingredient
from respondent. Firm 7 believed that the product and the brand name fit well with Firm
7's other products. Rather than acquire only the amount of key ingredient that the
Commission required to be divested at a fixed price, Firm 7 instead negotiated with
respondent the acquisition of a larger amount at a price to be determined annually.
After acquiring the assets, Firm 7 discovered that the product contained
ingredients banned by one state, a fact that required the cost and delay of
reformulation. Even more serious, by not bargaining for a price on the entire
amount of the key ingredient, Firm 7 found that respondent had control of its

21

manufacturing costs for the several years that would be required to develop an
alternative supply.
!

Firm 8 was a large, successful, diversified company with little manufacturing experience.
Because it was one of the likely buyers of the to-be-divested assets, Firm 8 played a role
in defining the package of assets to be divested. Firm 8 and other potential buyers
asserted that they would be satisfied if respondent were required to divest a key input in
the production of the product of concern to the Commission rather than the entire firm
respondent was acquiring. Firm 8, which distributed this product, argued that the
production process itself was uncomplicated and that it would be better off buying its
own production machinery.
The order required respondent to divest inputs of the buyer’s choosing. Firm 8
found that the inputs it selected from respondent’s stockpile were defective. In
addition, the production machinery it acquired (independent of the order) was
inappropriate. As a consequence, it was unable to enter the market of concern to
the Commission as quickly as it had intended.

!

Firm 14 was a successful, medium-sized firm that manufactured a single product. It
acquired from the respondent technological specifications to manufacture a product
related to its single product, machinery to produce the product, and limited rights to
acquire amounts of one critical raw material needed to make that product.
Firm 14 found that the machinery was incompatible with its production process
and did not meet federal regulatory standards without certain modifications. Firm
14 was concerned that modifying the machinery would be uneconomic. It also
discovered that it could not obtain the critical raw materials it needed for certain
products. Respondent would not supply them because the order did not require it
to do so. Without the ability to sell these other products, the business could not be
profitable. Ultimately, the company abandoned the project entirely.

!

Firm 5, like Firm 14, was a successful, medium sized, single product manufacturing firm.
It acquired from respondent the exclusive right to produce a line of products, rights to
acquire production machinery, and technical assistance to operate the machinery. Firm 5
had a choice of production machinery and chose a set that respondent offered at a lower
price.
Firm 5 found that the machinery it chose did not operate as efficiently as the
machinery it did not select and that the technical assistance it received was not
effective. Firm 5 was, however, able to overcome these problems and
manufacture the line of products.

!

Firm 9 was a newly formed corporation headed by an individual with technical expertise
in the product and funded by a venture capital company. It acquired from respondent the
exclusive right to produce the product and entered into a supply contract with respondent
that was to cover the period needed until Firm 9 could develop its own capacity.
22

Respondent did not deliver the finished product for over a month after the
acquisition. Although some compensation was paid, Firm 9 never recovered and
went out of business.
!

Firm 16 was a large, successful, technologically sophisticated, diversified manufacturing
company. It acquired the rights to a product in development and a supply of the product.
The product fit the marketing and sales portfolio of the company well.
After it acquired the rights, Firm 16 found that it did not have the capability to
produce the product. It had made the acquisition without consulting production
personnel about the specialized technology needed to produce this product.

In some of these divestitures, the buyers might have avoided the mistakes they made by
exercising more “due diligence” before committing themselves to the acquisition.
!

Firm 2, also a large, sophisticated, diversified manufacturing firm, acquired rights and
technology to produce a line of products from respondent. In contrast to the other firms,
it consulted its research and manufacturing divisions and tested whether it could use the
to-be-divested technology to produce the product. It, thus, determined that it could
manufacture the line of products before it agreed to acquire the to-be-divested asset.

