Tenneco, Inc

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IN THE MATTER OF TENNECO, INC.

FINAL ORDER, OPINION, ETC., IN REGARD TO ALLEGED VIOLATION OF SEC. 5 OF THE FEDERAL TRADE COMMISSION ACT AND SEC. 7 OF THE CLAYTON ACT Docket 9f)97. Complaint, March 1977-Final Order, Sept. , 1981 This order requires, among other tb-ings, a Houston, Texas, corporation to timely divest, in accordance with the terms of the order all assets and properties constituting the Monroe Auto-Equipment Company. The order also prohibits the company from acquiring, for a period of ten years, any enterprise engaged in the manufacture or sale of shock absorbers, without prior Commission approval; and bars any corporate offcer or employee owning or controlling more than 1 per cent of Tenneco s assets from acquiring any of the divested stock or assets.

Appearances For the Commission: K. Keith Thurman, Layn R. Phillips, and Linda C. Martin.

For the respondent: John L. Jeffers, Alan Gauer and Henry Kollenberg, Baker Botts Houston, Texas, and Dauid C. Murchison John DeQ. Briggs III, and Bernard Cooney, Howrey Simon, Washington, D.

COMPLAINT The Federal Trade Commission, having reason 00 believe that respondents, Tenneco Inc. (hereinafter "Tenneco ) and Monroe Auto Equipment Company (hereinafter "Monroe ), corporations subject to the jurisdiction of the Commission, through taking steps to combine Tenneco and Monroe, have violated Section 5 of the Federal Trade Commission Act, as amended (15 U. c. 45); the proposed acquisition by Tenneco of the stock of Monroe, if consummated, would violate Section 7 of the Clayton Act, as amended (15 U. C. 18) and Section 5 )f the Federal Trade Commission Act, as amended (15 U.s.C. 45); and t appearing that a proceeding by the Commission in respect thereof muld be in the public interest; the Commission hereby issues its complaint, pursuant to Section 11 of the Clayton Act (15 U. 21) nd Section 5(b) of the Federal Trade Commission Act (15 U. C45(b)) 1d states its charges as follows:

TENNECO, INC. 4bD 464 Complaint Definitions 1. For the purposes of this Complaint, the following definitions shall apply:

(a) Exhaust system parts (hereinafter "ESP") are all exhaust pipes connecting pipes, tail pipes, mufflers (including !\sports" mufflers), resonators and attaching parts for application on automobiles trucks, buses and farm equipment. (2) (b) Shock absorbers are McPherson strut assemblies, cartridges and shock absorber kits; steering dampers; and direct-acting, airadjustable, and spring-assisted shock absorbers for application on automobiles, trucks and buses.

(c) The replacement market includes all sales by manufacturers of automotive parts for use as replacement of original equipment parts or of previously replaced parts.

II. Tenneco 2. Tenneco is a corporation organized and doing business under the laws of Delaware, with its principal office at the Tenneco Building, Houston, Texas.

3. In 1975, Tenneco s consolidated operating revenues were 630 338 000 and its net income was $342 936 000. As of December 1975, Tenneco had total assets of $6 584 204 000. 4. Tenneco s automotive parts opffations are carried on by its Walker Manufacturing Company division (hereinafter "Walker which manufactures and distributes a full line of ESP, hydraulic and air jacks, steering dampers (a form of shock absorber), and other parts for passenger cars, light trucks, and heavy duty vehicles in the 5. In 1975, Walker s worldwide revenues amounted to $303 millon with net operating income before taxes of $52.1 millon. In 1975, Walker s domestic ESP operations had gross sales of $209. million, operating income before taxes of $38.6 millon, and a pretax return on investment of 38.7 percent. Walker operated thirteen plants located in the U.s., eleven of which manufactured ESP, and served domestic customers from twenty-two distribution centers. 6. At all times relevant hereto, Tenneco sold and shipped products throughout the U.S. and engaged in commerce within the meaning of the Clayton Act, as amended; and engaged in or affected commerce within the meaning of the Federal Trade Commission Act as amended. (3) 466 FEDERAL TI!ADE COMMISSION DECISIONS Complaint 98 F.

III. Monroe 7. Monroe is a corporation organized and doing business under the laws of Michigan, with its principal offce at International Drive Monroe, Michigan.

8. Through its fiscal year ended June 30, 1976 ("fiscal 1976" Monroe s business consisted mostly of the manufacture and distributionof shock absorbers, primarily for automotive use. Monroe produces and sells shock absorbers for use on virtually all domestic and many foreign, makes and models of automobiles. Monroe offers the most complete coverage of truck (light, medium and heavy) and bus shock absorbers. Monroe operates three domestic production facilities which, along with Monroe s corporate headquarters, function as distribution points for its independent aftermarket customers;

9. For fiscal 1976 Monroe had net sales of $174 346 000 and net income of $5 411 000. As of June 30, 1976, Monroe had total assets of $185 854 000. Monroe has experienced a rate of return on its stockholder s equity averaging 21.9 percent after ta"es for the ten year period 1965-74. For fiscal 1976, $123.8 milion of Monroe s total sales and all of its profits derived from its domestic operations. 10. Monroe is a leading manufacturer and distributor of shock absorbers in the U.S. and worldwide, especially in the replacement markets. Eighty-one percent of its sales in the latest fiscal year were made to the replacement markets. In 1976, Monroe ranked second in the U.S. replacement shock absorber market. Monroe s sales of shock absorbers domestically are made primarily to warehouse distributors (hereinafter "WDs ), but it also sells to chain stores and other private brand accounts and various vehicle producers for resale. Monroe is the largest seller of shock absorbers to WDs. Monroe has a quality product, a known brand name, and a competent force of field salesmen.

11. At all times relevant hereto, Monroe sold and shipped its products throughout the United States, and engaged in or affected commerce within the meaning of the Federal Trade Commission Act as amended. (4) IV. Agreement Between Tenneco and Monroe 12. On December 20, 1976, Tenneco announced an agreement in ,principle to acquire Monroe. On December 22, 1976, the Boards of Jirectors of Tenneco and Monroe approved a proposal for the combination of the two companies to be effected by an exchange of enneco common stock for Monroe common stock. Under the 'iENNECO , INC.

464 Complaint exchange proposal Tenneco would seek to acquire not less than 80 percent of Monroe s common stock. It is anticipated that. the proposed acquisition of Monroe by Tenneco wil be consummated in March 1977.

Nature of Trade and Commerce Market Definitions 13. The relevant geographic market is the U.S. as a whole. 14. The relevant product markets are:

(a) The manufacture and sale of shock absorbers to (1) the U. replacement market and (2) the U.s. independent aftermarket. (b) The manufacture and sale of ESP to (1) the U.s. replacement market and (2) the U.s. independent aftermarket. 15. No practical alternatives exist for shock absorbers and ESP in automotive use.

16. Shock absorbers are an integral part of automotive suspen sions. They are responsible to a large degree for the handling characteristics, roadability, safety and comfort of the car. They help to hold a car under control, reduce sway and roll on curves, reduce bottoming, control wheel hop, and smooth the ride. 17. Shock absorbers take three basic forms: McPherson units; steering dampers; and heavy duty, air-adjustable and spring-assisted shock absorbers. Monroe and its principal competitors offer all three forms as a complete shock absorber line. All forms of shock absorbers (1) involve the same basic design and manufacturing technologies; (2) are sold through the same . channels of distribution to the same customers; (3) are manufactured by the leading producers of shock absorbers; (4) are installed by the same people; (5) are priced within the same range; and (6) perform the same basic function, to aid in stabilizing the vehicle. (5) I8. ESP serve to dissipate engine exhaust fumes and to provide an acceptable noise level.

19. Both shock absorbers and ESP are sold for incorporation into new vehicles during their assembly (original equipment installation hereinafter "OE") and for replacement of worn out or damaged units on existing vehicles. The replacement market is distinct from the OE market. Prices of parts sold to the OE market are significantly lower than those sold to the replacement market. There is no cross elasticity of demand between the OE and replacement markets. Del1and for OE parts is a function of vehicle production; demand for Complaint 98 F.

replacement parts varies with a number of factors, including wear failure, and desired upkeep by users.

20. The replacement markets for shock absorbers and ESP are divisible into two submarkets: the service market; and the independent aftermarket. The service market consists of sales made to vehicle producers for resale to their dealers, plus sales by vehicle producers of parts of their own manufacture to their dealers. The independent aftermarket encompasses all other replacement sales but excludes those sales made to other manufacturers of the same product.

21. Manufacturers of shock absorbers and ESP recognize that the service market and the independent aftermarket are distinct submarkets, utilizing separate sales forces and distinct sales programs. To serve the independent aftermarket for shock absorbers and ESP it is necessary to have a stock of parts at various distribution points around the country. Such distribution facilities are not necessary to supply the service market inasmuch as the customers themselves already possess a distribution system for parts. Market Structure (i) Shock Absorbers 22. Sales of shock absorbers to the replacement market in 1975 totalled approximately 51.6 milion units, having a value of $312 millon. Sales of shock absorbers to the independent aftermarket in 1975 were 47.5 million units, with an approximate value of $288 millon. (6) 23. Monroe s total sales of shock absorbers to the replacement market during fiscal 1976 exceeded 18.3 millon units with a value in excess of $102 million, and accounted for 33 percent of total industry shipments to that market. Monroe s fiscal 1976 shipments of 17. millon units represented 34 percent of the 51.7 millon units (valued at approximately $301 milion) shipped to the independent aftermarket.

24. In calendar 1976 Walker sold $2.5 million or approximately 8 percent of total industry sales of shock absorbers to the replacement market.

25. Concentration in the sale of shock absorbers to the replacement market and the independent aftermarket is extremely high. (ii) Exhaust System Parts 26. In 1975, gross sales of ESP totalled approximately $525 TENNECO, INC. 469 464 Complaint milion to the replacement market and $473 milion to the independent aftermarket.

27. Walker s sales of ESP to the replacement market in 1975 were approximately $188 million, which represented 36 percent of industry sales. Walker s sales of ESP to the independent aftermarket in 1975 were approximately $184.4 millon, which represented a 39 percent share of such sales.

28. Concentration in the sale of ESP to the replacement market and the independent aftermarket is extremely high. (iii) Barriers to Entry 29. The barriers to entry into the sale of shock absorbers and ESP to the replacement market and the independent aftermarket are very high.

30. To enter into the sale of shock absorbers or ESP to the replacement market, a firm must make a substantial investment in plant and equipment. To enter the independent aftermarket portion of the replacement market, a firm also needs warehousing facilities and inventory; sufficient financial resources to meet seasonal requirements; a substantial marketing organization, including a large national sales force; and the ability to grant a variety extended payment terms to customers. (7) 31. There are large economies of scale in the production both of sbock absorbers and of ESP.

32. Holdings of U.S. and foreign patents provide current producers of shock absorbers and ESP with an absolute cost advantage over potential entrants. Monroe, in particular, benefits from its patent rights in shock absorbers. As of December 29, 1976, Tenneco held 194 unexpired patents including design patents on exhaust system items or their manufacture.

33. The leading sellers of shock absorbers and ESP to the replacement market and the independent aftermarket have developed a high degree of product differentiation. This differentiation has resulted from the use of extensive field sales forces to promote the products at all levels of distribution and substantial advertising and promotional expenditures.

34. To compete successfully in the indepp-ndent aftermarkets, it is necessary to offer a full line of shock absorbers or of ESP, fitting most vehicles sold in the U.s. A firm must distribute nationally, and be able to fill orders in a relatively short period of time. As of 1974, it took more than 5 000 shock absorber part numbers and a like number of ESP part numbers to fulfill the needs of the replacement market for most vehicles made or sold in the U. Complaint 98 F.

Compatibility of Sbock Absorbers With Walker Product Lines 35. The sale of shock absorbers in conjunction with ESP offers advantages from marketing and manufacturing viewpoints. Such advantages arise from an identity of marketing channels and methods, and from common manufacturing methods. Tenneco and Walker have recognized shock absorbers to be the product line most compatible with ESP.

36. Shock absorbers are distributed through the same channels as ESP, from manufacturer to consumer. Shock absorbers are typically installed in exhaust system repair shops. The two products represent under-the-car service items, subject to the same environmental and repair conditions. Both ESP and shock absorbers are sold to the same customers by utilizing similar selling programs, discount structures, and financing arrangements. (8) 37. Shock absorbers and ESP can be combined in one distribution and delivery system. They have been marketed together by Walker Maremont, and Questor to retail and mass merchandiser marketing channels. Both products are stored jointly by their manufacturers including Walker, in regional warehouses. If the acquisition of Monroe is consummated, Walker proposes a unified distribution system for both shock absorbers and ESP.

38. Technological similarities exist in the manufacture of shock absorbers, and ESP and jacks. Most shock absorber components could be made by Walker s jack and exhaust system manufacturing equipment.

39. The manufacture of shock absorbers requires a knowledge of hydraulics. Walker possesses a knowledge of hydraulics, both fluid and air, from its experience in manufacturing jacks. There are also similarities in research and development technology between shock absorbers, and ESP and jacks.

VI. Walker s Entry Into Shock Absorbers 40. Starting as early as 1967, Walker has sought toehold acquisition entry into the manufacture and sale of shock absorbers to the replacement market. At that time, Walker had acquisition talks with Armstrong Equipment Ltd. (hereinafter "Armstrong ), a British manufacturer of shock absorbers for both the OE and replacement markets. Armstrong had shock absorber manufacturing subsidiaries in Australia, Canada, and South Africa, and a marketing organization for shock absorbers in the U. 41. Early in 1973, Walker considered acquiring Tropic Industries a company which produced a self-adjusting shock absorber. TENNECO, INC.

464 Complaint 42. In May 1974 Walker commenced acquisition talks with Triple S Industries (hereinafter "Triple S"), a manufacturer of steering dampers. (9) 43. In May 1974 Triple S was experimenting with the Terramatic principle, which allows consolidation and reduction of the number of different sh ck absorbers required to serve the replacement market. Major automakers and Walker believed the Terramatic principle had great potential.

44. On October 15, 1974, Walker acquired Triple S and rights to use the Terramatic principle. Throughout their consideration of the Triple S purchase, Walker and Tenneco anticipated that this acquisition would provide a significant entry into the replacement shock absorber market. Subsequent to its acquisition of Triple S Walker has continued to expand in the replacement shoe!, absorber market.

45. Additional toehold acquisitions to assist Walker s expansion in the shock absorber replacement market have been and are available. Even subsequent to the purchase of Triple S, Walker has had discussions regarding the possible acquisition of leading European shock absorber manufacturers, including Armstrong and De Carbon.

46. Tenneco and Walker have made a significant commitment at their decisional levels to effect entry, either de novo or by toehold acquisition, to the manufacture and sale of shock absorbers for the domestic replacement market and the domestic independent aftermarket. Walker is one of the few firms likely to become a major factor in the U.S. replacement shock absorber market either by internal development or by additional toehold acquisitions. It is probable that such expansion by Walker would have a procompetitive effect and would result in deconcentration of the shock absorber replacement market and independent aftermarket. 47. Tenneco and Walker have been perceived as potential entrants into the shock absorber replacement market and independent aftermarket. It is probable that this perception has prompted a procompetitive effect in that market.

VII. Monroe Is One Of Few Likely Entrants Into ESP 48. Monroe has sought to expand into other automotive products sold in the replacement market to capitalize on its distribution channels and experience. ESP met or exceeded all of Monroe developed criteria for diversification. (10) 49. One means Monroe considered for diversification into ESP Complaint 98 F.

was through acquisition. In 1974 Monroe sought to acquire Arvin Industries, Inc. (hereinafter HArvin ), a small producer of replacement ESP.

50. Monroe has the ability to expand a toehold ESP producer into a significant factor in the ESP replacement market and the independent aftermarket.

51. Of the major shock absorber sellers to the replacement market only Monroe does not currently manufacture or sell ESP. Common manufacturing and distribution of shock absorbers and ESP, make shock absorber producers the most likely entrants into the replacement ESP market.

52. It is probable that entry by Monroe into the production and sale of ESP would result in deconcentration of the ESP replacement market and independent aftermarket.

VIII. Effects 53. The effects of the steps taken by Tenneco to acquire Monroe constitute an unfair method of competition in or affecting commerce in violation of Section 5 of the Federal Trade Commission Act, as amended; and the proposed acquisition by Tenneco of Monroe, if consummated, may be substantially to lessen competition or tend to create a monopoly in violation of Section 7 of the Clayton Act, as amended, and constitute an unfair act and practice in or affecting commerce, in violation of Section 5 of the Federal Trade Commission Act, as amended, in the following ways, among others: (a) Actual competition between Tenneco and Monroe and between Tenneco and other producers of shock absorbers for domestic sale to the replacement market and the independent aftermarket will be eliminated.

