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

DEPARTMENT OF JUSTICE

Antitrust Division

[Civil Action No. 1:97CV01515]

Public Comments and Response on Proposed Final Judgment United

States v. Raytheon Company, et al.

Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C.

16(b)(h), the United States of America hereby publishes below the

comments received on the proposed Final Judgment in United States v.

Raytheon Company, et al., Civil Action No. 1: 97CV01515, filed in the

United States District for the District of Columbia, together with the

United States' response to the comments.

Copies of the comments and responses are available for inspection

in Room 215 of the U.S. Department of Justice, Antitrust Division, 325

7th Street, N.W., Washington, D.C. 20530, telephone: (202) 514-2481,

and at the office of the Clerk of the United States District of

Columbia, United States Courthouse, Third Street and Constitution

Avenue, N.W., Washington, D.C. 20001. Copies of any of these materials

may be obtained upon request and payment of a copying fee.

Constance K. Robinson,

Director of Operations Antitrust Division.

U.S. Department of Justice

Antitrust Division, 1401 H Street, City Center Building,

Washington, DC 20530.

September 26, 1997.

John Heston, Senior MMIC Designer,

David Heston, Technical Director Space Programs,

Texas Instruments, Inc., 13510 North Central Expressway, MS 209,

Dallas, Texas 75265

Re: United States, et al. v. Raytheon Company, et al.; Civil Action

No.: 1:97CV01515 (District of Columbia, July 2, 1997)

Dear Messrs. John Heston and David Heston: This letter responds

to your letter of August 4, 1997, commenting on the proposed Final

Judgment in the above-captioned civil antitrust case challenging the

acquisition by Raytheon Company of Texas Instruments' Defense

Systems and Electronics Unit. The Complaint alleges that the

acquisition violates Section 7 of the Clayton Act, as amended, 15

U.S.C. Section 18, because it is likely substantially to lessen

competition in the manufacture and sale of gallium arsenide

monolithic microwave integrated circuits (MMICs) in the United

States. Under the proposed Final Judgment, the defendants are

required to divest Texas Instruments' Defense Systems and

Electronics Unit MMICs business located in Dallas, Texas.

In your letter, you expressed concern that the proposed Final

Judgment may degrade national security, cause prices of MMICs to

increase substantially, eliminate efficiencies, slow technological

development of MMICs as well as transmit and receive modules (TR

modules), which house the MMICs, and harm synergies between the

development of MMICs and TR modules. Your letter recommended

approval of the proposed acquisition, or in the alternative, that

Texas Instruments' Defense Systems and Electronics Unit TR module

business be divested along with the MMICs business.

With regards to the national security issue, the U.S. Department

of Justice and the Department of Defense (DoD) found no evidence

that challenging this transaction would compromise national

security. After a thorough investigation, the Antitrust Division and

DoD concluded that the proposed transaction, if not blocked, might

lead to higher prices for MMICs. In addition, access to these

critical components of advanced radar systems might be foreclosed to

Raytheon's radar competitors, thereby, increasing DoD's costs for

new radar programs. These radars are an important part of our

nation's defense.

The MMIC cost increases you project, should the acquisition not

occur, are not supported by the evidence obtained in the

Department's investigation. Indeed, the very MMIC and TR module

synergies you hypothesize that would be obtained from the

acquisition will likely also be obtained by an alternative

purchaser. For example, if the alternative purchaser is a commercial

MMIC and/or TR module supplier, the design and capacity utilization

efficiencies you discuss should accrue to that purchaser as well.

Under these circumstances, the costs of MMICs will not increase and,

ultimately, may decline. Moreover, there is little incentive for the

commercial alternative purchaser to spurn military business, as you

claim, especially in view of the excess capacity in the industry.

This same rational applies to the likelihood of advancement of

the MMIC and TR module technology. As you point out, DoD programs

require state-of-the-art MMICs and TR modules. First, technological

advancements should be enhanced by maintaining competition in the

industry not by eliminating it. Second, ``cost plus'' contracts,

which are common in military procurement, by themselves will not

ensure low costs or more technological development without ample

competition in the marketplace. Without competition, there is little

incentive to keep costs down or innovate in MMICs or TR modules.

Third, Raytheon, by acquiring the Texas Instruments' TR module

business, likely will achieve efficiencies in the research and

development and production of its TR modules and MMICs making the

achievement of ``cross functional technology breakthroughs''

possible.

Finally, because our investigation found that competition in the

TR module industry is robust and that the MMIC business could easily

be segregated for purposes of divestiture, sale of the entire R/F

Microwave Unit, as you propose, is not required.

The Antitrust Division appreciates you bringing your concerns to

our attention and hopes that this response will alleviate them.