Other firms might have protected themselves with better contracts. Firm 12 stated that it
has learned how to frame contracts that involve shared facilities as a result of this and another
transaction. Firm 9 and Firm 14 had never previously made an acquisition and lacked the
experience to anticipate any of problems they might face.
Because the mistakes are so pervasive in the experiences of both successful and
unsuccessful buyers, staff is persuaded that mistakes by buyers are inherent in the acquisition
process, particularly where buyers have no previous experience in the market. In general, it is
not possible to anticipate fully how a firm will operate in advance of the acquisition because the
nature of a business is too complex.
(2)

Buyers perceive a lack of bargaining power

The case studies indicate that buyers have generally perceived themselves to be in weaker
bargaining position than respondents.27 Although respondents are required to divest within a
specified time period at no minimum price, there are often multiple buyers interested in acquiring
the assets or lone buyers that believe there are others interested in acquiring the assets. In these
circumstances, the price and terms of the sale are dictated by what bidders are offering, not by the
theoretical requirement that the assets be sold for no minimum price. Some buyers have
represented to the staff that they did not need or want assets or divestiture terms that clearly

27

Not all buyers had this perception. Several demanded and received terms that
they considered to be advantageous and were not explicitly required by the orders.
23

would be in their interest. The Study suggests that many of those buyers took those positions
because they feared that if they insisted on more favorable terms the respondents would divest
the assets to some other bidder.
The buyers of divested assets have been very frank about the mistakes that they have
made, and none has even suggested that it knowingly misled the Commission. Nevertheless, it
seems likely that buyers knew at the time of negotiations that some contract terms put them at a
disadvantage. Presumably, they did not foresee the precise harm; rather, they assumed that they
did not need the added protection. They traded away a potential advantage in return for a lower
price, or for some other favorable term, or out of fear that some other bidder would be selected.
Regardless of the reason, the result has been that some buyers have acquiesced to terms that
increased the risks that the Commission’s order sought to minimize, while insisting that those
terms were not needed.
The insistence on terms that weakened the competitiveness of some buyers was not due to
inadvertence; rather the buyers made considered decisions to take risks. It is clear that the buyers
considered these issues, because the staff initially opposed specific terms that, in retrospect,
could have been foreseen as possibly harmful to the buyers. Staff opposed the terms, not because
it had greater knowledge about the businesses, but because of its remedial bias against continuing
relationships between competitors. Only because the firms had convinced the staff that they
would be good and effective buyers of the to-be-divested assets (a fact that appears to have been
true in most cases) was the staff persuaded that the Commission should permit the departures
from its institutional bias. The following are cases where divestiture provisions that normally
have been opposed by the Commission were accepted at the buyers’ urging:
!

Firm 1 and respondent negotiated a divestiture contract that included a provision
requiring Firm 1 to sell by-products from the divested plant to the respondent. Staff
initially opposed that provision, but Firm 1 argued that taking over the facility was
complex, and it needed the assurance for its business plan that the by-products would be
sold. Staff ultimately accepted this argument as reasonable, but, in retrospect, it might
have been better had staff interpreted this as a sign that Firm 1 had not sufficiently
studied the market.

!

Firm 4 negotiated a supply agreement with the respondent that included a limit on the
time respondent would supply a necessary component to Firm 4. Staff initially opposed
the time limit and argued for a longer supply contract with an option to terminate but
Firm 4 argued that it would have an alternative supplier in time. Staff was concerned that
the divestiture might fail if Firm 4, contrary to its expectations, was unable to qualify an
alternative supplier within the time period. Because staff had no industry specific
knowledge, it eventually agreed to support the divestiture contract with the limited supply
agreement. Firm 4 suffered competitively when it found it had no replacement supplier
at the end of the supply contract.

!

Firm 8 insisted that it could become a more effective competitor if respondent were
required to spin off some of its stockpile of key inputs, rather than spin off the fledgling
competitor that respondent was acquiring, which was the alternative staff was
24