(b) Potential competition between Tenneco and Monroe and between Tenneco and other producers of shock absorbers for domestic sale to the replacement market and the independent aftermarket will be eliminated; furthermore, the potential for substantial deconcentration as a result of Tenneco s independent expansion into those markets wil be eliminated. (11) (c) Potential competition between Monroe and Tenneco and between Monroe and other producers of ESP for domestic sale to the replacement market and the independent aftermarket wil be eliminated; furthermore, the potential for substantial deconcentration as a result of Monroe s independent or toehold entry into those markets will be eliminated.

(d) The dominant position of Monroe in the domestic sale of shock TENNECO, INC. 473 464 Initial Decision absorbers to the replacement market and the independent aftermarket wil be strengthened.

(e) The dominant position of Tenneco in the domestic sale of ESP to the replacement market and the independent aftermarket wil be strengthened.

IX. Violations Charged 54. The steps taken by Tenneco and Monroe to combine the two companies constitute a violation of Section 5 of the Federal Trade Commission Act, as amended (15 V.s.C. 45). 55. The proposed acquisition by Tenneco of Monroe, if consummated, would constitute a violation of Section 7 of the Clayton Act . as amended (15 V. C. 18) and of Section 5 of the Federal Trade Commission Act, as amended (15 V. C. 45). INITIAL DECISION BY THOMAS F. HOWDER, ADMINISTRATIVE LAW JUDGE MAY 27, 1980 PRELIMINARY STATEMENT The Commission s complaint in this case, issued March 15, 1977 charges respondent Tenneco Inc. ("Tenneco ) with violating Section 7 of the Clayton Act by acquiring- Monroe Auto (2)Equipment Company ("Monroe ' Specifically, it was alleged that by virtue of the merger:

(1) Actual competition between Tenneco and Monroe and between Tenneco and other producers of shock absorbers for domestic sale to the replacement market and the independent aftermarket has been eliminated;

(2) Potential competition between Tenneco and Monroe and between Tenneco and other producers of shock absorbers for domestic sale to the replacement market and the independent aftermarket has been eliminated; furthermore, the potential for substantial deconcentration as a result of Tenneco s independent expansion into those markets has been eliminated; (3) Potential competition between Monroe and Tenneco and between Monroe and other producers of exhaust system parts ESP") for domestic sale to the replacement market and the J Violation of Section 5 of theft Act W!l also alleged. Initial Decision 98 F. independent aftermarket has been eliminated; furthermore, the potential for substantial deconcentration as a result of Monroe independent or toehold entry into those markets has been eliminated;

(4) The dominant position of Monroe in the domestic sale of shock absorbers to the replacement market and the independent aftermarket wil be strengthened; and (5) The dominant position of Tenneco in the domestic sale of ESP to the replacement market and the independent aftermarket wil be strengthened.

The complaint was issued prior to the actual merger. Upon its issuance, the Commission initiated an action for injunctive relief in the UB. District Court for the District of Columbia. Based on its consideration of the parties' papers, various depositions and oral arguments of counsel, the court denied the Commission s application. 433 F.Supp. 105 (D. C. 1977) (18-page opinion). The merger was thereafter consummated in July 1977 (See Finding 24 infra). Later by order of February 7, 1978, issued by then-assigned ALJ Needelman, the complaint was amended to reflect the fact of the merger. (3) Prehearil)g conferences were held in Washington, D. C. on May 18 1977, January 4, 1978 and April 25, 1978. Following the completion of discovery and exchange of trial briefs, hearings were commenced in Washington, D. C., on June 12, 1978. Trial of this case lasted from June 12, 1978, until August 29, 1979, and consumed almost 120 hearing days. A transcript of over 13 300 pages was created, and several hundred exhibits were received in evidence. In their case-inchief, presented from June 12 through June 23, 1978, complaint counsel called 10 witnesses; respondent's defense presented from July 10, 1978, through February 2, 1979, included 36 witnesses; the rebuttal case of complaint counsel lasted from February 12 through April 30, 1979, and included the testimony of 11 witnesses; and respondent' s surrebuttal was presented from April 30 through August 9 1979, and included the testimony of six witnesses. The record was closed on November 23, 1979, following the resolution of a number of problems regarding exhibits in camera materials and extensive transcript corrections. Proposed findings were simultaneously filed by the parties on December 21, 1979, and reply findings on January 31, 1980.

Any motions not heretofore or herein specifically ruled upon 2 The amended complaiI1t doe not include Monroe as a named pol)dent " Appendix A to respondent'8 propo findings conUiins a list of the witness and indicates the location of their testimony in the transcript.

'lJi;Nl\ inc. 475 464 Initial Decision either directly or by the necessary effect of the conclusions in this decision, are hereby denied.

This proceeding is before me upon the complaint, answer, testimony and other evidence, and the proposed findings of fact and conclusions of law filed by counsel supporting the complaint and by counsel for respondent. The proposed findings of fact, conclusions and arguments of the parties have been considered, and those findings not adopted either in the form proposed or in substance are rejected as not supported by the evidence or as involving immaterial issues not necessary for this decision.

Certain abbreviations, including the following, are used in this decision:

Tr. Transcript of testimony.

Commission s exhibit.

CPX Commission s physical exhibit.(4J CPF Complaint counsel's proposed finding. CRPF Complaint counsel's reply proposed finding. Respondent' s exhibit.

RPX Respondent' s physical exhibit. RPF Respondent' s proposed finding. RRPJi' Respondent's reply proposed finding. The transcript of testimony is usually referred to with the last name of the witness and the page number or numbers upon which the testimony appears.

Having heard and observed the witnesses, and after having reviewed the entire record in this proceeding, I make the following findings:

FINDINGS OF FACT Tenneco 1. Respondent Tenneco Inc. ("Tenneco ) is a corporation organized and doing business under the laws of Delaware. Its principal office is The Tenneco Building, Houston, Texas (Complaint and Answer, n2; CX 106).

2. Tenneco is a conglomerate company with diversified manufacturing and distributing operations in farm and construction equipment, shipbuilding, petroleum, chemicals, packaging and automotive parts. Tenneco also has interests in agriculture and in land development (CX 2A-C; CX 2 pp.8-9, 12-20). Initial Decision 98 F. 3. In 1975, Tenneco was the 15th largest industrial corporation in the United States with total assets of $6 584 204 000. Tenneco 1975 net income of $342 936 000 was 18th largest and its consolidated operating revenues of $5 630 330 000 were 22nd largest among industrial corporations in the United States (Complaint and Answer , CX 192B).

4. Until 1977, Tenneco s automotive parts operations (5)were carried on by its Walker Manufacturing Division ("Walker ), which manufactured and distributed a full line of exhaust system parts for passenger cars, light trucks, and heavy-duty vehicles in the United States. The production and sale of ESP accounted for and still accounts for a majority of Walker s revenues (Complaint and Answer, n4; Cook 1570-72, 1646; RPF 9).

5. The Mechanex Corporation ("Mechanex ) was part of Walker and a Tenneco subsidiary before the Monroe acquisition. Mechanex distributed steering stabilizers or dampers under the brand name of Steerline, as well as other automotive products for application on passenger cars, light trucks and heavy-duty vehicles (CX 43A-H; CX 44A-F; CX 173A; CX 208K, Admission No. 24; CX 339A-B; Prescott 281).

6. Walker began business as a jack and lifting device manufacturer in approximately 1912 and currently manufactures a wide variety of jack products including jack stands, hydraulic and air jacks, mechanical scissors jacks and various other associated accessories and components (Complaint and Answer, n4; CX 27R; CX 140; Uhen 1866). In recent years Walker has also manufactured and distributed a line of automotive fiters, including air, oil and gasoline filters (CX 106B).

7. In 1975, Walker s worldwide revenues were $303 millon, with net operating income before taxes of $52.1 million (Complaint and Answer n5).

8. In 1975, Walker s domestic ESP operations had gross sales of $209.7 milion, operating income before taxes of $38.6 millon, and a pretax return on investment of 38.7%. Walker documents project similar rates of return through 1981 (CX 26B). 9. In 1975, Walker operated 13 manufacturing and/or distribution facilities in the United States (Complaint and Answer, n5; CX 208I, Admission No. 19; RX 233; Schultz 1791-92). Of these, ten were ESP facilities:

, This ranking is mea.ured in l.rmsoftotal astsaBufl)member:n, 1975. . ESP is defined in l"indjng 55 infra.

TENNECO, INC. 477 464 Initial Decision Location of Walker ESP Manufacturing Facilities (1) Walker Mississippi Division Aberdeen, Mississippi (2) Walker North Carolina Division Arden, North Carolina (6) (3) Walker Texas Division Greenvile, Texas (4) Walker Virginia Division Harrisonburg, Virginia (5) Walker Michigan Division Jackson, Michigan (6) Walker Ohio Division Hebron, Ohio (7) Walker Wisconsin Division (manufacturing only) Racine Wisconsin (8) Walker Nebraska Division Seward, Nebraska (CX 208I, Admission No. 19; RX 233).

Location of Walker ESP Distribution Centers (no manufacturing) (1) Walker Mid-West Distribution Center Batavia, Ilinois (2) Walker Western Distribution Center Salt Lake City, Utah (CX 208J- , Admission No. 21).

10. At the time of Monroe s acquisition by Tenneco, Walker also distributed ESP from 22 field warehouses located throughout the Initial Decision 98 F. (1) Atlanta, Georgia (2) Baltimore, Maryland (3) Buffalo, New York (4) Chicago, Ilinois (5) Dallas, Texas (6) Denver, Colorado (7) Elizabeth, New Jersey (8) Hayward, California (9) Indianapolis, Indiana (10) Los Angeles, California (11) Medford, Massachusetts (12) Minneapolis, Minnesota (13) Monroeville, Pennsylvania (14) Omaha, Nebraska (15) Philadelphia, Pennsylvania (16) Phoenix, Arizona (17) Portland, Oregon (18) Riverside, Missouri (19) St. Louis, Missouri (7) (20) Seattle, Washington (21) Springfeld, Massachusetts (22) Warren, Michigan.

(CX 208I-J, Admission No. 20).

11. During 1975, in addition to ESP, Walker stocked shock absorbers in the Buffalo, N ew York; Chicago, Ilinois; and Indianapolis, Indiana field warehouses and certain distribution centers in the S. for resale to muffer installation shops (CX 208K, Admission Nos. 22-23).

12. Before it purchased Monroe, Tenneco acquired and presently operates various muffer shops which install ESP and sometimes shock absorbers in Canada and in Europe (CX 4I; CX 27P; Cook 1698-99; Fleuelling 5815-17; Ashford 11 511). In 1962, Walker acquired Speedy Muffer King, Inc., a chain of four or five muffer installation shops in Canada (Putman 1140, 1211; Cook 1654). By 1975, Walker had expanded Speedy Muffer King s market area from Montreal and Toronto west to Vancouver, British Columbia (CX 2C; Putman 1211). By 1978 there were 70-75 Speedy Muffer King outlets operating in Canada (CX 2; CX 25K; Putman 1140 , 1145; Cook 1653-54). Walker plans substantial expansion in the number of . By December 31 , 1978, there were six Spey Muffer King outlet in the northeastern United State (CX 349 p.1G) TENNECU, 11'0-".

464 Initial Decision its muffer shops, particularly in the U.S. market (Nelson 9861-65 camera, 9866; Cook 1651-52 in camera). II. Monroe 13. Prior to being acquired by Tenneco, Monroe was a corporation organized and doing business under the laws of Michigan with its principal office at International Drive, Monroe, Michigan 48161 (Complaint and Answer U7).

14. In fiscal 1976 (July 1, 1975-une 30, 1976) Monroe had net sales of $174 346 000, net income of $5 411 000, and total assets of $185 854 000 (Complaint and Answer U9). ' (8) 15. In fiscal 1976, $128.8 milion of Monroe s total sales and virtually all of its profits were derived from its domestic operations; the company s foreign shock absorber operations taken as a whole were not profitable (CX 141C-D; CX isle; see CX 3K; CX 4S; CX 2lB; CX22).

16. Monroe, which has traditionally been a one product company,' began to manufacture shock absorbers before World War II (RPF 13). It became and presently remains a leading manufacturer and distributor of shock absorbers in the United States and worldwide. Monroe is considered to have a high quality product, a known brand name, and a competent force of salesmen. I 7. Monroe sells shock absorbers for use on virtually all domestic and many foreign makes of automobiles. (CX 4Q; CX 143K). Monroe domestic sales of shock absorbers are made primarily to warehouse distributors ("WDs ), but it also sells to chain stores, other private brand accounts and various vehicle producers for resale (Complaint and Answer UlO). In fiscal 1976, 81% of Monroe s sales worldwide were to the replacement market (Complaint and Answer UlO). 18. Overseas, Monroe and its affiliates operated shock absorber plants in Belgium, Brazil, Argentina, Spain and Canada (CX 208F Admission No. 14; Barbeau 4695). Domestically, the company operated three shock absorber plants, which also functioned as distribution facilities:

Hartwell, Georgia , In fiscal 1972 (July 1, 1971 hme 30, 1972), Monroe was the 683rd largest industrial corporation in the Unite State in terms of net sales, with consolidate net sales of $127 521 954 (CX 144 p. citing ortune Magazine Directory of the 1 00 largest U.s industrial companies;CX 145 p.8). It ranked 255th large t in term net income with only six industrial corpc-rations surpassing Monroe in net income as a percent of sales (eX 144 p. citing Fortune Magazine Directory of the 1 00 largest U.S. industrial companies) . Monroe experience a rate of return on its stokholder s equity averaging 21.9% after taes for the ten year period 196-74 (Complaint and Answer fig). In 1976, Mon s earnings had dropped from the 1973 !eves of 12.4% of revenues and 15.3% of equity to 3. 1% of revenues and 4. 1% of equity (CX 4D). " Monroe introdtlced an oil fiter in 1975 to diversify it. prootlct line (CX 141 p.9; ex 141F; ex 142E). , p.

Initial Decision 98 F. Cozad, Nebraska Paragould, Arkansas 8; Hegel 1975).(Complaint and Answer, U8; CX 208E, Admission No. 19. Monroe distributed shock absorber products, including steering dampers, from its Reno, Nevada, Hartwell, Georgia and Cozad Nebraska facilities. Automotive oil filters were distributed from all (9)of the above except the Reno, Nevada facility (CX 171A-B). III. Jurisdiction 20. It is not disputed that, since at least 1975, both Monroe and Tenneco sold and shipped products throughout the United States and engaged in commerce within the meaning of the Clayton Act, as amended; and engaged in or affected commerce within the meaning of the Federal Trade Commission Act, as amended (Complaint and Answer, U116, 11).

IV. Acquisition of Monroe 21. On December 20, 1976, following negotiations, Tenneco o Onannounced an agreement in principle to acquire Monroe. December 22, 1976, The Board of Directors of Tenneco approved a proposal for the combination of the two companies to be effected by an exchange of Tenneco common stock for Monroe common stock. Under the exchange proposal, Tenneco sought to acquire not less than 80% of Monroe s common stock (Complaint and Answer U12). 22. The merger was consummated on July 29, 1977 through an exchange of one share of Tenneco common stock for each 2.6 shares of Monroe" (CX 106A; CX 202 p.2).

23. Following the merger, Monroe Auto Equipment and Walker Manufacturing became operating units of Tenneco Automotive which now oversees the activities of Walker, Monroe and the Speedy Muffer King unit for UB. operations (CX 202 2; CX 349 p. 16). Relevant Geographic Markets 24. There is no dispute that the relevant geographic market for both ESP and shock absorbers is the United States as a whole (Complaint 113; RPF n.6; See Nelson 9663, 10 716). (10) JU Tenneco s prior intertft in Monroe is di.';uss in Findings 385--7 infra " On July 29, 1977, Monroe was merged into the wholly owned subsidiary of Tenneco which held the shares of Monroe stock acquired pltTSUant to the offer (Respondent s Trial Brief p.5). '" There are no regional variations if' the prices of replacement shock ab$Orbers or ESP (CX 208N, Admission No. 43; Ka!upa 3654, 4190, 4196; Robisn 3691; Luyclu 3746; Fleuel!ing 4115, 5159-; Foster 51OfH: in camera 7233-5 in camera; see Nelsn 96:1 561 716-17). 464 Initial Decision VI. Relevant Product Markets Shock Absorbers 25. Shock absorbers are products that have virtually no substitutes for use on motorized vehicles (CX 208" , Admission No. 44). 26. Shock absorbers are an integral part of automotive suspension systems and are responsible to a large degree for the handling characteristics, roadability, safety and comfort of vehicles (Complaint and Answer 1116; CX 15A; CX 309B). The specific function of a shock absorber is ". . . to diminish or hopefully, eliminate any of the subsequent movements of the (vehicle s) body after the tire or tires have negotiated the bump in the road" (Hegel 1931). Shock absorbers fulfil their function by converting mechanical energy to thermal energy and then releasing it to the atmosphere (Hegel 1932; see 220Z-). Thus, shock absorbers help hold a car under control at all times by keeping the wheels on the road, reducing sway and roll on curves, reducing bottoming, dampening vibrations, controlling wheel hop, as well as smoothing the ride (CX 15A, CX 208 " , Admission No. 47; CX 220Z-1O; Hegel 1931; Tompkins 2316). 27. In order to meet specific requirements, shock absorbers take various forms, including direct-acting or conventional shocks 13 airadjustable, spring-assisted, steering dampers and MacPherson struts" (CX 15A--; CX 99; CX 168A-B; CX 169A-G; CX 175; CX 189; Hegel 1943-44; Diggelman 2525; Fleuelling 4104, 4118; Nelson 9665 9729).

