Cooperative Computing, Inc.; Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 971-0013]

Cooperative Computing, Inc.; Analysis To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: In settlement of alleged violations of federal law prohibiting

unfair or deceptive acts or practices and unfair methods of

competition, this consent agreement, accepted subject to final

Commission approval, would require, among other things, the Austin,

Texas-based company, upon completing its merger with Triad Systems

Corporation, to divest, through an exclusive, royalty-free, and

perpetual license, its electronic parts catalog to MacDonald Computer

Systems or another Commission-approved buyer. The complaint

accompanying the consent agreement alleges that Cooperative Computing's

proposed acquisition of Triad would have substantially lessened

competition in the development and sale of management information

systems and electronic parts catalogs for the automotive parts

aftermarket and would likely have resulted in increased prices and

reduced services, in violation of antitrust laws.

DATES: Comments must be received on or before May 6, 1997.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT:

William J. Baer, Federal Trade Commission, H-374, 6th St. and Pa. Ave.,

N.W., Washington, D.C. 20580. (202) 326-2932.

George S. Cary, Federal Trade Commission, H-374, 6th St. and Pa. Ave.,

N.W., Washington, D.C. 20580. (202) 326-3741.

M. Howard Morse, Federal Trade Commission, S-3627, 6th St. and Pa.

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Ave., N.W., Washington, D.C. 20580. (202) 326-2949.

Joseph G. Krauss, Federal Trade Commission, S-3627, 6th St. and Pa.

Ave., N.W., Washington, D.C. 20580. (202) 326-2713.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46, and Section 2.34 of

the Commission's Rules of Practice (16 CFR 2.34), notice is hereby

given that the above-captioned consent agreement containing a consent

order to cease and desist, having been filed with and accepted, subject

to final approval, by the Commission, has been placed on the public

record for a period of sixty (60) days. The following Analysis to Aid

Public Comment describes the terms of the consent agreement and the

allegations in the accompanying complaint. An electronic copy of the

full text of the consent agreement package can be obtained from the

Commission Actions section of the FTC Home Page (for February 26,

1997), on the World Wide Web, at

``http://www.ftc.gov/os/actions/htm.'' A paper copy can be obtained

from the FTC Public Reference Room, Room H-130, Sixth Street and

Pennsylvania Avenue, N.W., Washington, D.C. 20580, either in person or

by calling (202) 326-3627. Public comment is invited. Such comments or

views will be considered by the Commission and will be available for

inspection and copying at its principal office in accordance with

section 4.9(b)(6)(ii) of the Commission's Rules of Practice (16 CFR

4.9(b)(6)(ii)).

Analysis To Aid Public Comment on the Provisionally Accepted Consent

Order

The Federal Trade Commission (``the Commission'') has accepted,

subject to final approval, an Agreement Containing Consent Order

(``Agreement'') from Cooperative Computing, Inc. (``CCI'').

The proposed Order has been placed on the public record for sixty

(60) days for reception of comments from interested persons. Comments

received during this period will become part of the public record.

After sixty (60) days, the Commission will again review the Agreement

and the comments received and will decide whether it should withdraw

from the Agreement or make final the Agreement's proposed Order. The

purpose of this analysis is to facilitate public comment on all aspects

of the proposed Order, including public comment with respect to the

suitability of MacDonald Computer Systems (``MacDonald'') as a proposed

licensee.

The Commission's investigation of this matter concerns a proposed

acquisition by CCI of Triad Systems Corporation (``Triad''). In October

1996, CCI entered into a merger agreement with Triad and commenced a

tender offer for all of the outstanding voting securities of Triad.

Under the terms of the tender offer, Triad shareholders will receive

$9.25 per share, or a total of approximately $181 million. Immediately

prior to the CCI acquisition of Triad, Hicks, Muse, Tate & Furst

(``Hicks Muse''), a private investment firm based in Dallas, Texas,

will acquire over 50 percent of CCI stock and gain control of CCI.

The Agreement Containing Consent Order would, if finally accepted

by the Commission, settle charges that the CCI acquisition of Triad may

substantially lessen competition in the development and sale of (1)

electronic catalogs and (2) management information systems or ``MIS''

systems integrated with an electronic catalog, in the United States or

in North America. The Commission has reason to believe that CCI's

agreement to acquire Triad violates Section 5 of the Federal Trade

Commission Act and that the acquisition, if consummated, would violate

Section 7 of the Clayton Act and Section 5 of the Federal Trade

Commission Act, unless an effective remedy eliminates likely

anticompetitive effects.

The Proposed Complaint

According to the Commission's proposed complaint, CCI is a

privately-held company that develops and markets management information

system software for the automotive aftermarket, with annual sales of

approximately $43 million. CCI offers a portfolio of software products

that assist auto parts distributors and retailers to track their parts

inventory. CCI has developed and markets with its software a

proprietary database of auto parts for domestic and foreign

automobiles.

Triad, a publicly-held Livermore, California-based company,

similarly develops and markets management information system software

for the automotive aftermarket and for other industries. Triad also

develops and sells a proprietary database of auto parts for domestic

and foreign automobiles. Triad has had annual sales of approximately

$175 million, including approximately $90 million attributable to sales

to the automotive parts aftermarket.

According to the Commission's proposed complaint, one relevant line

of commerce within which to analyze the effects of CCI's acquisition of

Triad is the market for electronic catalogs. The complaint alleges that

there are no economic substitutes for electronic catalogs. Paper

catalogs, the only theoretical alternative, are inadequate substitutes

because paper catalogs are cumberstone and time consuming to use. The

ability of warehouse distributors and jobbers to access information

about parts availability and supply the required product is critical to

their success, since the industry standard for same day repair service

causes service dealers to require delivery of needed parts within 30

minutes. Electronic catalogs are sold as stand-alone products and as

parts of integrated MIS systems.