considering. Firm 8 also insisted that it did not need to have a transfer of manufacturing
technology. Firm 8's subsequent problems in selecting from the stockpile of inputs and
its difficulty in acquiring appropriate production machinery both reflect problems that
would not have existed if the respondent had divested the company it was acquiring.
There is no reason to doubt that all three firms discussed above believed that the overall
terms of the divestiture were in their interests. Firm 1 believed it would receive a fair price for
the by-products. Firm 4 believed it would have a replacement supplier before the supply
agreement with the respondent terminated. Firm 8 believed that it did not need technological
assistance to select and operate the production machinery efficiently. In retrospect, though each
firm was wrong.
In contrast to Firm 4 and Firm 8, only Firm 1 could have been harmed by resisting the
terms suggested by respondent and accepting the position urged by the Commission staff. Had
there been no market for the by-products, Firm 1 would have lost revenue absent the contract
with respondent. However, the apparent protection that Firm 1 received from the contract
mistakenly relied on its ability to bargain effectively with respondent.
The mistakes made by Firms 4 and 8 appear to have been accepting respondents’ terms
because the terms were clearly contrary to the interests of the buyers. Why should Firm 4 have
insisted it did not need more time to find a replacement supplier? Why should Firm 8 have
insisted that it did not need to examine the manner in which the respondent operated its
productions machinery? It appears that buyers accepted disadvantageous terms, in part, because
they overestimated the value of assets they were acquiring. They assumed that the order’s
requirement of a forced sale of assets at no minimum price gave them a significant chance to buy
the business at a bargain price. Thus, it appears that buyers are likely to underrate the harm that
adding risks will cause. As noted in the previous section, buyers do not have very good
information about the operation or value of the divested assets; consequently, their assumption
that they are acquiring a bargain predisposes them to accept contract terms that reduce the value
of the divestiture transaction.
The Study suggests that buyers sometimes propose the terms that reduce the value of the
transaction because they want to be chosen by the respondent as the buyer. Most buyers told
staff that they either knew or assumed that they were not the only business that was interested in
acquiring the to-be-divested assets. Consequently, few of the buyers felt that they had any
leverage in negotiating with the respondents, and many indicated that their offer would have a
greater chance of success if they minimized the contractual burden on the respondent.
Accordingly, buyers repeatedly bid against their own interests as a future competitor in hopes
that they would be selected as the buyer of the assets in the required divestiture. Their
assumption seems to have been that, given a bargain price, they would be able to succeed with
even a somewhat diminished asset package.
These assumptions may have undermined orders that were designed to aid the buyers to
become strong competitors. Certainly, staff must be careful when evaluating on-going relations
between respondents and buyers in proposed divestiture contracts.

25

(3)

Buyers do not often communicate with the Commission
regarding difficulties in their dealings with respondents

The Study also revealed that buyers rarely alerted the Commission or Commission staff
about their difficulties in dealing with respondents at the time the difficulties occurred. The most
significant factor contributing to the firms’ reluctance to raise these issues with the Commission
was a fear that, if the buyer complained to the Commission, the respondent would provide worse
service.28
!

Firm 9, which received no deliveries of finished product in the first month it was in
business, did not alert the staff. It received some compensation from the respondent, who
later began deliveries. Firm 9 was concerned that its complaints might have soured
continuing relations with the respondent and revealed only an accidental production
failure that respondent claimed was responsible for the disruption.

!

Firm 14 did not alert staff even though it ultimately discontinued efforts to get into
production. In its interview, it stressed that it felt that respondent had acted in bad faith
and that it could not do business with a firm without trust. Firm 14 generally operated
without written contracts with its suppliers and customers. It accepted that the divestiture
contract may have been inadequate to guarantee its rights, because it had never drafted a
contract for that purpose. For the same reasons, Firm 14 did not think the Commission
could have forced an effective divestiture.
(4)

Buyers’ interests are different from the FTC’s

The Study suggests that interests of buyers may diverge from those of the Commission.
!

When Firm 27 took over part of the operations of the respondent, it continued to operate
at the same location. It had a transitional arrangement that allowed it to sell products
under the respondent’s marketing umbrella while at that location, and it decided to
maintain that arrangement after the transitional period. Because the respondent also
received some advantage from the arrangement, the arrangement has endured and the
result is an implicit partnership, rather than competition, between the firms.

!

Firm 22 acquired a facility from respondent that primarily produced one product that did
not compete with respondent but also produced another product that did compete with
respondent. Firm 22 put most of its efforts into developing the product that did not
compete with respondent. It used respondent’s network to sell the product that did
compete with respondent. It, thus, guaranteed that it had little effect on the respondent’s

28

Other buyers in the Study have, however, sought Commission assistance. Firm 4
complained when it had no replacement supplier at the end of the period specified in the
divestiture contract. Firm 5 complained that it should have had the right to acquire an associated
product to complete its product line. In these two cases, the buyers’ complaints were clearly
beyond the scope of the applicable order.
26

business. Although its business was profitable, the divestiture to Firm 22 did not
accomplish the remedial purposes of the order.
!