28. Shock absorbers have been recognized as distinct products by the Census of Manufacturers (CX 190G-H). The Motor Equipment Manufacturers' Association (" E.M.A.") Quarterly Product Trend Report breaks down unit replacement sales of shock absorber manufacturers into the following categories; direct acting, air-adjustable, spring-assisted and MacPherson struts and cartridges (CX 162A; Fleuelling 1404-5). Employees or agents of Monroe participated in the formation of M.E.M.A. shock absorber reporting categories and Monroe relies on M.E.M.A. data (CX 208Z-13 Admission No. 173; Kalupa 356CW1; Fleuelling 4098-5105). (11) 29. A MacPherson strup5 is considered as and referred to as a form of shock absorber by members of the industry (Givens 429-30; Hegel 1943-44, 1950-51; Diggelman 2525, 2555; Robison 3761; Fleuel1ing 4104, 4118; Joines 9115; Garfinkel 9105; Stewart 9243-44). " Shock ab orberscomein a range of sizes including the most common 1. and 'h.1 . See, e.!J. RX 52 A- " MacPher50n struts ami sterling dampers are disuss in greater detail in Findings 29-1 and 42-7infra " Named after a certain Mr. Ear! S. MacPhersn, a former emploYeI ofGM and Ford in the 1940's and 1950' who first conceived the idea of and obtaned a patent "on a suspesion arrangement similar to what we now call a MacPhersn strut" (Hegel 196).

,.

Initial Decision 98 F.T. 30. A MacPherson strut" may be characterized as a shock absorber which also incorporates some structural components of the suspension system (RX 555A-C in camera; Givens 429-30; Hegel 1953-54; H. Wright 3815, 3838; Cox 4408-9; but see N. Wright 805).

31. MacPherson strut units perform the same damping function for automotive suspensions as does a conventional shock absorber (RX 555A in camera; Givens 429-30; Hegel 1950-53; H. Wright 3815; Cox 4408-9; Garfinkel 9205). 32. . The strut assembly consists of a hydraulic cartridge plus attaching and positioning parts (Givens 439-40; Hegel 1950-52). The hydraulic cartridge of a MacPherson strut is similar in its design basic parts, and function to other types of shock absorbers (CX 189; Hegel 1952- , 1955, 1961--2, 2104; H. Wright 3779 3815; Cox 4408- 09).

33. Both conventional shock absorbers and MacPherson struts use pressure chambers and piston rods (CX 189; Hegel 1950-52). In the case of Monroe and Woodhead, for example, the same sized pressure chamber and piston rod are used in the MacPherson strut cartridges these companies produce as in the 17;6 " conventional shock absorber. MacPherson strut units involve much of the same manufacturjng technology as is used in producing shock absorbers (CX 208P, Admission No. 51).

34. There was testimony that a firm which manufactures hydraulic cartridges for MacPherson struts would not find it (12) technically difficult to produce the remainder of the strut components (Cox 4409-10). .

35. MacPherson units are designed for use on smaller automobiles, and have become original e::uipment on such makes as Volkswagen, Toyota, Datsun, Capri, Colt, Mazda, Honda, Porsche BMW as well as certain GM, Ford and Chrysler cars (CX 172A- , L; CX 280" , Admission No. 48; RX 555B- in camera; Hegel 1947 1961; H. Wright 3779). While conventional direct-acting shocks are still standard or original equipment on most American cars, there was evidence that vehicle manufacturers may use MacPherson assemblies on the smaller new cars of the future, where space is a prime consideration (CX 98F; RX 555A-C in camera; H. Wright 3779 3842; Bracken 4312; Garfinkel 9205).

36. Consequently, there is a trend toward increased use of MacPherson struts in cars manufactured in the United States (Pond See ex 243, which is a marked copy of RX 381 , for a diagam of a MacPherson strut. Se ex 242, which is a marked copy of RX 38, for a diagram of Ford's Hybrid strut. For purpo of this ca the Hybrid wil be considered a typ of MacPhecsn strut.

11 ."k, Finding26 sllpra g, 464 Initial Decision 862; Hegel 7270; Compare Hegel 2120, 2122-23 with Freeman 8863 in camera and H. Wright 3823 in camera). 37. The same engineers at Monroe, GM, Bilstein and Woodhead are responsible for both MacPherson strut and shock absorber design (RX 555B in camera; Hegel 2104; Petzsch 2466; Cox 4416). Some U. shock absorber manufacturers have developed the in-house ability to design and produce MacPherson strut assemblies, or at least proto- 8 types' 38. MacPherson units can be serviced in one of three ways: using MacPherson shock absorber repair kits, inserting MacPherson cartridges or replacing entire strut assemblies (CX 44D; ex 169C; CX 172A; ex 223Z-55; Hegel 1961--3).

39. Firms which manufacture both conventional shock absorbers and MacPherson units or cartridges include: Monroe, Maremont Deleo Division of General Motors, Questor, Ford, Armstrong, Kaya- , Tokiko, ITT, Boge, Woodhead, Fichtel & Sachs, (13JCofab and Bilstein.

40. Manufacturers that sell MacPherson struts or replacement cartridges to the U.S. replacement market generally also sell at least one other type of shock absorber.

41. Monroe began marketing MacPherson strut cartridges to the S. replacement market in approximately 1973 (CX 145E; CX 144D; Hegel 1961).

42. A steering damper like a shock absorber, is a hydraulic device (CX 282A; ex 294B-C). Steering dampers are, however installed in a horizontal position while shock absorbers are generally installed vertically.

43. A steering damper is considered and referred to as a form of shock absorber by members of the industry. " For example, GM designed and produces its MacPherson strut in-house (RX 5558 in mmera). Monroe has designed, aod mllde prototype of MacPhersn struts and recently WOn a contract to supply strut asmblies without the spring on the top to Chrysler (DeLisle 11 267-6; Ashford 11 540). Maremont has produced MacPherson struts in the Unite State since 1975 (Stewart 9264J. 1"ord has more than ten years of experience with MacPherson struts in their German made cars and presntly manufactures Hybrid strut asmblies in the U. (Tompkins 2319; H. Wright3807 3836).

,. ex 84C; ex 143G; ex 144D; ex 151A-B; CX 154A-C; ex 172B-E; ex 175; CX 189; CX 208R, Admision Nos. 58-9; RX 555A- in camera;Givens 429; Pond 745, 862-3; Putman 1149, 1174; Moore 1243; Hegel 1947- , 1961 2122 7259; Petzsch 2446; Diggehnan 2W3 2515, 2525, 2532, 25867; Hooper 2613; llkin 2867; Robison 3671; II Wright 3778-79; Cox 4:189-90, 4407-08; Fmeman 8856 in mmera; Stewart 9264, 9274-75; Nelson 9822-2:1; DeLisle 267; seeCX 208R, Admission No- 61 20 E Maremont (Givens 429); Questor (Putman 1149); KYB (Moore 124:1); Monroe (Hegel 1947); Deleo Division of General Motors (Hegel 1961); Bilstein (Petzsh 2446, 2452) .. Se RX 643 p.30 for a diag3m of a sterling damper, and RX 643, for diagams of various type of shock absorbers. One ;"itnef\ describe !I Htering damper as a standard shock absorber with speially tailored valving (Kody 929), Only one sterling damper is installed in each vehicle while four vertically mounte shock absorbers are required per vehicle (pond 1491). Monroe s 1976 catalog lists sterling damper applications for Volkswagens (eX 175). Othur present applications for sterling dampers include off-the-road, and recreational vehicles Oldsmohile Toronado, and Cadillac Eldorado (eX 239, CX 338C; Nelson 9741). .. ex 239; Givens 404-5; Petzsh 2446; Robison 368689; Kody 929, 9309, 9317- , 9338. g., g.. Initial Dccision 98 F. 44. Walker and Monroe offcials categorize steering (14Jdampers as horizontal shock absorbers.

45. The steering damper functions as a stabilizing and ride control device that acts to absorb and dampen lateral shocks, vibrations and oscilations to the steering system (CX 43B; CX 44D- E; CX 54A; Kody 9334). The function of the steering damper complements and is similar to the function of a vertically applied shock absorber which dampens the vertical oscilations of the vehicle after it has negotiated a bump in the road (CX 220Z8-1O; Hegel 1931).

46. The engineering, technology and design requirements of steering dampers are similar to those of other forms of shock absorbers (Pond 768; Hegel 1938, 1941-42 2114- 15). Monroe and Maremont use the same engineers to develop specifications for both steering dampers and vertical applications (Givens 403-04; Hegel 1938, 1941-42). The testing parts and procedures for steering dampers and shock absorbers are likewise similar (Prescott 11 317- 19; Bethell 11 354-55, 11 375; See, e. RXs 635-39, RX 642). 47. The component parts as well as the manufacturing and assembly processes for steering dampers and shock absorbers are similar (CX 69D; Givens 405; Tompkins 2409; Kody 9309; Nelson 046; see Pond 1942-43).

48. The various forms of shock absorbers, including MacPherson struts and steering dampers, are distributed by suppliers through the same channels to the same customers (CX 208Q, Admission No. 54; see, e. CX 54A; CX 62B; CX 69N; CX 337C; CX 338B; Kody 9325; Nelson 9737-39).

49. Shock absorbers, including MacPherson cartridges and steering dampers, are basically hydraulic dampening mechanisms which reduce the transmission of road imperfections into the vehicle passenger compartment by converting mechanical energy to heat (Finding 26 supra).

50. Monroe and its competitors manufacture and sell a full line of shock absorbers consisting of direct acting, air-(15Jadjustable spring assisted, steering dampers and MacPherson struts and cartridges.

" ex 15B; ex 510; ex 282A; Dit:gelmao 2555, 2590; Kody 93.'4; Prescott 11 319; Bethellll :J54-5, 11 375; Ashford 11 494.

.. The basic component of a s ring damper is often a sbock absorber cylinder (CX 690). Walker and Heckethorne use a sbock absorber unit purchased from tbe Gabrid division of Maremont as the basic component of its slering dampers (Pond 770, 798 Schultz 1746, IB:II Nelson 11 071; Pn scott 11 295). 20 ex 99; CX 151A-E; ex 154A-E; ex 173A; ex 208T-U, Admission Nos. 71, 72, 74; Givens 429; Pond 767; Moore 1243; Cok 1715; Hegel 1938 1941 , 19472118-20; Petzsch 2446; Diggelman 2503, 2515, 2525, 2532, 2555 2587 2590; Robinson 3670-71, 3686, 3689-90, 370:, 3705; Cox 4389; Barheau 4638- 39; DeLisle 1l 24:1 Hohman 4905; Nelson 9729-30, 9736-7, 9743-4, 11 060-61 , 11 063; see, e. ex 172H. TENNECO, INC. 485 464 Initial Decision 51. A full line" of shock absorbers is included in manufacturers current shock absorber catalogues. Warehouse distributors and many nontraditional accounts, such as mass merchants and muffler installation shops, purchase a full line of shock absorbers. '" 52. From the manufacturing standpoint, shock absorbers, including steering dampers and MacPherson struts, constitute a relevant shock absorber product market. The basic engineering, design and manufacturing technologies pertaining to all of these products are substantially similar or the same.

53. From the marketing or distributing perspective, shock absorbers including steering dampers and MacPherson struts constitute a relevant shock absorber product market. Manufacturers distribute shock absorbers, including MacPherson struts and steering dampers through the same channels of distribution to the same o Retailers consider their shock absorber line to includecustomers. steering dampers and MacPherson struts along with the other forms of shock absorbers.

54. Accordingly, it is found that the shock absorber (16Jproduct market consists of conventional direct-acting, air-adjustable, springassisted, steering dampers and MacPherson struts and cartridges. Exhaust System Parts 55. Exhaust system parts ("ESP") are products installed on motorized vehicles which have no substitutes. ESP consists of muffers (including "sports" muffers), resonators, and all exhaust pipes, connecting pipes, tail pipes, clamps and attaching parts for use on automobiles, trucks, buses, farm equipment and other vehicles (Complaint and Answer nl(a); Schultz 1753). As Walker s engineering vice president testified:

The function of an exhaust system is to conduct exhaust gases from the engine to some exit point at the rear of the vehicle. It also is-performs a function of quieting engine noises and on vehicles where catalytic converters are part of the exhaust system, it also converts hydrocarbons and carbon monoxide to water vapor and carbon dioxide. (Schultz 1742) " See Finding 50 supra 2T Monroe ex 175; Gabriel ex 189; Bilstein ex 220A-Z-.18; ex 221C-l"; Armstrong ex 224A-Z-2; 225; Deleo ex 239: Dearbon ex 3141, Q.

,. ex 151A-E; ex 154A-E; ex 337B-; ex 338B-; Glasman 1062; Moore 1243; Robison 3691; Garfinkel 9204-5; Neh;on 9737- , 9972; see Nelson 9850-1 '" Finding46 supra '0 FindingsI9 supra.

" See, e- ex 338C.

486 EDERAL TRADE COMMISSION DECISIONS Initial Decision 98 F. VII. Original Equipment and Replacement Submarkets for Shock Absorbers and Exhaust System Parts 56. Automotive parts manufactured and sold for incorporation into new vehicles during assembly are regarded and referred to as being original equipment installation ("OE") parts (Pond 730). 57. Replacement or aftermarket parts are produced as replacements for damaged or worn out parts on vehicles already in use. The replacement portion of the automotive parts market includes the OE service segment, which consists of those parts sold to the original equipment manufacturer that, instead of being placed on the vehicle as it' s originally produced, go through the warehousing operation to the car dealer and become installed as either service warranty parts or as replacement parts " (Pond 739-40; see, e. CX 15E; CX 39B-F; but see N. Wright 6343-44).

58. The market for replacement parts includes the traditional aftermarket, which consists of WDs and jobbers who resell to customers such as garages and service stations, as well as the nontraditional channel containing such customers as mass merchandisers and muffer installation shops which resell directly to consumers (Pond 739).

Shock Absorbers 59. Shock absorber manufacturers, including Monroe, report shipments of shock absorbers to the Bureau of Census separately for replacement and OE installation (CX 190G-H). (17) 60. The shock absorber industry and its trade association report and analyze sales and competitive conditions separately for the OE and replacement shock absorber markets (CX 51K; CX 25D H; CX 191B; Baker 537; Pond 744, 828; Putman 1192; Fleuelling 4098-99 4100-2).

61. Before the merger, both Walker and Monroe separately analyzed Monroe s market share in the U.s. replacement market and in the U.S. original equipment market (CX 7; CX 20A, G-E; CX 51K, Z-; CX 141B).

62. Monroe has separate engineering and sales departments for its DE and replacement sales (Hegel 2096-97; Hohman 4811; Bethell 333).

DE Shock Absorbers 63. The parties agree that there is a lack of cross-elasticity of " Concerning the DE and replacement segmen of the shuck absorber indust.ry, Mr- l"reeman of ITf testified that "yes, we se them as different businesss" (Freeman 8875). TENNECO, INC. 487 464 Initial Decision demand between the OE and replacement markets for shock absorbers. That is, a shock absorber produced for the original equipment segment would not be sold as a replacement shock absorber (N. Wright 6465; Nelson 9666 647). 64. Demand for shock absorbers for original equipment use is primarily a function of new vehicle production (CX 208W, Admission No. 87).

65. Shock absorbers made for OE installation are of primarily a single grade (Bracken 4362). Generally, 1" shock absorbers"" are the standard size used in new car production (RX 423A-D; RX 424A- Hegel 2127, 2130; H. Wright 3804-5; Fleuelling 3907; Nelson 433-34).