While the Department understands your positions, we believe that the

proposed Final Judgment will adequately address the competitive

concerns created by the Raytheon's acquisition of Texas Instruments'

Defense Systems and Electronics Unit. Pursuant to the Antitrust

Procedures and Penalties Act, a copy of your letter and this

response will be published in the Federal Register and filed with

the Court.

Thank you for your interest in the enforcement of the antitrust

laws.

Sincerely yours,

J. Robert Kramer II,

Chief, Litigation II Section.

To: J. Robert Kramer

From: John Heston, Senior MMIC designer RTIS, David Heston,

Technical Director Space Programs RTIS

Claim: We claim that the July 2 order of the Department of

Justice (97 1515) to break up the R/F Microwave business unit of

Raytheon TI Systems (i.e. divestiture of the `MMIC Business') will

degrade the national security in both the short term and long term.

It is our premise that the Department of Justice made a premature

decision due to time pressures, political pressures, and lack of

complete information. This paper presents additional information

relevant to the Department of Justice decision and asks for

reconsideration.

[[Page 52774]]

Our perspective of the July 2 consent decree: On January 6, 1997

Raytheon proposed to purchase the Defense Systems and Electronics

Group of Texas Instruments for $3B. In clearing the

anti-trust issues with the proposed acquisition the technology used

to manufacture radar components (i.e. GaAs MMIC circuits and

microwave modules) became an issue. Several months were spent in an

investigation of this technology and both Raytheon and Texas

Instruments provided information on microwave power amplifiers and

modules to the Department of Justice. With direction from the Office

of the Secretary of Defense the Department of Justice issued a

consent decree to allow the acquisition of TI's defense group

provided the `MMIC Business' of Texas Instruments RF/Microwave

Department be divested. The RF/Microwave Department employees

800 people and had annual sales of $125M in

1996. The RF/Microwave department is comprised of: GaAs operations

(MMIC fabrication), module manufacturing, MMIC and module design

groups, and program management. The `MMIC business' as decreed by

the Department of Justice comprises 300 of these people

(all of GaAs operations, a portion of the MMIC design and program

management capabilities, and the microwave GaAs research lab) and

had equivalent revenues of $50M in 1996.

The goal of the Department of Justice decision was to keep

Northrop Grumman and other military system suppliers competitive in

the microwave module business by ensuring it a supply source of

outstanding GaAs MMICs. It was the underlying assumption that this

competition was necessary to drive down the cost of military-use

MMICs.

However, there are four facts that need to be reviewed again

before the consent decree is issued. The conclusions previously

reached regarding the impact of this consent decree need to be

reconsidered.

Fact 1

The `MMIC Business' spin-off company will have to raise MMIC

costs.

Reasons for FACT 1: The same fabrication overhead will now be

spread over a much smaller revenue and people. Short term MMIC costs

will soar. Initial estimates provided to the programs from the now

`fire-walled' MMIC Business group indicate a 50% to 100% price

increase for MMIC devices. This price increase is effective August

1, 1997. The price increase does not include GNA or profit since

they are still part of RTIS.

Also, the synergy existing and being developed between the

module and MMIC business will be broken. This synergy includes

sharing office space, test equipment, printer/copiers, secretarial

support, financial support, prototype parts stock, design seminars,

and profit. As a result of eliminating this synergy, the long term

cost of the `MMIC Business' spin-off will remain higher than they

would have been regardless of the Buyer.

Revised Conclusion 1A

Northrop Grumman and other military system suppliers will not be

able to compete against Raytheon at the microwave module level in

cost since it will be purchasing higher priced MMICs from the `MMIC

Business' spin-off. Raytheon will still have access to their own

MMICs which will not change in price. Raytheon will also be able to

lower module costs due to synergy between the two module factories

(i.e. its own module factory and the one acquired from Texas

Instrument's RF/Microwave department.

Revised Conclusion 1B

Short term cost to F-22 and all other RTIS microwave military

(cost plus) programs will increase.

Fact 2

The commercial market (not military competition) dominates the

volume and cost of every GaAs fabrication plant and thus the cost of

military radar MMICs.

Reasons for FACT 2: The bulk of the fab cost is fixed.

Therefore, volume drives the cost/die down and allows profits to

grow. Military programs have low volumes. Even a military phased

array such as F-22 only requires an estimated 500 wafers/year of

high yielding power amplifier MMICs [estimate based on 440 planes

produced in a 10 year period]. By contrast, cellular phones require

millions of units per year (7000 wafers/year for every 1

million phones.) And the potential commercial telecommunications

phased array market (Teledesic, Motorola, Alcatel) is also much

larger than the military market. To place this in perspective, in

1996 Texas Instrument's GaAs facility produced only 414 wafers of

high power X-band MMICs for all of its microwave customers (military

and commercial). The only way to achieve low cost military use MMICs

without allowing commercial volume to set the price would be to

operate a very tiny GaAs fab.