Firm 13 also had a different objective from the Commission’s. It acquired the divested
assets as part of a multi-year plan to create a business that it would be profitable to resell.
It placed few demands on its managers, and thus the assets had little competitive vigor.

!

Firm 7's acquisition of divested assets should have created a strong competitor. In its
interview, Firm 7 described the problems it had encountered in the course of the
divestiture, including the realization that it had lost the opportunity to compete on price as
a result of failing to stockpile raw materials. Nevertheless, the manager of Firm 7
indicated that the firm’s major objective of the transaction had been achieved: Firm 7
now has a complete line so it can compete more effectively on selling its other products.
The fact that Firm 7 could not directly challenge respondent for the market in the divested
product was of less interest to Firm 7.

The divestiture process should be designed in a way that makes it more likely that the
buyer will compete, rather than cooperate, with the respondent after the divestiture is complete.
Methods must continue to be developed for reviewing divestitures to distinguish those buyers
who are likely to compete from those who are likely either to cooperate or to use the assets for
other purposes.
c.

Complexities of technology transfers

It is almost always difficult to transfer a business technology unless the individuals who
implement the technology also transfer to work for the buyer.
!

Firm 8, having had no previous manufacturing experience, assumed that with the aid of
consultants it could assemble a plant to manufacture the divested product; it thus
supported a divestiture of raw material by respondent and opposed what it considered as
an inferior option to divest an operating plant that had developed its own source of raw
materials. With hindsight, Firm 8's assumption that it could choose the proper raw
materials from respondent’s stockpile, choose the right production machinery, and
properly operate the machinery, was wrong.

!

As Firm 5 discovered, it is difficult to learn how to operate production machinery even if
it has been used for that purpose by the respondent and even if someone is reading the
instructions from a manual.

The substantial literature about the industrial learning curve29 suggests that refinements in
manufacturing procedures are the source of great productivity gains. The learning curve is
applicable to almost every aspect of a business, and the difficulty of transferring knowledge is

29

See, e.g., D. Abell and J. Hammond, STRATEGIC MARKET PLANNING 103-133

(1979).
27

one reason why divestitures of on-going businesses succeeded more often than divestitures of
selected assets. Where an entire business is divested with the personnel who operate it, the
knowledge will pass as part of the transaction. Finding ways to make successful and effective
transfers of trade secrets and technology is a major task in formulating effective remedies.
d.

Difficulties in defining viability

The problems that arose in particular divestitures were sometimes the result of an
incomplete understanding of the needs of a viable business. The cases discussed below show
that even when the Commission properly identified the markets in which the transactions were
likely to create competitive harm, the package of assets to be divested may have been drawn too
narrowly to create a viable business.
!

Firm 5 was harmed competitively because the order defined the assets-to-be-divested too
narrowly. Firm 5 complained at the time it acquired the assets that it needed the right to
produce an additional product to be an effective competitor. Respondent refused to
include rights to that product because the order did not require it. As Firm 5 feared, some
customers refused to allow it to undergo the customers’ quality testing program because it
was not a full line producer.

!

The rights acquired by Firm 14 to purchase raw materials from respondent were limited
to raw materials that Firm 14 would use to manufacture products for customers who were
in the market defined in the Commission’s complaint. This definition narrowed the
potential market for the buyer to the point where Firm 14 decided it was not worthwhile
to enter the business.

Establishing a viable competitor requires a thorough understanding of the operations of
the business. The order must ensure that the buyer has access to the necessary technology,
suppliers, distribution channels and other essential business elements. As noted above, Firm 8's
problems in selecting appropriate raw materials from respondent’s stockpile and acquiring
appropriate manufacturing equipment in the open market illustrate how difficult it can be for a
new entrant to understand the range of elements required to operate a business. That kind of
difficulty is transmitted to the Commission where, as here, the staff was persuaded by Firm 8 and
other potential buyers to recommend that the order require respondent to divest a supply of
respondent’s own raw materials rather than divest the acquired business which had its own
supply of raw materials.
The order in Promodes30 illustrates a related difficulty in framing effective divestitures of
less than an entire business. The order was modified to eliminate five of the six required grocery
store divestitures when neither the respondent nor the Commission-appointed trustee could locate
buyers for the five stores. Their lack of viability may have been related to scale economies in
purchasing or advertising. It may be that the stores were subsidized by their chain and were
viable only because they established a convenient presence that maintained customer loyalty.