66. Shock absorbers produced for the OE market are supplied to OE manufacturers in bulk without mountings (Hegel 2133-34; Fleuelling 3908, 4170; Buck 9401; Nelson 9797-98; DeLisle 1l 25&- 58). (18) 67, A shock absorber manufacturer can successfully complete in the OE market with a limited line" of shock absorbers because OE sales are geared to one or a few specific shock absorber applications (CX 208X, Admission No. 95; Pond 757-58; see Nelson 9685-7, 9692- , 10 414).

68. Shock absorbers produced for the OE installation market may have different performance and durability specifications than those produced for replacement use on the same model because the new vehicle manufacturers establish their own OE specifications (CX 208W, Admission Nos. 91, 93-94; Pond 871; Hegel 1983-84; Tompkins 2237; Fleuelling 4171; DeLisle 4868; Freeman 8877 in camera). 69. In the OE market shock absorbers are sold in an engineering competition where the emphasis is on the product and whether the product meets certain engineering specifications, as well as meeting subjective and objective ride requirements for a given application (Pond 757; Tompkins 2237; Petzsch 2467; H. Wright 3836; Cox 4415 Hegel 7256-0; Freeman 8876; Buck 9425).

70. Buyers of shock absorbers for OE use are generally professional, technically qualified persons who are responsible for seeing that the product they select meets the vehicle manufacturer technical specifications (Tompkins 2237; Hegel 725&-57; Buck 9425; Nelson 10 675). The OE buyer is basically an analyst, interested in '" There was testimony that the somewhat targer 1- %- size shock ab orbem are installed by vehicle manufacturers On pohLe cars and cars designate to be equipped with a handling option package (Hege! 2131) 34 At the time of trial both Questor and 117 were selling onlyinglea part number tu the dome tic OE market (putman 1120-21 Nelson 9692, 10 414-15). In contrast, Monroe supplied approximately loo DE part numbers fur the 1978 model year pa.o;(mgercar production (Hegel 21:J2-33). Initial Decision 98 F. product specification compliance, delivery ability and costs, including freight costs (Pond 794).

71. An OE shock absorber manufacturer must have an OE sales staff which can competently service OE buyer needs in purchasing, engineering and product planning (Freeman 8876-77). 72. OE customers receive few services other than the actual production and delivery of shock absorbers (Pond 793). A shock absorber manufacturer producing for the OE market does not incur costs to proviqe other services, such as promotional efforts, advertising or catalog service to the OE buyer (Pond 764-45; Cox 4405-7; Freeman 8875; Nelson 9716, 11 680-1). The OE market buyer assumes a significant portion of the production (19Jrisks including those incurred for raw materials, components and finished goods inventory (Pond 793).

73. The OE shock absorber market "is very cost oriented relatively short margin, and fairly fixed anticipation of business (Pond 758, 792-93; see Barna 1368-9; Nelson 10 625-26; DeLisle 275).

74. Sales of shock absorbers to the OE market have a lower profit margin than sales to the aftermarket (Barna 1369; N. Wright 8694 camera; Nelson 9725-26; see Freeman 4173-74). 75. Production of shock absorbers for the OE market generally requires a high volume assembly line designed to produce the size and type of shock absorber for which a firm has an OE contract (Pond 800-1; DeLisle 4866; Nelson 9691- , 9700-3; see H. Wright 3803-04).

76. A shock absorber manufacturer selling only in the market would have very limited requirements for low volume production facilities (Pond 801; Barbeau 4650). 77. The production run for an OE shock absorber contract is fairly high, from 1 000 to 20 000 units (Hegel 1978; H. Wright 3805; DeLisle 4865; Stewart 9259-40; see Freeman 8845 in camera). 78. The location of a given shock absorber plant is a competitive consideration in the OE market because location affects freight costs to the OE vehicle manufacturer (See Pond 794; Nelson 970&-9 711 714-15 749-50).

79. OE shock absorber supply does not require extensive warehousing facilities or inventory investment, because OE demand is anticipated several weeks in advance and shipment is made in bulk from the factory directly to the OE vehicle assembly lines (Pond 755- 57; Freeman 8889 in camera; see Freeman 8875; Nelson .1 126). " A "run" is defined 3$ "(tJhe number of identical part that would be ffiide on a part,icu!ar asmbly line without changing to any other part numbers in the meantime" (Hegel 1979). TENNECO, INC.

464 Initial Decision 80. OE shock absorber contracts extend from one to five years at a set price established by bid (FleuelJing 4013; Hegel 7270-71 Freeman 8842-43 in camera 8891-92 in camera; Stewart 9260; Nelson 9678-80, 9724-25, 10,424-25; DeLisle 11 267). The set price can vary only if certain events occur, such as significant increases in costs for labor or material, or (20)Jarge changes in the quantity of shocks needed (Fleuellng 3908-14; Hegel 7261, 7270-71; Freeman 8891-92 in camera; Nelson 10 424-26). 81. A lead time of from nine to twelve months is generally required to seek and obtain an OE contract for shock absorbers (Freeman 8855 in camera; Nelson 9678-79; see Stewart 9260). 82. Prices obtained by producers of shock absorbers sold in the OE market tend to be lower than for those sold in the replacement market (FleueIJng 4173-74; Buck 9416; see Nelson 9725, 10 0585 camera).

83. In 1975, Monroe adopted a price cutting strategy to increase its share of the OE market.

Replacement Shock Absorbers 84. Demand for shock absorbers sold for replacement purposes depends upon the number of cars on the road, miles traveled, and overall economic conditions (CX 5G). It is affected by incidences of failure of a vehicle s shock absorbers, vehicle owner upkeep and wear on the vehicle s shock absorbers.

85. Shock absorber man ufacturers determine the specifications for shock absorbers manufactured for sale in the replacement market (CX 208X, Admission No. 94).

86. Shock absorbers made for the replacement market are generally of three grades good, better and best (Bracken 4362; see Kalupa 4208 4210-12).

87. Replacement market customers require a broad range (21Jof 0 of shock absorbers fortypes,38 sizes and grades full coverage. oS "Corporate wide use will capture increas r;hare of the OE market by selective price decr-eases relative to the market price at that time" (CX 181B, empha.i added) 31 Replacement frequency for various types of shock absorbers is summarized in Dr. Nelson s testimony (Nelson 9794-9821) There were estimates that struts taste longer than conventional shock absorbers, and also that they taste about a. long as conventional shocks (Moore 12::1, 1404-5; Hush 3288; H . Wright 3841--42 camera; N. Wright 8703-; Nelson 9794-9821 seeCX 337, ex 3:38). ,. The leading producers and seHcrs ofshock absorbers for the replacement market offer a full line ofair and spring-assiste shock absorbers. These shnck. are not standard equipment on new cars but may be ordered as optional equipment (Putman 1123, 1168; Hegel 202, 2137; Robison 3670, 3703; Barbeau 4638-:19; Borick 4740; Buck 9377; Nelson 9691-94) ," Different diameters of shock absorbers the 1%. or 17;. ' may be offen-o for application On the same car '0 See Finding 84, Sllpm.

It lr:vcragcJ goes to whether or not you have a specialty large bore shock absorber for an off-the-road vehicle, whether or not YOIl have a spring asiste shock absorber for older cars, whether or not you have an air shock absorber for station wagons or performance vehicles" (Pond 759; Robison 3691) ..

490 'EDERAL TRADE COMMISSION DECISIONS initial Decision 98 F. 88. While there is a strong customer preference in the WD channel for suppliers who can provide a full line of replacement shock absorbers, some customers in the replacement market tend to purchase from multiple suppliers (Pond 827-28; Barna 1349-50; Bush 3259, 3306).

89. The 1%6'" shock absorbers are the most popular size for replacement use (RX 424A-F; Fleuelling 4168; Kalupa 4210-12; Nelson 9689, 9694; see Hegel 2132; Kalupa 4205-7). 90. Shock absorbers produced for the replacement market are packaged and shipped with the mounting parts (Fleuelling 3908 4170; Buck 9401; Nelson 9707-D8; DeLisle 11 256-58). 91. A shock absorber manufacturer producing for the replacement market incurs substantial costs to provide services, promotional efforts, advertising and catalogs to the replacement buyer (Moore 1260; Fleuelling 3960; Cox 4406-8; Freeman 8875; Stewart 9279; Nelson 9716-17, 11 680-1). The manufacturer generally assumes almost all of the risks to produce shock absorbers for the replacement market." (22) 92. Replacement buyers are more service and market oriented than product and application oriented (Pond 757-58; Buck 9372 9381). Increased sales and penetration of the replacement shock absorber mar,ket are the focus of a strong marketing program in the replacement market rather than changes in design, quality other factors (Buck 9372).

93. Purchasers in the replacement market are generally merchants concerned with their suppliers' abilty to provide sales and distribution services, including an extensive field sales force, as well as to supply adequate coverage for all makes and models of vehicles on the road (Pond 758, 794-95, 833; Schubert 8504-5 in camera; Freeman 8875; Stewart 9257, 9279, 9288-9; Buck 9372, 9374, 9381; Kornafel 9449-50; Nelson 11 115-16; Ashford 11 518). 94. Replacement customers in the traditional channel do not buy on bid or have set price contracts (Fleuelling 4173-74). 95. Air-assisted and spring assisted shock absorbers are important44 to compete successfully in the aftermarket (Pond 778; Buck 9375 9377; Nelson 9690-94).

96. Prices for shock absorbers sold in the replacement market .. The only exception note in the record was Sears, wh;ch assumes some but not an uf the risks that DE buyers asume (Pond 863). Mr. Pond of Maremont characteril Sears as somewhere between the OE purchar and typical! aftermarket customer (Pond 793) 4" Technical competence alum., win not insur SUCCP.B in the rplac ment mark t (Freeman 8877; Nelson 422 11.154-6) A. Quarlerly Prud Trend Report; indicate that air adjustable and spring asiste shocks taken togdher accounted fur approximately 10% (0.097) of rl'porting compaoies ' replacement sales io 1976 , and 9% (0.094) of replacement sales in 1976 and 1977 respectively (RX 31A-B). See RX 29B-F, RX 30A-H for prior years TENNECO, INC. 491 464 Initial Decision tend to be higher than for those sold in the DE market (Fleuelling 4173-74; Buck 9416; See Nelson 9725, 10 585 in camera). 97. Monroe has attempted to increase its share in the replacement market through non-price stratagems increased promotions, rather than price decreases (Nelson 10 493; cf CX 181B (OE price strategy)). (23) Supply Flexibility 98. A shock absorber manufacturer selling only in the OE market would have very limited requirements for low volume production facilities (pond 801; Barbeau 4650). 99. Lead time for entry into the replacement business is substan" tial (Stewart 9259). Some replacement accounts in the nontraditional market Sears, have long term supply arrangements which are similar to OE accounts (Buck 9410-11 , 9420-21; Schubert 8541 camera).

100. In general, a run for an OE shock absorber contract is fairly high, from 1 000 to 20 000 units (Hegel 1978; H. Wright 3805; DeLisle 4865; Stewart 9259-60; see Freeman 8845 in camera). 101. A shock absorber manufacturer producing for the replacement market must be able to produce a wide variety of grades, types and sizes of shock absorbers. " Various types of shock absorbers such as spring-assisted, air shocks and struts require additional manufacturing equipment and may, in some cases, be most efficiently produced on low volume low speed lines (short lines). 102. The production of spring-assisted shock absorbers requires a spring assembly process, involving hand assembly of a spring over a conventional shock absorber (DeLisle 11 254). Separate assembly equipment is required to assemble these units also (DeLisle 11 254- 55). The springs may be manufactured in-house 0 by the shock absorber manufacturer or sourced outside (Barna 1341; DeLisle 254-55, 11 271). (24) 103. The production of air-assisted shock absorbers requires a The number of identical part that would be made on .I particular a.embly line without changing to any other part numbers in the meantime" (HcgeI1979). .. Finding 87 supra.

4T Findings 102-3, 105 infra.

,. Findings, 103-5 infra.

.. Chrysler, which pmduces in-hou!; conventional!" for OE in!italJation, purchass its spring-asiste shocks for DE use from Monroe, a.,, weU as other shocks for Chrysler s replacement Mopar line (FleuellinX 3896, 3898; Hohman 4890).

00 Monroe has manufactured its own springs from purchas coil since 196 at its Hartwell, Ga. plant. The cost of the special machinery was slightly over $10100 and $230 000 for the Hartwell and Paragould plants respectively (DeLisle 11 254- -55).

'L Monro s Pamgould, Ark. plant is the only Monro facility tolc. for air-asiste shocks. While the basic shock absrber component can be manufactured on the auwrnat. line with extensive retoling, the unit cannot (Continu.ed) g.. . Initial Decision specialized separate 98 F. and equipment to containing componentline place Barna 1341--2; , on a standard shock absorberthe boot n- --- DeLisl 104. The aggrei'o 4865, 11 247--2, 11 270; Nelsor tooling insignificant"'production of, 'nd for andpackagingequipmetequipment is of dollars for e, ;th the cost of the tPM n shock absorbers, -nilions 105. Strut pJ andard I different from absorbers Bracken 4287(H.-89 inca , 9918, 10 144; J 8887-89 in camera (;I , 0036-38; 21). 69; see generally, Neiso 9912- N. Wright 11 106. To be an 805shock absorber r in the replacement assembly lines both high f25Jm ket, a volume high Speed issembly lines (Pond 800-01; Wright107.3803-5;Then produc the traditional 'me specialty items is important to nontraditional cust " and, to a lesser ch, Nelson 970I-(2). Lc 'placement extent, to the market (Pond 801-D2; necessary to produc ,ly lines (short, Or hand lines) are in production runs of 100-500 unitsv volume(Pond 801; H. Wright 3803-D4; or specialty units made DeLisle 4829 4862-63 4871 4874-75 108. While 270). as noted, OE production is generally of high there are because of the nevertheless some low volume volume low volume OE shock absorbers which short lines (See demand, are most effciently produced on RX However, the record, e. shows that43IC,bothG,QuestorI; RX and432B-N;ITT competent 433B-0).in the OE shock absorber market with (Putman 1120-21;

see Nelson only high volume shock absorbers 109. The use of a high 9692, 10 414-15). specialty volume line items results to produce times in ineffciencies caused by low volume (H. Wright 3803-D4;

long changeover ti Nelson 9701-D3; changeover and retooling costs are much DeLisle 276). The how,"e,. "" fioi'h"" 00 'h, "O"'mo"" ho, 'Deli"e lower to run a news,ldio. r"'iliti 48&'1 '0 195 ,i, ,hock ,the air shocks cost '"approximately'he $60hoe"" io",- , of W" ,ffi,o,y. Mo", $4' DOj) (Deli", 11 " The 249. 11 2701. O'h" ",,"d,,"dd"" ,ep'mle "'lal 00" fo, th. ",oipm,", 00i,(DeLisl,, 255) '",oo'd . Aek. P'"o' "0", th,o 5% ofthe, ",oipm,o, f" (S" H,g" 2061 "p""'",", 00", ofthe"laod.,d Ioho. io Mo", in "mero " E 'od Ch,y"". whi,h Fi"dio" prod",,, oOlyeoo",,,,,oo,'O,"'k", ""2, D'Li,', 11 1OZ-3 '"prol. ,hock ,"'""",, 26" Althoo,h F"d w' P""'oco "'0"'0""00' ,h . "'"""'"" 00' the ,bl, '" o P'''",,,oo wm, oftb, k ,b,,,,,,, '0 i "'''"",oipm,o' io th",",,, ",oip,""" it h'd P""io",ly of""'mp'oY'd ",w hyb'id",,, 'whi,h i, h",.",w !Bm,k", 4287.,9, N'/ ,imil" Co, MocPhe",". ""'CJ. ,"o,t", n 969&-96, N. W"gh, 11 63&-:/6).

, i'1: l"l'u:"v""

464 Initial Decision part number on a short line than on lines designated for longer production runs (H. Wright 3803--4; DeLisle 4829- , 4862-63, 4871 11,275; Nelson 9701).

110. Shock absorber assembly lines are most efficient" when specialized according to size. Because a line changeover from 1" to 1- %" or l-?is " shock absorbers requires a change in almost every component in the assembly line, such specialization can eliminate duplication and (26)triplication of downtime resulting to model changeovers which would affect the effciencies not only of the manufacturing processes, but the assembly processes" (Cook 1624; Hegel 1981-82; DeLisle 486 5; Hegel 7268; Nelson 9694-96, 9698- , 10 601; DeLisle 11,275).

111. Special packaging machinery" required for shock absorbers produced for the replacement market is not required for OE shock absorbers which are sold in bulk (Buck 9401; Nelson 9707--8). 112. Manufacturers are obligated to meet their OE contracts and to be prepared to deliver the specified quantity of shock absorbers, as well as to meet the order requirements of their replacement customers (Pond 794-95; Freeman 8888-91 in camera; Buck 9374; Nelson 10 622-23; DeLisle 11 74).