The proposed complaint alleges that a second relevant line of

commerce within which to analyze the effects of CCI's acquisition of

Triad is the market for MIS systems integrated with an electronic

catalog. According to the complaint, an MIS integrated with an

electronic catalog enables users to access the vast inventory of

automotive part numbers of hundreds of automotive part manufacturers on

the same computer terminal as the MIS. Customers often demand an MIS

integrated with an electronic catalog to be able to electronically

transfer automotive parts data from the electronic catalog to a

purchase order in the MIS. This transfer of data is important because

it saves times and eliminates any risk of human error during the

process of rekeying automotive part numbers into purchase orders.

The Commission's proposed complaint further alleges that CCI and

Triad are the dominant providers of electronic catalogs and of

management information systems integrated with an electronic catalog

and alleges that the relevant U.S. or North American markets for

electronic catalogs and for MIS systems integrated with an electronic

catalog are highly concentrated.

According to the complaint, in addition to CCI and Triad, there is

only one firm, Profit-Pro, Inc. (``Profit-Pro''), which develops and

sells an electronic catalog for the independent automotive aftermarket.

Triad sells both a stand-alone catalog and a catalog integrated with an

MIS system, while CCI only sells its catalog integrated with an MIS

system. The proposed complaint alleges that CCI and Triad have,

nonetheless, been substantial, direct competitors. According to the

complaint, the electronic catalog offered by Profit Pro is considered

inferior compared to the CCI and Triad catalogs, in the size of its

database, the accuracy of the part numbers in the database, and the

speed with which it is updated.

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According to the proposed complaint, Triad and CCI are the dominant

providers of MIS systems integrated with an electronic catalog,

together controlling approximately 70% of the market. The merger of CCI

and Triad would increase the Herfindahl-Hirschman Index (``HHI'') over

1200 points to over 3900. Aside from CCI and Triad, all other firms

selling an MIS integrated with an electronic catalog rely upon Triad or

Profit-Pro for their electronic catalog. The complaint alleges that

these fringe firms do not constrain pricing nor in any other way

substantially impact competition for the development and sale of MIS

systems integrated with an electronic catalog.

The complaint further alleges that de novo entry or fringe

expansion into the relevant markets which would be sufficient to deter

or defeat reductions in competition resulting from the CCI acquisition

of Triad would not be timely or likely. According to the proposed

complaint, developing an electronic catalog would require an

expenditure of substantial sunk costs and would be time-consuming.

Electronic catalog data must be entered manually into a database

because the electronic parts data is received in a different format

from each of hundreds of automotive parts manufacturers. Entry with a

catalog covering only a fraction of available automotive parts would

not be acceptable to most warehouse distributors and jobbers.

The proposed complaint alleges, finally, that the acquisition by

CCI of Triad may substantially lessen competition by, among other

things, eliminating substantial, direct head-to-head competition

between CCI and Triad, likely resulting in increased prices and reduced

services for electronic catalogs and MIS systems integrated with an

electronic catalog.

The Proposed Consent Agreement

The proposed Order accepted for public comment contains provisions

that would require CCI to divest CCI's electronic catalog to MacDonald.

The proposed Order would specifically require CCI to divest, absolutely

and in good faith, through a perpetual, royalty-free, transferable,

assignable, and exclusive license with the right to use for any

purpose, combine with other information, reproduce, modify, market and

sublicense, CCI's PartFinder electronic catalog database,

CCI's J-CON application program interface, CCI software

utilized to retrieve vehicle data from the CCI Database, and support

software and documentation.

MacDonald is a California-based privately-held company which on

February 13, entered into a confidential license agreement with CCI

fulfilling the requirements of the proposed Order. MacDonald currently

sells MIS systems to the automotive aftermarket and has previously

offered customers the option of utilizing the Triad catalog with its

MIS system.

The purpose of the divestiture of the CCI electronic catalog is to

ensure the continued use of that catalog in competition with the merged

CCI/Triad, to ensure MacDonald operates as an independent competitor in

the development and sale of electronic catalogs and MIS systems

integrated with an electronic catalog, and to remedy the lessening of

competition as alleged in the Commission's complaint.

The proposed order would require CCI to offer updates to MacDonald

for the electronic catalog for a period of two years. The proposed

order would also require that CCI provide to MacDonald technical

assistance for electronic catalog maintenance for a period of one year.

The purpose of these provisions is to ensure that MacDonald becomes a

viable competitor to CCI, thereby fostering a competitive environment

for the sale of MIS systems integrated with an electronic catalog.

In the event that CCI fails to divest the CCI Products to MacDonald

because MacDonald, unilaterally and through no fault of CCI, breaches

the License Agreement, CCI is required under the proposed Order to

divest to another acquirer that is approved beforehand by the

Commission, within sixty (60) days after the date on which the Order is

made final. If CCI fails to divest, the proposed Order provides for the

appointment of a trustee, to accomplish the required divestiture.

Pending the required divestiture, CCI is required, under the

proposed Order, to maintain the viability and marketability of the CCI

electronic catalog, by among other things, updating the CCI database on

a regular schedule. In order to assist the acquirer, the proposed Order

prohibits CCI from preventing employees from working for the acquirer,

and from entering into long-term contracts with firms in the business

of distributing hardware and/or software systems to warehouses, jobber/

retail stores and/or service dealers in the automotive aftermarket,

that might interfere with the acquirer's ability to obtain customers

This analysis is not intended to constitute an official

interpretation of the Agreement or the proposed Order or in any way to

modify the terms of the Agreement or the proposed Order.

Donald S. Clark,

Secretary.

[FR Doc. 97-5707 Filed 3-6-97; 8:45 am]

BILLING CODE 6750-01-M