30

See Promodes, note 17, supra.
28

The absence of any buyers for the to-be-divested stores, when they were offered at no minimum
price, may also suggest that these stores were never competitively significant.31 In order to have
a basis for recommending the divestiture of individual stores, the staff needs to know details
about individual stores and their role in the overall business.
3.

Recommendations to increase the effectiveness of divestiture remedies

The following section discusses some ways divestiture remedies can be made more
effective, based, in part, on information obtained from the cases studies.
a.

Increase respondents’ incentives to achieve an effective divestiture

A number of approaches have the potential to increase respondents’ incentives to achieve
effective divestitures.32 The case studies, as well as more recent cases, suggest ways to cope with
respondents’ incentives to advocate ineffective orders, weak buyers, and disadvantageous
divestiture contracts.33
(1)

Appoint auditor trustees

The appointment of an auditor trustee may facilitate the effectiveness of the on-going
relationships, some of which are critical to the success of the divestiture. In addition, the
reluctance of buyers to alert the staff to difficulties they encountered in dealing with respondents
can be mitigated by the appointment of an auditor trustee. The auditor trustee has unrestricted
31

Where stores have become unviable because of actions by the respondent, the
Commission has obtained civil penalties or additional divestitures, or both. See, e.g., FTC v.
Schnuck Markets, Inc., Civ. No. 4:97CV01830CEJ (E.D. Mo. 1997) (consent judgment).
32

The threat of civil penalties for noncompliance with its obligations under the order
may provide some incentive for respondents to comply with the order. The Commission has
sought and obtained civil penalties in cases where the respondent has failed to divest in a timely
fashion (see Louisiana Pacific, note 9, supra; FTC v. Rite Aid Corp., Civ. No. 98CV00484
(D.D.C. 1998)), where respondent has allowed assets to deteriorate before the divestiture is
accomplished (see Schnuck, note 31, supra; FTC v. Rubus Development Corp. et al., Civ. No.
94CV0041 (D.D.C. 1994)), and where the means by which respondent has divested assets has
adversely affected the viability of the assets (FTC v. CVS Corp., Civ. No. 98CV00775 (D.D.C.
1998)).
33

The Commission has begun requiring representations from the respondents that all
assets used in the divested business or necessary for its operations are included in the divestiture
contract. The greater understanding of the imbalance of knowledge has demonstrated that the
staff should not fully rely on buyers to define the elements that should be included in the
divestiture package. Respondents generally have the greater knowledge and can reasonably be
required to take responsibility for the adequacy of the assets divested. Such representations can
be made so that if later it appears that some additional asset should have been included, there is a
basis for adding it.
29

access to the facilities of both the respondent and the buyer and no concerns about informing the
Commission. This is particularly true in cases involving supply agreements in which the
respondent agrees to supply in-puts or finished product to the buyer and in cases involving the
transfer of complex technology.34 Recently, the Commission has appointed individuals with
technical knowledge of the industry to perform those functions that cannot be accomplished by
either the parties individually or the Commission. With the combination of their technical
knowledge and their unrestricted access, they can resolve disagreements between the respondent
and the buyer and determine whether the respondent is performing its obligations, a matter which
may be unclear to the buyer.
This independent observer has generally had a beneficial effect by his or her presence.
The auditor trustee creates a basis for trust between parties that do not naturally have a
community of interest. Also because of their technical backgrounds, the auditors have
sometimes found ways to implement the obligations that the parties themselves had not thought
of.
The respondent and the buyer know that the auditor has no reason not to inform the
Commission if the auditor believes that the obligations are not being fulfilled. The respondent
cannot retaliate against the auditor for filing a truthful report with the Commission. The auditor
is also well positioned to report to the Commission if the buyer is failing to follow the business
plan submitted to the Commission or otherwise is failing to comply with any conditions of the
divestiture.
(2)

Require divestiture of a crown jewel if respondent fails
to divest during the divestiture period

The case studies suggest that the inclusion of a crown jewel provision may have an
impact on the incentives of respondents.35 To avoid divestiture of the crown jewel, the
respondent has an incentive to propose initially a package of assets that is adequate to create a
viable competitor and for which an acceptable buyer will be found.
There are several grounds for including a crown jewel. The crown jewel gives the
Commission the assurance that should no acceptable buyer be found for the to-be-divested assets,
there is a larger, more saleable, package for which an acceptable buyer can be found. In
addition, by maintaining the possibility that the respondent may have to divest the crown jewel