113. Even though both OE and replacement demand can fluctuate within a given time period, shock absorber manufacturers cannot simply shift from OE to replacement customers unless there is excess capacity available (N. Wright 11,666-8, 11 681-82). The record shows no evidence of abandonment by shock absorber manufacturers of any customers in order to serve other customers (Nelson 10 682- , 10 686, 10 669-70).

114. An abrupt attempt to shift production from OE installation to replacement products might damage ongoing relationships .with OE customers. Likewise, an abrupt shift in production from replacement to OE (unlikely because of the lead time required for OE contracts) could harm relationships in the replacement market (see .. Monroe s shock absorber asmbly !in are currently \; ia.li7.e according to Rh.c (Cok 1624; DeLisle 4865 11 ,275). Monroe has, in the past, prouced multiple siz of shock absorbers on the same line but has realize savings of $4.2 mi!ioo a.nd iocreas capacity by switching to a system of ialized lines (Cok 162 , 1631; Nehim 969596, 10 601; DeLisle 11 275). Respondent' s lengthy argument regarding the production flexibility of shock absorbers is discuss more fully in Finding 116 infrc Repoodent' s presentation on this issue was extremely thorough. However, its persuasivencs was dilute by the fact that Monroe does not curr(mtly produce shock absorbers in a manner which involves switching production lines from one size to another beause it is not economically effcient(See fo'finding 116,infra). '" Packagng machinery at a cost of over $35 00 per plant is available for use at each Monroe Plant (DeLisle 256-7) ,. In 1975, when Monroe experienced demand for its replacement shock ahsorbersexceeing its domestie capacity, it did I1t shift production away from its OE installation customers (RX 52A-D; RX 423A-D; RX 424A- NelSlfJ 9681--2, 10 68:1, 11,143, 11 188). Monroe purchased shock abSorben; from other manufacturers and its foreign plant, incurring higher costs than if Monroe itslf had produced the shock absorben; in its own dOIDestic plan\. (CX 5Z-14; Cok 1627-28; Barbeau 5 70;Nel$On 961-82, 11.43). Initial Decision 98 F. Findings 80-1 supra; Pond 794; Freeman 8888-89 in camera; Nelson 9681-82, 10 456-57, 10 670-73; see N. Wright 11 666-8 681-82). (27) 115. Complaint counsel's economic expert testified that, in an oligopolistic market, 51 such shifts might upset market equilibrium thus making manufacturers reluctant to challenge the status quo (Nelson 10 686-88).

116. Monroe production data for 1976, as presented by respondent, indicate that at that time there was sbifting of production lines between OE and replacement, as well as lines operating for joint production (RPF 38-9; RPF pp. 14-19, Tables I-V). This evidence supports the proposition that production flexibility between OE and replacement shock absorbers is possible. On the other hand, complaint counsel presented evidence that after 1976 Monroe changed its production lines, so that these lines are now specializing in the production of one size of shock absorber. As a result, Monroe realized cost savings of $4.2 milion (CRPF p.50; Finding 110 supra). B. ESP 117. Exhaust System Parts constitute a separate overall market distinct from other automotive parts (Nelson 10 305). U8. The parties agree that there is no cross-elasticity of demand between the OE and replacement market for ESP (Nelson 10 306 647; see N. Wright 6465).

119. ESP is sold for two basic uses: incorporation into new vehicles during assembly (OE installation) and replacement of worn out or damaged units on existing vehicles (Pond 739, 744). 120. The ESP industry separately reports and analyzes sales and competitive conditions in the OE and replacement markets (CX 106B-; CX 120E; CX 191; Baker 535, 537; Putman 1U6). Walker analyzes conditions separately in the OE and replacement markets (CX 27D, F, N- ; CX 31A). Mr. Putman of Questor, a significant ESP producer, characterized the distinction between selling to the OE and replacement markets: "There is a world of difference. It' like two different activities completely" (Putman 1116). 121. Walker and other ESP producers report shipments of (28) ESP separately for replacement and OE use to the Bureau of Census (CX 190G-H).

122. Pricing of ESP differs between the OE and replacement markets. The OE market is sold primarily on a bid basis while the replacement market price is based on price lists " (Putman 1162; " See Findings 185-86 infra conceming replacement markel concentration '" Respondent and complaint counsel agree that in both the shock absorber and exhaust system part (Continued) T1!.N.N1!L.U, l.NL.. '"0 464 Initial Decision Moore 1323; Ince 4950; Foster 5049-50; Nelson 10 350, 10 352; Ashford 11,403-4). (29) 123. Taken as a whole, sales to the DE market are less profitable than are those to the replacement market (CX 244A- in camera; 246 in camera; Nelson 10 353- , 10 355 in camera). 124. Warehousing and distribution facilities are generally more extensive for a manufacturer supplying ESP for the replacement market than for a manufacturer supplying ESP for OE installation use (CX 25Z-N; CX 27N; CX 208Z-21, Admission Nos. 217, 219; Baker 552-53; Pond 755-58; Putman 1116-18). OE Exhaust System Parts 125. Demand for ESP sold for DE installation use is a function of new vehicle production (CX 106B; CX 208Z Admission No. 107; see CX 27E).

126. To serve the ESP market for DE installation, a manufacturer must produce ESP for the current year, but may choose to produce only for a limited number of applications" (CX 27D; CX 208Z-1 Admission No. 114; Baker 551; Pond 757-59; Putman 1116 , 1119). 127. In the DE market, the same firm may not supply all of the ESP components for a given application (Baker 553; Schultz 1760). For example, a firm may bid to supply an exhaust pipe-muffer combination, but not the tail pipe (Putman). 128. Aluminized mumers, stainless steel pipes and resonators industries it appears that pricing in the original equipment service market and independent aftermarket were relate: "If the vehicle producers were to lower their price to the car dealers, that would definitely have SOme impact on the decision making proces of the mlioufacturers who are supplyiog the replacement market other than through the DE service channel" (RPF 151; CRPl" p.53; Nelson 10 785; seealso N. Wright 11 726). Mr. Pond of Maremont testified that:

fIJn the exhaust system busines historically the aftermarket has followed changes in the original equipment pricing, at list If Geoeral Motor!), Ford, and Chrysler have increas their component prices over a period of .sveral months, then typically folowing that there would be an afterm!lrket price change by whomever the price leader might be in the aftermarket.

In the shock absrber busines, the pricing probably tends to be a little bit more geared toward what occurs in the aftermarket, beause there is a--hock absorbers tend to be a one price product line. Whereas exhaust is typically priced by application, shock libsorbers are typically priced by type of shock absorber (Pond 760).

Mr. Putman ofQuestor agee:

Back when I first came in the business and got on the AP sales force, th"re was almost a blind following of preli.sly the car factory prices and, that is, the list prices And then the whole prices were figured 00 the basis of what price the vehicle manufacturer charged his dealers. And then there had evolved a discount structure there from that to arrive at the final blue sheet price. And it just sL'lyed that way with minor modifications for 25 years now.

(Putm!ln 1172). Respondent argues that this pricing link as well as other differences are sufficient to remove DES from the rep!!lccment market altogether (RPF 156; RRPF n. 18) 59 Arvin and Walker, two leading DE producers for QE have a rang!' of 225 to 289 part numbers for OE use and produce approximately 2 500 part numbers for the replacement market (CX 325A-B; Baker 551, 672-73; Schulb 1759-; Bush :10:1) Initial Decision 98 F. are used for OE installation ESP (Baker 559--2, 634-35; Pond 871; Schultz 1811, 11 232).

129. Muffers shipped for OE installation use are generally in the form of a welded exhaust pipe-muffer combination with some tail pipes occasionally included in the assembly (Putman 1117- , 1165; Schultz 1809; Saker 5002-03, 7599-7602). (30) 130. ESP products for the OE installation market are shipped in bulk (Baker 552, 685-6; Putman 1117; Saker 7581, Nelson 10 329). 131. ESP sold for OE use are produced to specifications established primarily by the vehicle manufacturer (CX 208Z-1, Admission No. 111; Baker 550; Putman 1100 in camera 1102-03, 1162--3; Moore 1322-'23; Schultz 1771- , 1808, 1810-11, 1848-9, 1855-59; Tompkins 2237).

132. In the OE market for ESP, the product is sold in an engineering competition with every part being thoroughly tested by the buyers (CX 25S; CX 27D; Baker 552, 562, 566; Pond 757-59; Moore 1322; Putman 1100 in camera; Schultz 1772, 1778; Tompkins 2237; see Nelson 10 351-52). The OE customer supplies the ESP manufacturer with the space constraints in which the ESP system wil fit, the location and type of silencing devices to be used, the objective and subjective noise levels, the back pressure and the durability requirements (Schultz 1771-72; Nelson 11 068). The ESP OE design engineers work closely with the vehicle manufacturer to develop workable designs (Schultz 1855-56). Their designs must then be submitted to the OE customer s engineers for final evaluation and approval (Schultz 1771- , 1778-79, 1855-56; Nelson 11 068). 133. The primary ability required for success in the OE market is the ability to design and manufacture a product which meets the manufacturer s specifications at low unit cost (CX 25E, S; Baker 551- 644 648; Pond 757-59).

134. In the OE market the most significant elements of cost are the basic engineerin.g and manufacturing expenses (Baker 553- 588-89, 648-9, 685-86).

135. The ESP manufacturer s use of advertising for OE installation ESP is minimal or non-existent (Baker 565--8; Pond 764). 136. Buyers in the OE market for ESP are technically knowledgable professionals (Baker 551-52; Tompkins 2237). 137. Geographic plant location is a factor in securing installation business. Producers with plants located closer than competitors to vehicle assembly plants have an advantage in obtaining OE business (Pond 794; Bracken 4348; Saker 5005, 7598- 99; Nelson 10 340, 10 755; Schultz 11 210-11; see N. Wright 11 778- 79).

TENNECO, INC. 497 464 Initial Decision 138. Warehousing facilities for ESP producers are not much needed for the OE market. Operating under an agreed-to schedule, a producer can anticipate a customer s demand several (31)weeks in advance and arrange for prompt shipment of the manufactured products (Baker 552- , 623, 671 72; Pond 755-59; Putman 1117-18; Saker 7611-12). Manufacturers may, however, carry a very small amount of inventory as "float." (Saker 7611-13). 139. The method of setting prices for ESP sales to the OE market is not the same as for the replacement market"O (Foster 7322-36 camera; Ashford 11 403).

Replacement Exhaust System Parts 140. Demand for ESP for replacement purposes results primarily from the failure of a vehicle s exhaust system. Overall replacement demand is influenced by the number of vehicles in use, the number of miles driven, the average age of the vehicle population and the useful life of the exhaust product (CX 106B; CX 208Z-Z-1, Admission Nos. 108 see 109; see CX 27H).

141. Specifications for ESP for replacement purposes are established primarily by the ESP manufacturer (Baker 550; Putman 1100 in camera, 1102--3; Moore 1322-23; Schultz 1773, 1781, 1808, 1810- , 1848-9, 1855-59).

142. Engineering for the replacement market focuses on the consolidation of part number offerings (Baker 551, 644-5; Putman 1100 in camera; Schultz 1810, 1844-5; '1852-53). The relationship between the product engineers and the replacement buyers differs from the OE market in that most WDs and mass merchandisers have neither design engineers not engineering expertise in ESp61 (Schultz 1856-59).

143. In the ESP replacement market a supplier generally offers all ESP components (e. exhaust pipe, muffer and tail pipe) for a given application (Schultz 1760).

144. Manufacturers of replacement ESP need a broad line of all the ESP components fitting various makes, models and model years (CX 24G- , CX 25Z-3; CX 208Z-21, Admission No. 221; Baker 537- , 540, 636-38, 658; Pond 757-59; Putman 1119, 1167; Kittridge 1404; Schultz 1759-60, 1844; Bush 3303--5). 145. ESP sold to the replacement market differs from (32)that sold to the OE market in specifications, materials and, in the case of resonators, some elimination of that part from the ESP "package (Baker 559-61; Pond 811- , 870-71; Putman 1100-1 in camera; .0 See Findings 202-203, infra regarding profitability. ., Walker hll a separate engineeringdepartment for its QE and replacement sales (CX 37B). Initial Decision 98 F. Moore 1241; Nelson 10 764). Manufacturers of replacement muffers may cut corners on acoustics and back pressure specifications (Baker 559-60 650; Pond 870-71; Putman 1100-1 in camera). Aluminized muffers are used for OE production, while galvanized muffers are common in the replacement market (Baker 559-62; Pond 871; Schultz 1811). Stainless steel pipe which is used for OE is not used for replacement (Baker 634; Schultz 11 232). Generally, pipes are used in lieu of resonators in the aftermarket (Baker 634; but see Moore 1241). 146. "Universal" muffer lines, which achieve the maximum market coverage with the fewest possible part numbers, are sold primarily to muffer installation shops and mass merchandiser accounts (Verner 890; Nedell 969-71; Putman 1096-98, 1166; Moore 1313; Kittridge 1403, 1437; Schultz 1844; McAdams 8994; Goodman 9090-91). These "universal" muffers differ in size and basic design from muffers sold for OE installation use and are thus not used on cars as OE (Verner 890; Nedell 969- , 988; Putman 1096-98, 1166; Kittridge 1403, 1434, 1437; Schultz 1844; Luyckx 3748; McAdams 8994; Goodman 9090-91).

147. ESP manufacturers, including the leading firms, also produce "performance" or Hsports" mufflers for replacement custom ers desiring ,higher noise levels. !'Sports type mufflers have a different type of construction from other muffers. 148. Exhaust systems components are individually packaged (muffers) or are specially coated and labeled (pipes) for the replacement market (Baker 552, 559-60, 624; Putman 1108-9, 1118; Schultz 1798, 1814, 1848-9; Nelson 10 329-31). 149. An ESP manufacturer for the replacement market incurs in addition to the basic manufacturing costs, sales (33)expenses warehousing costs and merchandising expenses such as advertising, which are either much smaller or nonexistent in the OE market (CX 5R; CX 246; Baker 553-55, 564-6, 588-9, 685-6; Pond 764). 150. ESP buyers in the replacement market are generally nonprofessionals with a merchandising orientation64 (Baker 551-52; Tompkins 2237).

151. Generally, in the replacement market sales are made in separate parts for exhaust pipes, muffers and tail pipes (Baker 557; Putman 1117- , 1165; Schultz 1809; Saker 5002--3, 7599-7601 234).

., Sports muffen; rarely areuse in QE (Schultz 1854;see Luyckx 3748) ", (Putman 1166; Kittridge 1403, 143031, 1437; Schultz 1851, 1853-4). A sport. muffer has a str..ight through design and is filled with fiberglass, whereas a standard muffer has a series of tubes and baffes and relies on the principle of cancellation rather than absrption to control the nois level (RI'X 2; Schultz 1800- , 1853-4). .. However, purchasing agents of mass marketers may have, as in the cas of Sears, certin tehnical familiarity and financial80phistication approaching that ofoome DE porcha.'RfS (See Buck 940912, 9420-22) TENNECO, INC.

464 Initial Decision 152. Warehousing, packaging, cataloging and delivery are stressed in merchandising efforts for ESP in the replacement market (Baker 552- 565-7 648-9 661--3; Pond 757- , 811-12; Verner 908-9; Putman 1116-17; Nelson 10 332 33, 10 336-38; Ashford 518, 11 531). Thus, sales merchandising, distribution, availabilty and brand name recognition are considered important, if not the most important, ingredients for success in the ESP replacement market (CX 5R; CX 25Z-3; Baker 553-55, 567, 66O-l-, 663; Pond 757- 811-12; Verner 908-9; Putman 1116-17; Nelson 10 336-38). 153. An efficient warehousing and distribution system with a large investment in inventory is necessary to adequately serve the ESP replacement market. Such a warehousing system 65 is necessary because replacement ESP manufacturers are expected to have a large number of low volume part numbers available for replacement customers, who generally purchase relatively small quantities of each part number (Baker 552- , 671-73; Pond 755-59; Putman 1118; Nelson 10 333; Ashford 11 531).

154. Geographically dispersed plants are a competitive advan. tage in the ESP replacement market (Ashford 11 535-36). 155. Prices for replacement ESP are based on established price lists with variances accounted for by cost justified discounts (Moore 1323; Foster 7233-35 in camera; Ashford 11 403). (34) Supply Flexibility 156. Muffers are designated by "cross section" or external dimension. Cross sections are determined by the configuration of vehicles. Basic design parameters for cross sections are established when the vehicle is first engineered and are thereafter carried through the specifications of both original equipment and replacement muffers (RPF 75; Schultz 1765, 1779-80; see Putman 1164; Moore 124I, 1271; Schultz 1858).