Revised Conclusion 2A

To provide a good supply of military MMICs, the `MMIC Business'

spin-off must be viably competitive in the commercial market. The

increased overhead rate of the `MMIC Business' spin-off may cause it

to lose business to commercial competitors such as MA/COM, Triquent,

and RFMD. Unless they are extremely successful in the commercial

market the long term cost/availability of the military radar MMICs

from this group is questionable. The `MMIC Business' spin-off will

also be focusing their resources on commercial MMICs instead of

military MMICs since they know that their survival is dependent upon

success in that market.

Fact 3

Military component costs (i.e. radar MMICs and modules) are

driven by technology immaturity.

Reasons for FACT 3: Military programs require the latest MMIC

technology (0.25um gates, pHEMT material, highest power levels) that

has been developed. The program costs are typically driven more by

development of this technology and solving unexpected travails of

the technology development than by competitive pricing analysis. All

the process development costs involved in solving technology

development difficulties are passed onto the government through cost

plus contracts.

The GaAs industry is still struggling to solve the two key

problems that held Silicon growth down until the 1970's: reliability

and FET pinchoff control. These two issues are not as thorny for

lower requirement commercial MMICs.

Revised Conclusion 3

Military MMIC cost and availability will likely be improved more

by allowing consolidation than by increasing competition. The use of

cost plus contracts will prevent the consolidated companies from

arbitrarily raising prices on military programs. Commercial

competition will keep the MMIC costs low. Teaming agreements between

military system suppliers (as is the case on F22 where RTIS and

Northrop Grumman are teamed together) can be used to provide a

continuous source of microwave components to competitors.

Fact 4

Divestiture of the `MMIC Business' divides a team that is

acknowledged as a leader in military microwave solutions and may

impair technical breakthroughs on future military programs. Cost of

future military programs will be higher without these breakthroughs.

Reasons for FACT 4

The RF/Microwave department at Texas Instruments has very good

synergy between system requirements from government agencies and the

technology needed to achieve these requirements. There is synergy

between module and MMIC designers, between MMIC designers and the

GaAs facility, and between programs and the research lab that has

developed over the past 25 years. A number of cross functional

engineering teams are in place to promote technology development and

minimize re-invention. We have both worked on programs where a

Government agency had a technology roadmap of desired system

capability and the year they anticipated this capability becoming

available. Through a combination of Government research programs and

internal investments key technical areas in the research lab and

GaAs facility were targeted for development to achieve specific

module performance levels. Over a 3 to 4 year period, a number of

technical breakthroughs occurred at both device (GaAs process and

material) and design (MMIC and module) levels. These breakthroughs

enabled system architectures up to 5 years sooner than previously

anticipated. Hopefully this pull-up has benefited the National

Security and also provided a lower cost solution. This type of

technical breakthrough will be much more difficult with the `MMIC

Business' divestiture and a breakup of the cross functional

engineering groups developed over many years within the RF/microwave

department.

A secondary result of the `MMIC Business' divestiture is an

increased turnover of personnel. Since the decision, three MMIC

designers and six process personnel in the `MMIC Business' have

already given notice of

[[Page 52775]]

their intention to leave the company and many others are openly

talking of leaving due to career uncertainty created by the Justice

Department decree. Morale is extremely low and it possibly endangers

the core team of MMIC design/process expertise that is being

divested.

Revised Conclusion 4

The `MMIC Business' divestiture will increase the cost of future

military microwave components through increased difficulty in

achieving cross functional technology breakthroughs.

Revised Conclusion 4B

The `MMIC Business' spin-off could potentially lose critical

mass of its key personnel due to morale problems associated with the

Justice Department decree.

Proposed Solution

Keep the R/F Microwave Business unit intact. This will prevent

an increase in MMIC costs, keep the company viable for commercial

business, and allow the company to continue development of advanced

technology.

Option 1: Keep the unit with Raytheon. This will provide the

greatest opportunity for high performance, low cost military MMICs

and modules. Since RTIS is teamed with Northrop Grumman on the F22

program they will be provided necessary MMICs for their module build

as part of that agreement.

Option 2: Spin off the entire R/F Microwave unit from RTIS. This

will make Northrop Grumman and other military system suppliers more

competitive. The downside is a loss of possible maturity for

advanced MMIC processes that would have occurred with the merger

(i.e. combination of Raytheon and TI engineers sharing information.)

Regards

John Heston, (972) 995-6051, RTIS, 13510 North Central Expressway,

MS 209, Dallas, TX 75265

David Heston, (972) 995-6048, RTIS, 13510 North Central Expressway,

MS 262, Dallas, TX 75265

[FR Doc. 97-26828 Filed 10-8-97; 8:45 am]

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