34

The Commission has also used auditor trustees to monitor hold separate
agreements, which are designed both to create an entity that actually competes with the
respondent before the divestiture occurs and to create a firewall to prevent the respondent from
learning about the operations of the held-separate entity. When properly framed, hold separate
agreements can reduce both pre- and post- divestiture competitive harm.
35

An appropriate crown jewel provision requires divestiture of a freestanding
business with a customer base. No respondent subject to a crown jewel provision has ever failed
to divest within the time required by the order.
30

and retain instead the original divestiture assets, the provision provides an additional reason for
the respondent to maintain the strength and viability of the to-be-divested assets.
A crown jewel is not designed as a punishment for failure to divest,36 but it is clear that
respondents may see its imposition as a threat to the value of their acquisitions and therefore
institute procedures to ensure there will be no occasion to activate the larger divestiture. The
respondent that divested assets to Firm 30 appears to have been much more rigorous in its
adherence to the terms of the hold separate agreement than the respondents that divested to Firm
17 and Firm 28. One reason may have been that respondent that divested to Firm 30 was subject
to a crown jewel and the respondents that divested to Firm 28 and Firm 17 were not. The first
respondent stated directly that the most difficult part of persuading its board to accept the consent
order with the Commission was the crown jewel provision. The board was not satisfied with
assurances that the language was standard and had never been invoked, but insisted that
management set up procedures to ensure that it would not be invoked against them.
It appears that Firm 30, and probably many others, benefitted from the existence of a
crown jewel provision. It created an incentive within the respondent to make the order work in
the way intended by the Commission. Rather than the indifference or hostility that is exhibited
by some respondents, this respondent had an internal reason to see the divestiture succeed.
(3)

Require consequential damages for failure to deliver
supplies

Interim supply contracts by respondents may be critical to the survival of new operations.
The terms of supply contracts created difficulties for Firms 4, 7, 8, and 12. The failure to deliver
timely supplies had a terminal effect on Firm 9. Although Firm 9 recovered some damages for
non-delivery, supply contracts generally do not provide for any damages, and contract law
normally will not compensate the buyer for loss of profits or goodwill. Normally the lack of such
remedies does not pose a problem because the interests of the supplier and its customer are
aligned; however, respondents are competitors of the buyer of divested business and therefore the
respondent does not automatically have an interest in the success of the buyer. As a result of the
vulnerability of the buyer, the Commission staff has required that supply contracts specify that
buyers will be entitled to damages equal to the loss of business plus the amount necessary to
restore the buyer’s business for failure to provide timely supplies. Because respondents then
share in the economic risk, they have strong incentives to prevent supply failures.
b.

Facilitate the success of the buyer

The Study suggests that buyers may be more successful if staff assures that buyers have
access to needed information and carefully analyzes proposed buyers in order to recommend
appropriate ones.

36

The Commission’s cease and desist orders may not be punitive. American
Medical International, Inc., et al., FTC Docket No. 9158, 104 F.T.C. 1, 223 (1984) (Decision
and Order), citing United States v. E.I. du Pont de Nemours & Co., 366 U.S. 316, 326 (1961).
31

(1)

Assure that the buyer has access to accurate
information

The case studies illustrate that the inherent complexity of a business prevents buyers from
fully understanding a business before taking over its operation and frequently even after taking it
over. However, some of the buyers could have obtained much better information through more
thorough due diligence. Had Firm 16 consulted with its production personnel, it would have
discovered that it could not produce the product. Firm 7 should have known that the product it
was buying had been banned by one state and would require reformulation before it could be
sold. In contrast, as noted above, Firm 2 actually tested its capacity to manufacture the product
during the due diligence period. Firm 23 went even further and required respondent to make
significant modifications to restore the to-be-divested business before it would sign a contract to
buy the assets. It is important, therefore, that proposed buyers be given adequate time and an
opportunity to conduct full due diligence, because the information buyers gain can greatly
improve the likelihood that the divestitures will succeed.
Given that many buyers appear to bid against themselves (probably for fear that
respondent may select another bidder), it is not sufficient that buyers merely be given an
opportunity to conduct due diligence. Buyers may be reluctant to take full advantage of the
opportunity. This perceived inequality in bargaining power may be reconciled in appropriate
cases by taking one or more of the following steps:
1.