157. A crimp type enclosure is used on muffers made for the replacement market whereas a spun type enclosure is used for muffers manufactured for the OE market (Moore 1222 , 1328-29). A substantial capital investment would be required for a producer of crimp type muffers, such as Midas, to shift over to the spun type (Moore 1322- , 1328-29; Nelson 10 415-16). 158. The record does not reveal the total number of muffer cross sections in use by all manufacturers for original equipment or , Approximately two-thirds of an ESP plant may be devote to warehousing and distribution functions(Schultz.. Muffer cross sectiOflis the manufacturer1795).s method of defining the size of the muffer. For example, OIl a muffer cross section designated as 5 by y'inches, the 5 indicates the minot radius on either end and the 9-y. indicates the major radius of the muffer shape (Saker 7513) Initial Decision 98 F. replacement use. Evidence presented in a Walker "1976 Original Equipment Competitive Analysis" indicated that at least seventeen cross sections were produced by the industry for OE use in passenger cars in 1976 (CX 325A-B; Nelson 10 320; N. Wright 12 542-44). All but one of the eleven cross sections produced by Walker for the OE market have replacement applications (RX 325B; Schultz 11 222-23). 159. The machinery necessary to package replacement muffers costs between $40 000 and $100 000 depending on its degree of automation (Schultz 11,214-16).

160. All muffers are produced from some of the same basic equipment regardless of cross section (Baker 628-30; Saker 7581). However, muffer assembly lines individually tooled for the manufacture of specific cross sections achieve the greatest efficiencies in production.

161. In order to produce muffers of different cross sections a change in tooling on the assembly line is required (Saker 5005, 7578- , 7612-13). The time required for these (35Jtooling changes varies from thirty minutes to two days (Saker 7580; Schultz 1845-46 205). For example, a changeover from one cross section to another at Walker s Greenville, Texas plant requires fifty man-hours of labor during which the assembly line is idle for four hours (Saker 7580-1). 162. Walker seeks to minimize changeovers in its manufacturing operations, and to use the equipment as efficiently as possible (Schultz 11 229). It is not economically feasible to changeover the tooling on an assembly line if only a few muffers of a given cross section are to be made (Schultz 1846).

163. Generally, the production lines for muffers are set up to produce one Of, at most, a few muffler cross sections. Once a line is set up for a given cross section it can produce several part numbers (including both OE and replacement muffers), provided that the units have the same shape when viewed endwise (Saker 7577; Nelson 10,738).

164. ESP production runs for OE installation are generally of a higher volume than those for the replacement market (Bracken 4348-9; Saker 5010-11). Thus, production facilities for the two markets may differ, with the higher volume, more automated lines serving the OE market, while the more flexible but less automated o. (&e FindifJgs 151-63,infra; BaktJr 628; Saker 7676-78.) .. (Baker 632 33; Saker 7573, 7577; Nelson 10,322-23, lO :H6, 10 758; Schultz 11,238; see Saker 5006, 5008; hford 11534.) Walker tends asign the production of a giv.,m crosstion to a single plant tid, generally, to a $ing!e line within that plant (Saker 5005, 508). At Walker s Greenvile, Texas plant., only replacement ffuffers are produced on one asembly line beause there are no QE orders for thf: cruS$ section(s) which that line m;Jkes (Saker 7570, 757:.1 At this plant, other than in an emergency, there has n lio production shift frum Hne one which produces cross setions r!Muircd by the aftermarket only, and line two, which prouces those cross tions needed for OB or OE ami n'!placement (Saker 7570 , 7614). , g., "'.L 464 Initial Decision lines primarily producing ESP for the replacement market (Bracken 4348-9; Saker 5010-11; see Baker 628). 165. Walker s Jackson, Michigan plant produces primarily for the DE market. However, testimony and exhibits indicate that four out of five plants supplying the OE market also produce at least some ESP for the replacement (36)market. The fifth, the plant located at Newark, Ohio formerly produced catalytic converters, and pipe for the OE Market only. That plant has been rebuilt for another purpose. There are seven Walker plants supplying the replacement market, of which three also supply original equipment (CX 39B- CX 244 in camera; CX 290; Bracken 4348; Foster 5072, 5074; Nelson 342-43 744-46; Schultz 11 214).

166. To compete successfully in the OE market, an ESP producer need produce only a few muffler cross sections, whereas to compete successfully in the replacement market the ESP manufacturer needs to produce all or nearly all of the 17 or 18 muffer cross sections sold for that market. '9 Further, the OE manufacturer need not produce all of the cross sections used for original equipment installation to be a significant competitor.

167. There was testimony that tooling considerations, downtime, cost of duplicate machinery, diminish the ability of an ESP manufacturer to switch production lines from cross section sizes used for OE or DE and replacement to those cross section sizes manufactured solely for replacement. As a result, ESP producers are generally required to have enough production lines devoted solely to those cross sections peculiar to the replacement market, thus diminishing production flexibility (Saker 7573; Schultz 11 202; Ashford 11 534; see Saker 7570).

168. Midas, one of the top four ESP manufacturers for the replacement market does not sell ESP to the domestic OE market" (Moore 1319).

169. Production flexibility between the ESP replacement and OE markets may be somewhat diminished by the contractual constraints on the ability of an ESP producer for the DE market to shift production from OE to replacement customers (Nelson 10 419-21). The DE producer is required to (37)meet his commitments, which generally run in three year terms, to the OE customer and also be mindful of the development time necessary to sell a new ESP "0 (NeJ"on10 3J7 322- 345-6;&hultzll 221;Ashfordll 534J '0 No ESP prooucer for the DE market manufactures all of the cross 5"-,,t;ons used for OE (CX :J25A-B; Baker 627- 28m 6;j2- 33; Nelson 10 145--46), Walker, the second large!\t OE supplier, as of April 1979 made only nine cross sedions for the OE market while at the amQ time it made 17 or 18 cross sections for the rl'placement market (Schultz 11 221-22).

There are some sales to origio.,o, I'quipment manufacturers in Canada " IMoore 1319) Initial Decision 98 YT.

application to an OE customer (Schultz 1856 , 11 234; Saker 7601; Nelson 10 338). C. OE Service and Independent Aftermarket Submarkets for Shock Absorbers and ESP 170. The OE service market consists of sales made by absorber and ESP manufacturers to vehicle manufacturers for resaleshock to their dealer outlets while the aftermarket replacement sales (Pond 744; encompasses all other 33)." but see N. Wright 6336-43 , 11 732- 171. M A. reports both ESP and shock absorber sales separately for OE service and the aftermarket (CX 120-B- FleuelIing 4131; Nelson 10 C; CX 162A- 307). for business planning purposes and" Walkerfor filingreliespublicondocumentssuch statistics (CX 2082 , Admission Nos. 180-181). 172. Walker separately analyzes its competitive conditions in the domestic ESPsales,aftermarketmarket specificallyshare and excluding OE service (CX 291) 173. Both Monroe and Walker have absorbers and ESP to new vehicle manufacturersdescribedforsalesresaleof toshockcar dealers as the OE service channel of distribution (CX 24G; ex 31B; CX 2082 , Admission Nos. 104, 124; Baker 546-7; Barbeau 4648 4650; Hohman 4811; Saker 4992-94).

174. Manufacturers use separate sales forces and distinct sales programs to serve the OE service and independent aftermarket (Baker 547; Putman 1100 in camera; FleuelIing 4230; Hohman 4811). 3848, 41.5; Kalupa Monroe, Walker and their leading competitors in the sale of shock absorbers and ESP oriented sales forces to selI to the serviceemploymarketsmalI, technically extensive promotion and marketing (38joriented field, whilesales devotingforces to selI to the independent aftermarket (CX 39M; CX 143I--; , Admission No. 223; Baker 545--6; Pond 744--5 CX 208Z- , 747, 754, 757-58; Putman 1100 in. cam.era 1116-18; CX 39G-L). 175. . The OE sales forces of leadingsee producers of shock absorbers and ESP selI those products to the vehicle manufacturers for both OE service and OE installation purposes (CX 31B; CX 2082-3 Admission Nos. 118-120; Baker 545--7; Pond 744--5 " Under this, 754; Putman the Slimp product aroe exclud"dbreakdown, sHies from one 'nanufact.urer of ESP Or shock absorbers to another manufact.urer of fe_t;, ex 120A- " However, it h()uld he noted that MEcatpgory withol1ldifferentiatingbetween the two A. reports saJ..s to OF: installation and OE service in a " Some companies illso have different sing'Je al..s forces for tr::ditional and nontraditional aftermarket (see, HRF 47; (I..lson 10 678-79) Cl1HtOt)er within the TENNECO, INC. 503 464 Initial Decision 1117-18). Generally, ESP producers do not make direct sales to vehicle dealers (Putman 1118).

176. GM uses separate divisions to serve the OE service market and the independent aftermarket (Robison 3692-93; Fleuelling 4131). 177. Orders in the OE service market, particularly for a current model year, are awarded to one or more of the shock absorber or ESP producers who furnish a given vehicle manufacturer s OE production requirements (Baker 548-9; Pond 760-1; Putman 1119; Luyckx 3748; Nelson 10,314).

178. Geographically dispersed warehouse stocks of parts are necessary to serve the aftermarket effectively whereas the vehicle manufacturers have their own independent distribution system for OE service (Baker 547, 671; Pond 739-40, 755-56; Nedell 946, 968; Glassman 1027; Nelson 10 314, 10 405-06). 179. Services" provided by shock absorber and ESP manufacturers to customers in the independent aftermarket are performed by the vehicle manufacturer in the OE service market (Baker 566-67; Verner 908-9; Nelson 10 405-06.

180. A firm sellng to the independent aftermarket must have a broader range of parts for all recent years ' makes and models (i. greater coverage) to compete effectively than is necessary to compete successfully in the OE service market (CX 24H; Baker 547, 556-57; Robison 3691, 3694; Nelson 10 781). (39) 181. If Arvin s experience is typical,6 then the existence of service as a submarket of the replacement market is bolstered by the difficulties which Arvin has encountered in its efforts to enter and become a significant factor in the ESP independent aftermarket. 182. The above-described factors are sufficient to make the finding that OE service sales should be included in a submarket separate from other replacement sales of shock absorbers and ESP. VII. Market Structure Shock Absorbers 183. The total net dollar sales of replacement shock absorbers in " E. catalogues and merchandising programs ,. Arvin sold only toOE installation ..nd service customers for many year\ before 1959 (Baker 649, 677 , 682- R3: Pond 811; Putman 118:1; Nelson 10 310). Although A.-in had exp€rtise in engineering and manufacturing F-SP. Arvin found such ahihties to b" of little importnce in winning customers in the independent aftermarket and encuuntered severe problems (Baker 559, 655; Pond 811-12; Nelson 10 310- , 10 420--21) Arvin s reputation as a successful ESP produ(:er for the OE market did not insur., automatic acceptance in the aftermarket (Baker 559). Consequently, Arvin was forced to acquire new skills in merchandising, promotion and advertising-. Fourteen years after iL o"try, Arvin believed itself to be in fourth place in the 3fterm3rket hellind Walker, Mar"ffont and Questor (AP) (Baker 578-79; Pond 811".12) p ,, . . ., . Initial. Decision the United States by manufacturers.in 1975 98 F and in 1976 were OVer $290 milion (CX 261 were OVer $250 milion 184. The great bulk of in camera). Mm:emont, these sales were made by four companies: were accountedMonroe,for byQuestorover aan.ddo General Motors. shock absorber and zen other domestic" (40JandThe remainderforeign 185. Concentrationvehiclein themanufacturers.manufacture76and sale shock absorbers in the United States is very high of replacement firms accounting for 77.6% in 1976. The top four firms, withaccountedthe top twofor 91.4% of such sales in 1975 and 92. camera 9% in 1976 10,147, 10 152-53). (Nelson 145 186. With WSPecLto shock aftermarket, concentration is likewiseabsorliershighsales to the independent companies having 81.9% of this market in 1975 , with the two leading The top four figures were 94.4% in 1975 , and 80.9% in 1976. sales to the independent aftermarket in ,1975and 95% in million, and in 1976 were over $275 million 1976. Doll totalled almost $235 (see 187. In 1976, there were 13 manufacturers whichCX 262 hadin salescamera).of shock absorbers in the United States in excess of $100 camera; see CX 4R; CX Questor and General20E;MotorsCX 191D).were Of thes 000 (CX 261 , Maremont, suppliers (CX 3E; CX 15I; Pond 829;recognizedNedell as beingMonroemajor Stapleton 3429; H. Wright 3833; 942; Putman in camera). Fleuelling 1130; 4043 4138; Nelson 11 027 188. Thes same four absorber firms have dominated the replacement S. shock period, concentration hasmarketremainedsince theverylatehigh1960' s. During this 1359-60; Stapleton 3471- (Pond 742; Barna Buck 9378; 72; Kalupa 3638 Nelson 154). Tenneco, 3657-58; Borick 4755; partment recognized this high concentrations Corporate 1976 examination of the shock absorber replacementDevelopmentmarket: De- , stating as follows in its There are tour principal supplie" of shock absorbers for vehicles wbo supply both Calm Deleo Productsthe loriginalDivisionequipmentof GeneralJOE) marketMotorsand in tbe United States the aftermarket and '" M,,,",,", "'""of,,,,,," Gob,'" . Macemont Co poration . and 'e, M,,,,oo b,,", w,1I ""M ,b,o, 0"'". 'b, Co'omb",.'obe'G"''''cbfe, Mid",,,' Th,"w"o"dp""",,Mo",,,",,,yh""d,lobel ehook,W"'e ,Expo"d2(1"7561.Q",,,o,Moo,", """""",,,,,,""'"of"",,,,,. G''''''ol Mol", , ""d,., 240; Robisun 3666""""'""0'"

, 3670J ebock oh"""" fo, ,h, "P"ce",,",. '"d"'o'k","e" ,,',,',o"d" '"',Iw', rex "fl." Pol,,,," ebock110" Tb, Ii" ACDeleo ""''',d """" rex ,..clod,., . A,",,,,,,,,Girlillg, and Corle & Cass Foed Hyd . HII",'" '" Tb, '0" ,wo lin" A""",,, OIock,'"", . "0,"1.0. WOO"",,,,,"" ebey,r". g.." SP'''o"""'coli, Ii""", "" "om " """'" cb,Ji,,,,,,,,," of" "" Tbo""shi "f cb, ALl ", di",,,,, ,,, ,""..'e""'ee" dol" '" Hoe e"m' How"". . Ho', ""''' '' d",,, ,,, the ,o,, """d,,,,""""'''''0" ,,, cbo ,,',,"'" "'''k,rew'" ".."f.. 0,di"" wbo'b" y "" cb, ""'PC' doll"" m ""'re "''''' No'"," , "0""""" "p''''O" . beli'wd 0"'" ,,, be ",0" . doll"," wee, "'''"' """'""01. , "'"'''''y "n"',d "P"""'"II" rN. Wngh' 69411- 2R79:1. wbileNo'""Dc 10W"Sh'1;1"- TENNECO, INC.

464 Initial. Dccision Monroe Auto Equipment Company contJ olled 83% of the aftermarket in 1967, and have probably increased that percentage since then. (CX 3E; see CX 15I; CX 20E) 189. Since at least 1960 Monroe has been one of the two leading suppliers (Pond 742; Kalupa 3638; Borick 4755). 190. Other than the acquisition of shock absorber companies by ESP producers, there were no new entrants into shock absorber manufacturing in the United States between 1958 and 1978 (Putman 1109 1203; Moore 1326; Nelson 10 214).

191. Exits from the business evidence a trend toward even greater concentration in the shock absorber replacement market (Nelson 10 154). In 1975-76, Chrysler exited as a manufacturer of replacement shock absorbers (CX 261 in camera; Nelson 10 158; see Pond 791-92; Thompkins 2429; Steward 9280; Nelson 10 707). Immediately prior thereto, Moog essentially exited the market as a reboxer (Nelson 9789 , 11 073). In 1978, Armstrong closed its North American (Canadian) shock absorber manufacturing facility (Steward 9524; Nelson 9929 158-59).

192. In June 1977, Ford began to discontinue the manufacture of conventional shock absorbers, and plans to manufacture only a portion of its future MacPherson strut needs (Pond 791 , 862; Luyckx 3730; H. Wright 3778-79; Fleuelling 3880, 3942; Bracken 4280; Stewart 4280; Stewart 9280; Nelson 9912- , 10 158). As a result Ford has significantly curtailed its manufacture of shock absorbers (H. Wright 3778-79; Fleuellng 3942-43; Stewa.rt 9820; Nelson 9912- I3). Moreover, Blackstone, a small manufacturer of replacement shock absorbers in the U. , is attempting to exit the market (see Finding 411 infra).