Require the buyer, as a condition of Commission approval, to submit an
acceptable business plan for the assets. Developing a persuasive business plan
requires a proposed buyer to consider the full operation of the divested business.
The business plan also provides a framework for the staff to consider whether the
proposed buyer has fully considered the operation of the business. For example,
the production people in Firm 16 would have had to be consulted to develop cost
projections and presumably would have indicated they could not manufacture the
product.

2.

Require the buyer, as a condition of Commission approval, to have final
and executed contracts with third parties who will supply any necessary
inputs or provide services that the proposed buyer does not intend to
undertake itself. The case studies indicate some tension concerning the
circumstances in which this requirement is suitable. On the one hand,
where the buyer is inexperienced and needs the capacities of a
knowledgeable manufacturer or distributor, the staff needs assurance that
the buyer will have access to such capabilities. On the other hand, buyers
frequently lack essential knowledge before they buy. That is how Firm 1
ended up in an unfavorable contract under which it was bound to sell byproducts for less than market value. That is also how Firm 9 ended up
with the same distributor as the respondent. That distributor decided that
since it had a monopoly it could make more money from Firm 9's product
by price discriminating and selling it only to the smaller group of
customers who could use only Firm 9's product.
32

The staff must scrutinize third party contracts with great care. In both of the
above cases, there were signs of potential problems. Giving monopoly power to
Firm 9's distributor invited abuse. Permitting sales of a significant portion of
output to respondent should be discouraged unless there is clear proof that it is
necessary or harmless. Respondents, too, will take advantage of their greater
knowledge of the economics of the transaction. Moreover, as previously noted,
buyers may be willing to give back to the respondent some of the benefits of the
divestiture package because they assume they will still be getting a bargain. The
Commission should therefore reject suspect contracts and insist on divestitures
that establish a more independent business operation.
3.

Assure that the buyer fully understands the requirements of the Order. The
case studies and the experience of the Bureau of Competition have shown
that some respondents have proposed deals to the buyers that transfer less
than is required by the order and that buyers have not all been aware that
their divestiture contract provided them with less than they were entitled
to. Informing the buyer of the terms of the order is both more difficult and
more important when orders require “up front” buyers: more difficult
because the order is being drafted at the same time respondent is
negotiating with a buyer; more important because the buyer’s input can be
critical to assuring that all necessary assets are divested.

By insisting that the buyer understand the terms of the order, that the buyer submit an
acceptable business plan, and that the buyer execute all necessary third party contracts, the staff
can assure that the buyer has an opportunity to become as fully informed as possible. The better
informed buyer will, in turn, be able to provide better information to the staff.
(2)

Select appropriate buyers

Ultimately, the success of a divestiture depends on transferring the business to an
appropriate buyer.37 The Commission generally allows the respondent the first opportunity to
market the assets (although it must do so within a specified period of time). This, however, gives
the respondent an opportunity to seek weak buyers. As a consequence, the Commission needs to
be able to identify which buyers are likely to succeed and which are not. The decision is always
fact specific, but the case studies offer some helpful rules of thumb.

37

The insight about the critical role of the buyer is not new in the Divestiture Study.
It was, for example, one of the major points in Elzinga’s 1969 article. See note 3, supra, at 6166.
33

(a)

The knowledge and experience of the buyer
makes a difference

As noted above, the weakness of some of the buyers appears to have resulted from their
lack of knowledge. Some paid too much. Some were dependent for assistance on the
respondent. Many made other mistakes. The most successful buyers appear to be the ones that
know the most about what they were buying.
Frequently, the most knowledgeable and best buyer was the fringe competitor or an
entrant extending geographically. Firm 25, for example, who bought a stand alone production
facility, already owned another facility in a different geographic market. It took over the new
facility, expanded its capacity, and aggressively captured market share without any transitional
problems. Firm 32 did essentially the same in a different, but related industry. It installed new
operating policies and almost immediately began increasing market share.
In other cases, suppliers or distributors knew enough to be very good buyers. In one case
in the study, the order provided an opportunity for the buyer to learn about the industry before it
was required to invest in a plant to use the technology it was licensing. The buyer obtained a
license to technology from respondent and then was given a number of years in which to build
the plant; in the meantime it was supplied with product by respondent. Over that time, it was
able to understand the market and did not have to rely on new technology that it did not fully
understand.
(b)

The degree of the buyer’s commitment to the
market may make a difference

The staff has insisted on a demonstration of commitment by would-be buyers.38 Consider
the history of Firm 19, which acquired the right to sell a branded product and entered into a
supply contract with respondent for a period of time in which the buyer was to develop its own
production. Staff discouraged a proposal that would have allowed the buyer to borrow the
money from respondent. Had that loan been allowed, the buyer might have made profits during
the period of the supply contract and then walked away from the deal with a net profit when the
supply arrangement ended. Instead, staff recommended the divestiture contract only after the
owner of Firm 19 personally guaranteed the financing. With such a commitment, the only way
the buyer could expect to recoup his investment was to plan to operate the business for a period
that was longer than the supply contract. Only when the business became no longer dependent
on the respondent, could the buyer either continue to operate it or to sell it. Until then, the
business had no value because the buyer was entirely dependent on the respondent. The buyer
quickly expanded market share and chose to establish its own production facility.

38

The term "commitment" is used in the sense that it is used in game theory: an
action taken by a party that makes it difficult for that party to alter its position later. See, e.g., M.
Porter, COMPETITIVE STRATEGY 102 - 105 (1980).
34

Similarly, Firm 24, which paid a substantial amount to acquire a brand name and
technology, had no possibility of recouping its investment unless it built a manufacturing plant.
Firm 24 was a start up company managed by executives from the firm that respondent acquired
and financed by a venture capital company. This industry did not have contract manufacturers;
thus the buyer had to make the product for itself. As a result, it became less and less able to walk
away from the business without losing its payment to respondent and its investments in new
production facilities. It also succeeded quickly in establishing a profitable firm.
It is difficult to insist on equivalent ways to commit large firms. The acquisition price for
a divestiture is rarely so large that a multi-divisional firm would not walk away from its
investment in divested assets if the business did not meet its internal rate of return criteria. For
this reason, staff examines the business plan of large firms with special reference to their own
criteria, seeking to understand how the acquisition is justified internally. For these firms, the
internal bureaucratic approval systems may represent a commitment sufficient to support the
divestiture.
(c)

The size of the buyer may make a difference,
such that smaller buyers should not be presumed
to be less competitive buyers

In the Study, small buyers were successful more often with divested assets than large
multidivisional firms. Of 23 divestitures to smaller firms, only three made mistakes serious
enough to put them out of business. In contrast, of the 14 divestitures to large firms, four of them
made serious mistakes that destroyed their profitability permanently or for a significant period of
time.39 Partly, the better record of smaller firms appears to be due to commitment. The owners
had risked their own money and were therefore more determined to succeed. They examined the
acquisition more carefully and planned more carefully. Also, they appear to have been more
opportunistic. Because they had fewer levels of review and fewer issues to focus on, they were
more able to adapt quickly to changing competitive conditions. As a result, staff should not
presume that a smaller firm may necessarily be a less competitive buyer than a larger firm.
On the other hand, larger buyers have deep resources that may substitute for commitment.
Large buyers, unlike small ones, can absorb the consequences of gross financial mistakes and
ignore historical costs. Firm 1, for example, despite being locked into losses in its initial years as
a result of paying too much and entering an unfavorable contract with respondent, approached the
market aggressively and expanded its market share with innovative products. While some large
firms made fatal errors, such as the mistake of Firm 16, which could not manufacture the product
it acquired, large firms can often afford to ignore the fact that they paid too much. Furthermore,

39

This represents only seven out of the nine divestitures that did not satisfy the
remedial purposes of the order. The remaining two, which are discussed in section II.A., above,
included a divestiture of assets that did not operate in the complaint market at the time of the
divestiture and whose buyer never entered the complaint market and a divestiture of assets that
never operated independently of the respondent. These two divestitures, while not effective
remedies for the Commission, were profitable ventures for the buyers.
35

they more often have technical expertise that can make them less dependent on

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Aftc%3A69403cbd538db782. Public record. Not legal advice.