193. In addition to the 17 companies which manufactured replacement shock absorbers for sale in the United States in 1975 and 1976, eight companies (including Midas, TRW and Arvin) were engaged in the purchase of replacement shock absorbers for resale by them to wholesalers and direct-buying retailers in competition with shock absorber manufacturers (CX 263 in. camera; Putma.n 1131; Nelson 9785-6, 10 210). Such resellers are known in the trade o (Nelson 9782-84).(42)as reboxers.

194. Total sales by reboxers of shock absorbers in 1975 were over $9,5 milion, and in 1976 were approximately $12 millon (CX 263 camera).

'0 The other reOOJU'T firms were Interpart, AGM. Rob, RRS Engiri ring, and Mickey Thompson (CX 263 in camera).

Monroe ilo;lf in. 1975 purchased a quafltity of shocks from Questor which it resold a .rcooxer (see supm), Walker also perforTrwda reboxer role in 1975 and 1976, purchasing shock absorben; from Monroe for resale to mumer instal!abon shops(Cok 1635).

.,, Initial Decision 98 F 195. In 1975, Monroe s sales of shock absorbers in the United States for replacement use amounted to $90. 54 millon which accounted for 35.9% of the market. In milion and 37. 1976, the figures were $110. , respectively (CX 261A in camera). 196. Until the past few years, Monroe was recognized by itself and the industry as the absorber replacement marketundisputed(CX 5M;priceCX leader in the shock Nelson 10 522-23). 181B; Putman II32; 197. Since approximately 1975 acted as the leading firms in the, pricingMaremontof replacementand Monroe shockhave absorbers (CX 5M; Pond 843; Putman II32;

3748-9; Nelson Robison 3684; Luyckx 522- There Was testimony that other, II replacement097, II II9; shocksee Luyckxabsorber produc- 3731-32). ers cannot sell at higher prices than those charged by Maremont or Monroe (Putman II32;

see Luyckx 3731- GM look to Monroe and Maremont in setting, 3748-9).their Questor and shock absorber prices (Putman II32; Robison 3684 replacement looks to Monroe, , 3721-22). Ford ment shock absorberMaremont,prices (LuyckxQuestor3731-and GM in setting its replace- 198. Walker 32). s operational relationship to shock absorbers began in 1974 with its purchase of Triple S Industries Tenneco and s Answer, Section 44 see Finding 379 infra)."' (Complaint of Walker s steering In 1976, sales dampers, a form of shock shock absorbers accounted for absorber, and other 0.3% absorbers in the of the shipments of shock U.s. replacement market (CPF 124 29B; CX 197; CX 263 in camera; in camera; shock absorbers s sales of which it "manufactured""Nelson represented9792). Walker total sales in the U.s. replacement market. As a reboxer 0.2% of the shock absorber sales of $184 , Walker had representing approximately 0.000 in 1975 and $236 000 in 1 % of the total 1976, (43) in these years U.s. replacement sales (Nelson 199. Historically, the9784,replacement9792). shock absorber business has been markedly profitable (CX 144; CX 145F- Borick 4754; Nelson 10 G; Pond 777- 590-91). Over the, 856-57; high rate of return on its stockholders years, Monroe has earned a 591). ' equity and assets (Nelson 200. The record shows that Monroemiddle s profitability declined in the 1970's. There were two reasons for this: (1) strong competition from Maremont and (2) the existence of factors not normally associated with the historic profitability of the U.s. market (CX 3J; ex 4C; CX replacement 5Z-12; CX 21B; CX 146A; Nelson 10 591). See Findings 369-8.1 'nIra See FinrJing 381 infra . pp.

TENNECO, INC. blJt 464 Initial Decision In the eyes of Walker, one such factor was Monroe s costly, inefficient and inattentive management. (Cook 1581- , 1593- 1599-1600 1620; Nelson 10 600; Ashford 11 453- , 11 541). Another factor was the losses and start up expenditures experienced Monroe s expanding foreign operations (CX 5 12; CX 21B; CX 160B; Cook 1620; Nelson 10 591 , 10 599- 600). An additional factor was the substantial premium incurred by Monroe in purchasing shock absorbers from its competition, and from its Brazilian plant (CX 256A-B; CX 257A-B; CX 270A-B; Cook 1627; Ashford 11 464-65). By 1976, prior to the merger, these adverse problems were, or were in the process of being corrected (Cook 1581, 1583, 1615, 1620, 1624- 1631; Nelson 10 592).

201. As for the competitive activity of Maremont. and Monroe response thereto in recent years, the effect has been to make the shock absorber business more competitive and less attractive to potential entrants than it otherwise would have been (Pond 858-59; see Cook 1581, 1593-94; Nelson 1O 591-91A). 202. In the present litigation, respondent portrays the shock absorber industry as one of deteriorating profitability (see RPF 191- 210). Respondent's economist, Dr. Neal Wright, prepared calculations concerning rates of profitability for Maremont 84 Qucstor and (44JMenroe. According to Dr. Wright' s calculations (which are disputed by complaint counse!), the rates of return for these companies were less than the average return on stockholders' equity for all manufacturers.

203. The data upon which Dr. Wright based his calculations regarding Monroe s profitability appearing in RX 573 arc found in RX 278A. (These exhibits are reprinted in RPF Appendix BJ. Mr. Barbeau, Monroe s domestic comptroller, constructed RX 278A from the internal accounting records of Monroe (RPF 198-99). The exhibit was designed to present a clear picture of Monroe s earnings from which Dr. Wright could calculate profitability figures (RPF 198-21m. Complaint counsel continue to claim that these exhibits are unreliable (CRPF pp.61-63). Whatever the dispute, the record shows Walker s perception of the shock absorber market as an attractive "' (RPf. 195-97; Dr. Wrightc:onverted Maremon1. s9.9% pre-t.ax return nn "ss"L found On RX lR"1 pp. IG to a return on stockholder ' equity of 22. 1 '! , which was I",ss than the 22.7% averar,e return On stockholdprs' "quit\' fo, all manufact.uring concerns in 1976, as r"l)(rted in the FTC's Quarterly Financi,,) Rl'port for the first quarll' of 197HiRX:Jf!;RX512;N- Wright 6809- 1 1 In ''lmem . 6817- 19 In mmem 8649, 1249511. ", Tht' documentation for Questor was less 5pe"ific- Dr, Wright s conclusion that Questor has not achieved" sat.isf"ctory r"tl' of return for either its shock absorbers or exhau t repl"cementsales in recent. years is bast'd on RXs J61-63; Putman 1198-1200: N. Wright 6809- 11 in camera 6817- 19 In ""mern:scc N. Wright 12, ",,1 ," 8"" Finding 207 In",-"

" SceCRP 60-6:J "" Complaint colm e) view respondent s accounting data as nawed, "nd complain Int",- alia or improper adjustment and allocations lellding to diHtortions in Mrmnw s profitabilit.y ICRPF pp61-6:JI , p. , pp. , pp. Initial Decision 98 F. one from a profitability standpoint, particularly as to Monroe ability to enhance Walker s (and thus Tenneco s) overall profitability.

It is clear from internal documents that Walker believed Monroe reduced earnings to be a "temporary problem" (CX loc). Increased earnings were projected for Monroe in 1976 and 1977 over those experienced in 1974- , even without Monroe s acquisition (CX 4C ZI-Z2; CX 5D, Z-12; CX 11; see CX 4 35-36; CX 5 2-4, 64-66; Cook 1583-85, 1594, 1613- , 1618-19, 1622, 1625; Nelson 4A-B; CX 77; CX 6B; Cook 1594; Ashford 11,455).

204. The question of the existence of "buyer (45)power""' in the shock absorber replacement market, and its bearing upon the profitability of that market was pursued at great length in the record by respondent (RPF 221-58). The buyer power theory as a defense is based upon the premise that the presence of dominant buyers in a market insures that the market will function competitively.

205. While Walker believed that the state of competition in the replacement market would prevent Monroe from returning to its historic high profitability, Walker nevertheless, held of the opinion prior to the merger, that Monroe s profits would rebound to where it can reasonably be expected to return to better than average rates, either on its own or with the assistance of Walker (CX lob; Cook 1594). "(SJigns of turnaround at Monroe " detected by Walker prior to the merger, were "coming to pass" at the time of trial, according to Mr. Cook, president of Tenneco Automotive (CX loa; Cook 1638). ESP 206. The total net dollar sales of replacement ESP in the United States by manufacturers in 1975 were over $467 million, and in 1976 were over $494 million (CX 264 in camern). 207. The bulk of those sales were made by fivc companies: Tenneco s Walker, Maremont, Questor, Arvin and Midas. The remainder were accounted for by approximately 18 of the domestic and foreign ESP or vehicle man ufacturers. '0 (46) "" Huyer power was describe as an economic phenomenon in which the dominance of large purchasers results in in nsified price competition and diminished profitability for the sel1r,rs in that industry. Respondent rdies buyer power in its effort to explain tho: competitive state of the sh()k klbsorber business. (Nelson 11 19:J; see Wright12 2:JO-:11) '" The list includes: Hooker, Muffer Dynamics, GM, Tamper, Exzostic, Mitchel! , Mercury Tube, Arnold Haviland, Everco, Superior, I1' , American Muffer, Carlson Industries, Hklyes-Albion (through Eagle), F.mton Ford and Eagle. (CX 261 in camera) Walker produces Walker kind private label ESP (CX 27K) Questnr produces AI' murters, Goerlich muffers and priv"tc I"be! ESP (Putman 1095). Arvin rn"nufadufI's ESP under the Arvin and Supreme labels as well as private" !ahels (Hklker 5391. Midas manufactures t-5P under the Midas and IPC I"bds (Moore 1220). Maremont manufacture Maremont and private label r:SP l.tl"'l".I A-, U,,\..

464 Initial Decision 208. Concentration in the manufacture and sale of replacement ESP in the United States is high, with the four leading companies having 73% of this market in 1975, and 73. 5% in 1976 (CX 264 camera).

209. All five of the companies named in Finding 207 supra including Midas, are recognized as significant competitors in the S. replacement market (CX 27N; Baker 537 551 638 641--2 715 725; Pond 829; Putman 1123, 1127; Ince 4936-38; Ashford 11 529-31). 210. Walker is by far the leading manufacturer and seller of US. replacement ESP. In 1975 and 1976 its market share was approximately 31 % (CX 264 in camera). Its sales in those years were almost twice that of the second leading firm; more than twice that of the third; and roughly three times those of the remaining significant suppliers (CX 264 in camera).

211. While the same companies have continued to playa major role in replacement ESP for several years, the market share of Walker has been on the increase (Buck 9389; Nelson 10 934-35 camera 024; Ashford 11 528-31; CX 27N). According to Walker 1976 Five Year Plan presentation, the company expected further market share increases in the immediate years to come (CX 27N). 212. There has been no new entry of any significance in the replacement ESP market for the past several years (Nelson 10 385 027-28 in camera). During that time certain companies, minor factors, exited from that market. Named in the record were McCord Grand Safeguard and Hayes-Albion (Putman 1184, 1203; Kittridge 1411; Stapleton 3457; Nelson 10 380, 10 385, 10 739, 11 074-75). 213. Walker is recognized by its competitors and others as being the price leader in replacement ESP (Baker 602-05; Nedell 944; Putman 1127; see Nelson 10 470-71 , 10 513- , 11 099; but see Wright 8320-21). The record sets forth a notable example of Walker s pricing ability: Following the Monroe merger, Walker initiated a 4% decrease in ESP prices, a move each of its major competitors felt compelled to respond to (Baker 595- , 603--4; Pond 830; Nedell 944; Putman 1128-29; Stapleton 3428-29; Inee 4973-78). When, some months later Walhr raised its prices, its competitors moved in a similar direction (Stapleton 3491; Ince 4976-77). 214. According to internal documents and reports, Walker regards itself as the dominant supplier of ESP to the replacement market (CX 13A; CX 27B, E; CX 107A; CX 288). Walker s studies concerning the acceptability of its products and preferences of jobbers and dealers reinforce this view (CX 104; CX 105). (47) 215. As attested to by complaint counsel's economic analyst Walker in 1975 and 1976 earned a very high rate of return on its Initial Decision 98 F. assets employed in replacement ESP (Nelson 10 553-54 in camera 610, 11 102-05; analyzing CX 26A-B; CX 244; CX 246). 216. Among vehicle manufacturers, GM produces the largest quantity of replacement ESP (CX 264 in camera). But its ESP product line is not broad enough to supply customers other than its dealers. Thus, its replacement ESP sales, together with those of other vehicle manufacturers such as Ford, are confined to the OE service segment of the business rather than the independent aftermarket (Baker 569-73; Robison 3695; Luyckx 3747; Fleuelling 4168; Bracken 4280- , 4305; Nelson 10 307, 10 456, 10 497-98). 217. The percentage of the ESP replacement market represented by OE service sales has been declining steadily for the past several years. In 1976 the OE service share of the market stood at only 8% (CX 264 in camera; read in conjunction with CX 265 in camera; 15G; CX 28D; Cook 1658 in camera, interpreting RX 232C in camera). 218. The total net dollar sales by manufacturers of ESP direct to the independent aftermarket in the United States were $427. milion in 1975 and $458. 3 million in 1976 (CX 265 in camera). 219. Concentration in the sale by manufacturers of ESP direct to the independent aftermarket in the United States is high, with the top four firms accounting for 78.9% and 78.7% of such sales in 1975 and 1976 respectively (CX 265 in camera). 220. As in the case of the entire replacement market Walker is by far the largest supplier of ESP to the independent aftermarket (CX 27N; CX 227 A; Steward 9270). Walker s share of the independent market in both 1975 and 1976 was approximately 33% (CX 265 in camera).

IX. Barriers to En try 221. There is little disagreement between the parties that barriers to entry in this case are high for both shock absorbers and ESP.

Shock Absorbers 222. There are significant economies of scale in the production of shock absorbers (Moore 1288; Poe 8958; Stewart 9285-86; Nelson 132, 10 795). A single shock abserber plant of the minimum efficient scale must be able to produce annually in excess of 6 million shock absorbers, (48)representing in excess of 10% of the U. replacement market for shock absorbers (CX 208Z- , Admission No. 186; Nelson 9914, 10 125, 10,795). Thus, according to complaint counsel's economic witness, there is a very high economy of scale u..LAAJ u.... '-I.l 464 Initial Decision barrier present in the replacement shock absorber market (Nelson 015-16).

223. A substantial investment in plant and equipment is required to enter into the sale and manufacture of shock absorbers for replacement purposes (CX 4T; CX 5Z-15; CX 143L; CX 144B, E; Thompkins 2295; Borick 4753; Poe 8958). Dr. Nelson, testifying in support of the complaint, while recognizing the lack of precise figUi' es indicating the present d8Y cost of duplicating a shock absorber plant, placed the figure in the next-to-highest level of capital cost barrier classification (Nelson 10 127-28). 224. Substantial lead time is necessary to enter shock absorber manufacturing de novo (Petzsch 2443; Bracken 4291; Cox 4408, 4415; Freeman 8847 , 8856 in camera). Witnesses estimated that lead time at eighteen months or more (H. Wright 3786; Bracken 4289-93; Freeman 8847 in camera; Nelson 9678-79). 225. Entry into the sale of shock absorbers to the independent aftermarket requires a substantial investment in warehousing facilities and inventory; a substantial marketing organization including a large national sales force; and the financial ability to grant a variety of extended payment terms to customers (CX 144E; CX 191B-; CX 205; CX 208Z-19, Admission Nos. 208-211; Pond 747 755, 777, 779-80; Verner 908-9, 914; Nede!! 946; Glassman 1027; Putman 1108; Cook 1597-1600, 1704; Bush 3287; Robison 3677-78; Luyckx 3736, 3746; Borick 4753; Freeman 8875; Stewart 9256-57 9279, 9281, 9283-84; Kornafel 9433, 9436; Fouty 9483, 9488; Nelson 9690- 9709- 128-30 198 255 115-16). 226. To compete successfully in the sale of shock absorbers to the independent aftermarket, a company must offer several different basic sizes, types and quality levels of shock absorbers, and a full line of shock absorbers fitting most vehicles made or sold in tbe U.S. (CX 144E; CX 208A- , Admission No. 187; Verner 908-9; Nedell 946; Bush 3306; Robison 3670-71, 3677, 3691; Luyckx 3745; Kalupa 4205- 07; Buck 9374; Schubert 8504--5 in camera; Kornafel 9436; Nelson 9685-87, 9918, 10 128-29). A firm must distribute nationally, must be able to supply the products in a relatively short period of time, and must be able to supply nearly 100% order fill (CX 4F; CX 208Z- , Admission No. 192; Pond 777-79; Verner 908-09; Nede1l946, 968; Glassman 1027; Cook 1600, 1627- , 1630- , 1704; Stapleton 3477; Robison 3695; Luyckx 3745-46; Buck 9374; Kornafel 9436-38; Fouty 9487-88; Nelson 9713- , 10 128-29, 10 193; Ashford 11 497-98). As of 1974, to meet the needs of the domestic vehicle ( 49Jmarket alone more than 5 000 shock absorber part numbers were required (CX 143L; see CX 208A, Admission No. 2). Initial Decision 98 F. 227. The practice by major producers of providing consigned inventory to customers, along with dating terms, constitutes another absorbers to thebarrier to entry into the sale of replacement shock wholesale and retail channels (Nelson 10,128-30). Monroe and Maremont promote their products by extensively consigning inventory, thereby enhancing product availability and thus sales volume (CX 4N; ex 21C; CX 191C). While Monroe supported these consignments with extensive advertising, the real incentive to the dealer to agree to accept these inventories has been a promotional program offering attractive dealer premiums such as low cost trips (CX 4N; CX 5L; Cook 1599--1600). This program "enabled the dealer and his wife to travel virtually any place in the world for a modest out-ofpocket cost." (CX 5L) The program boosted Monroe s sales and gained Monroe such a strong dealer allegiance that many wholesalers felt compelled to carry the Monroe line (CX 5L). 228. In 1975 and 1976, Monroe, Maremont, Questor, and GM granted a variety of extended payment terms to their replacement Admission Nos. 208-11; shock absorber customers (CX 208Z-19, Robison 3677-78; Kalupa 4203, 4240).

229. Suppliers of shock absorbers to muffer installation chains have furnished various forms of financial assistance to such chains to enable them to increase their number of outlets (Verner 908-9; substantial Nedell 961-64 in camera). Such support can be of importance, especially for a rapidly growing retail installation chain (Verner 909- 10; Nedell 961-66 in camera). absolute cost barrier to entry into the 230. There is a moderate replacement shock absorber market presented by the technical production of machinery, requirements for entry, including in-house 165, 10 843, 10 845). and the existence of patents (Nelson 10 231. The current major producers of shock absorbers are long established firms (Putman 1192-93; Robison 3701; Bracken 4280; Fleuellng 5795). These companies enjoy an absolute cost advantage over potential entrants by virtue of the ownershipCXor169A-G;controlCXof numerous U.S. and foreign patents (CX 168A-B; believes that its shock 224Z-59; Petzsch 2452, 2465). Monroe absorber patents have afforded it valuable property rights and it is (CX 4V). These its policy to enforce its patent rights in the courts patents are important in the manufacture of shock absorbers especially advanced design shock absorbers which require two or more years to develop and perfect (Givens 397). The significance of should not be overstated; as the shock absorber patents. however, observed by Walker prior to the merger: (50) Monroe believes that while its ride control patents have afforded valuable proprietary . . . lC.l 464 Initial Decision rights. its engineering and manufacturing, and particularly its marketing capabilities are the principal factors in maintaining its position in the market. (CX4V) 232. Monroe designs much of the tooling and some of the equipment used in its shock absorber plants (Hegel 2167 , 2169- 2176, 2186, 2201). Monroe also manufactures in-house some of its plant equipment (Hegel 2169- , 2188, 2193; DeLisle 11 250). 233. Tbe major producers of shock absorbers for the replacement market have developed a high degree of product differentiation for their products, particularly regarding sales to the traditional wholesale channel (CX 4N; CX 5" ; CX 21C; Bush 3312-13; Freeman 8875; Stewart 9256-57, 9278-79; Buck 9372; Nelson 10 132 , 10 193 795). It would be a difficult matter for a new entrant to overcome these preferences, according to the record (Putman 1152-54; Barna 1348-50; Stewart 9256-57, 9278-79; Nelson 10 048). 234. While brand name loyalty is of less significance in private label sales, there was some testimony that the reputation of quality possessed by the major producers was important to private label purchasers who installed shock absorbers (Glassman 1028-32). 235. Another factor important in establishing and maintaining buyer preferences in the sale of shock absorbers is the use of an extensive field sales force which calls not only on WDs but also calls directly on the WDs' direct and indirect customers, jobbers and retail outlets, to assist them in the sale and promotion of shock absorbers at the retail level (CX 21C; CX 145C; CX 191B; CX 2082- Admission No. 203; Verner 908-09; Cook 1597-99; Bush 3305-06; Stapleton 3477, 3479-80; Robison 3667; Freeman 8875; Stewart 9257 9279; Kornafel 9434-35; Nelson 9718-19 , 10 048, 10 128-30 , 10 193; Ashford 11 438). As of 1976, Monroe had more than 250 such field representatives promoting its replacement shock absorbers, the largest sales organization specializing exclusively in the shock absorber replacement market (CX 141G; CX 1431). 236. In addition, a separate sales and service force is needed to perform the somewhat more sophisticated servicing program required to successfully sell to nontraditional replacement shock absorber accounts (Stewart 9283- , 9288-89). 237. Advertising and promotional expenditures also have helped replacement shock absorber manufacturers that sell to thc wholesale channel and certain mass merchants to achieve and maintain a high degree of product differentiation (CX 3C; (51JCX 5" ; 143I; CX 144E; Pond 765; Putman 1153; Cook 1597; Bush 3306-07; Stapleton 3473-74; Robison 3677- , 3706; Luyckx 3746; Fleuelling 3960; Cox 4379, 4406; Freeman 8875; Goodman 9070, 9074; Stewart 9256- Initial Decision 98 FTC. 9279; Nelson 9690- , 9717- , 10 048 , 10,128-31 , 10 193; Ashford 11,438). Monroe has recognized the importance of these marketing efforts to its success in the replacement market, as evidenced by the following Monroe advertising representations: Monroe is first in shocks because we are first in brand awareness and preference. ve enjoyed that leadership because of OUf national advertising efforts over the past 50 years.

(CX 319B, CX 332D) 238. Shock absorber manufacturers have made extensive use of c()nSllrncr advertising, often on television or radio as well as using cooperative advertising programs directed at the installers (CX 143I; CX 144E; 167; Pond 765; Putman 1153; Stapleton 3473, 3480; Robison 3677, 3708-08; Nelson 10 206; Ashford 11 438). Monroe has for years engaged in extensive consumer advertising and promotional programs for the replacement market, with the claimed result that consumer awareness of the Monroe brand is greater than that of any other brand of shock absorber (CX 143I; CX 144E). 239. Monroe began consumer advertising for replacement shock absorbers in 1956 (Fleuelling 3940). Since then its advertising program has continued to grow, as has that of its leading competitors (Robison 3677 , 3708-08). By 1974, Monroe emphasized network television sports programs, resulting in an estimated 1.4 billion adult impressions across the United States. Monroe credited its advertising "for the fact that among car owners who would specify brand, the preference for Monroe (in 1974) was almost two and one half times greater than for the closest competition " (CX 143I; see CX 144E). As of 1974, Monroe s Chairman announced that Monroe was "currently launching a new advertising campaign, concentrated on top-rated television sports programs, and supplemented by product and marketing messages in automotive trade and consumer publications. During the remainder of calendar 1974 it is anticipated that your company s products will be viewed over 460 million times" (CX 146B). Following this campaign, Monroe made the following representations to the replacement market in 1975: "That' s advertising muscle. The kind that keeps Monroe a leader in brand awareness and preference. A 1975 survey supported that position with an awareness score for Monroe that is 106% above its nearest traditional distribution competitor" (CX 330D).

240. Monroe and its subsidiaries in fiscal 1975 incurred advertising costs of $12.7 million, and in fiscal 1976 $13. 1 million (CX 191E). Monroe also maintains an unlimited cooperative advertising program for its brande accounts (Stapleton 3480). Under this program 1 I' l'O .1""V , H 464 Initial Decision Monroe pays 50% of all (52JMonroe product advertising done by such accounts (Stapleton 3480; Kalupa 4200). 241. As mentioned in Finding 240 supra Monroe renders service and assistance to private label accounts. In the instance of Midas Monroe helps in developing sales promotion programs, and provides catalog assistance and funds for cooperative advertising (Moore 1260).

ESP 242. There are significant economies of scale in the production of ESP. The plant or plants of minimum efficient scale necessary to produce a full line of replacement ESP would account for in excess of 10% of the unit shipment in the U.S. replacement market (eX 25X; Bracken 4349; Ashford 11 534-35).

243. Entry into the manufacture and sale of replacement ESP is very expensive (Baker 694; Ashford 11 534-35). Manufacturing facilities of minimum efficient scale necessary to produce a full line of replacement ESP would cost a total of $35--0 milion, in the judgment of Monroe s current president (Ashford 11 535). 244. To enter the independent ESP aftermarket on a major basis a firm would have to make substantial investments in warehousing facilities and inventory, establish a substantial marketing organization, including a large national sales force; and have the ability to grant a variety of extended payment terms to customers (CX 27K; CX 205; Baker 663; Verner 914; Glassman 1026; Kittridge 1407; Schultz 1795; Jaffe 280&-07; Stapleton 3477; Foster 5107; Ashford 438 531; see CX 208Z- , Admission No. 215). 245. In order to compete successfully in the sale of ESP to the independent aftermarket, a producer must offer a full line of ESP fitting most vehicles made or sold in the U.s., including foreign made vehicles (CX 2B; ex 25Z-3; CX 27M, Q; Baker 537- , 540, 544- 63&-37, 658; Verner 901- , 908-09; Kittridge 1404; Bush 3303-05; Kornafel 9433). A firm must also distribute nationally, must be able to supply ESP products in a relatively short period of time, and must have the ability to supply nearly 100% order fill (CX 4F; CX 208Z- 20-Z-21 , Admission Nos. 21&-217, 219; Baker 544--5, 660, 672; Verner 908-09; Nedell 968-9; Cook 1597- , 1630; Bush 3317; Stapleton 3456, 3473-74; Kornafel 9433, 9437, 9449-50; Fouty 9487; Ashford 11 438). Walker attributes its gain in market share over the last two years, in part, to its ability to deliver 98% complete orders of ESP within five working days (eX 25Z-3 , 4; ex 27N; see Kornafel 9434 9437 9449-50).

246. The practice by the major ESP producers of providing dating Initial Decision 98 FT. terms, advancement of advertising funds, (53Jcapital expansion funds and loan guarantees for customers constitutes another barrier to entry into the sale of ESP (Baker 663; Verner 908-09; Nedell 938 958; Jaffe 2793- , 2806-7; Stapleton 3477 , 3490; Fouty 9491; Ashford 11 532).

247. At the close of the year 1976, the record shows that Walker was the owner of approximately 150 unexpired ESP patents, with about a dozen applications pending (CX 40A-W). 248. Walker also possesses extensive proprietary ESP manufacturing knowledge and techniques. Traditionally, Walker has built internally of its tooling and specialized processing equipment, and some of its test equipment (CX 25Z-7; Schultz 1738, 1787- , 1804- , 1846-7; Bracken 4350).

249. The leading replacement ESP producers have been long established in that business (Baker 649; Pond 743-44; Putman 1109). These companies have developed a significant degree of product differentiation for their products, particularly on sales to the wholesale channel (Baker 553- , 558- , 567, 642, 668; Glassman 1026; Putman 1152-54; Foster 5107; see CX 27M; CX 104A- Witness Putman of Questor, speaking of the significance of brand name recognition, regarded this as "very important" ln other words, had it not been for that, some of these lesser companies like the Havilands and Hayes-Albions would have made a big penetration " (Putman 1154).

250. Another obstacle to success in selling ESP in the traditional replacement channel is the usual practice of WDs to stock only one manufacturer s line of ESP products at a given location (Baker 592- 921; Putman 1129-30; Bush 3303; Stapleton 3475; Nelson 10,490). 251. The witnesses mentioned a number of reasons, among others, for this WD practice: the large physical space (54Jneeded to warehouse two ESP lines; problems generated by the necessity of having to use more than one ESP catalog by the WD and his customers; purchase order confusion; uncertainty in meeting truckload freight requirements; lack of part interchangeability in competitive product lines (Putman 1130; Bush 3303-04; Stapleton 3475-76; Nelson 10 490- , 10 771).

252. For an ESP supplier to obtain new WD business, a total changeover" is the standard procedure. Under this arrangement, a .. A prime deterrent to thegrowth of a retail mum..r installation chain is the acquisition of real prop,'rty for ncw locations (NedelJ 939 , 961 in nmlcra; Jaffe 2793-94J- Growing, small chains often lack the funds n""""- 'HY for such property acquisitions (N"deJi 939; Jaffe 2793-94), Thus, such finns become dependent for their growth on their ESP suppliers' ability to pruvidl' the requisite property acquisition funds (NedI'll 938-0,in961-f2campm Jaffe 2793-94), One method by whi"h such chains may be helped is to have the supplier e-uarantee the mortgage li,r t.he outlet locations (Nedel! 939--0; .Jaffe 28071. For example, Walk", provided capit d expansion funds to Car- , a leading "h"i" Dr mumer installation shops (CX 27K; ex llUA-B; N..fJeI1938; ,Jaffe 2793 94 2806' . .

TENNECO, INC. 517 464 Initial Dccision supplier must physically remove all of the WDs' old ESP inventory, and replace it with a full line of the new supplier s ESP brand ("stock lifting ). Since this is done at no cost to the WD, it is an expensive measure for the supplier (Baker 597; Pond 867-68; Bush 3306-07; Stapleton 3475).

253. The major ESP producers, including Walker, maintain a large number of field sales personnel who call upon not only WDs but also upon the direct and indirect customers of the WDs jobbers and retail outlets to assist in the sale and promotion of ESP (CX 24G-D; CX 27M; CX 104C; CX 208Z-22, Admission No. 223; Baker 663; Verner 909; Bush 3305-6; Stapleton 3477; Kornafel 9434-35; Ashford 11.438, 11 507, 11 531-32). Walker, as of 1976, had a sales force of approximately 290, which it held in high regard (CX 24B, H; CX 39; CX 104C; CX 208Z-22, Admission No. 223). 254. Advertising and promotional expenditures have also assisted ESP suppliers selling to the traditional channel to achieve and maintain a high degree of product differentiation and brand name loyalty (CX 38A; CX 104G-D, G; Baker 567-68, 661 , 66&-69; Glassman 1026; Putman 1152-53; Moore 1276-77; Stapleton 3477; Foster 510 in camera; Nelson 10 201- , 10 337; Ashford 11 506-7 531). While Walker s promotional efforts, in the past have been geared towards the use of premiums and trips for wholesalers and installers, there has been significant recent advertising by the company (CX 38A; CX 316B; CX 318C; CX 329A-D; Baker 668-70; Cook 1704--4; Stapleton 3477; Foster 5107; Nelson 10 200- , 10 920 924- , 10 964; Ashford 11 503--4, 11 506-07, 11 532). 255. In 1976, Walker s point of sale and trade journal advertising expenditures were approximately $1.5 million, more than double the 1975 amount (CX 38A). In 1976, Walker also spent an additional $2. milion for other advertising and promotional purposes (CX 38A-B). Included in these latter expenses was $1.1 milion for "promotional support funds for distribution systems" (CX 38B). Walker s "initial objective" in such advertising and promotional efforts is to "support the dealer and thereby increase his exhaust volume " while its prime objective is to bind the dealer s loyalty to the Walker product since an established brand loyalty by the dealer can be a deterrent to the jobber and the warehouse distributor in changing exhaust lines (CX 27J; Nelson 10 965; see CX 24G-D). (55)Walker declared that competition cannot match the size and scope of our current wholesaler marketing activities. We do not believe our competitors have the financial strength to match the strategy " (CX 27J; see CX 24G-D).

256. Walker has recently increased its consumer advertising of 518 FEDERAL TRADle COMMISSION DECISIONS Initial Decision 98 F. ESP since brand awareness on the part of consumers has been on the rise, especially with the increase in self-repair among automobile owners (CX 240; ex 321; CX 349, p. 18; Cook 1657 in camera, 1712). With respect to consumer advertising, Tenneco s 1979 Annual Report stated:

A major development in Walker Manufacturing Company s approach to its market was inaugurated in early 1979 when the unit became the first manufacturer of aftermarket exhaust systems to advertise in national media. The Walker campaign which was successfully test marketed in 1978, will appear on national television and radio as well as in national magazines and leading newspapers and trade publications. (CX 349, p. 18) During 1979, Walker used extensive TV advertising for its Walker brand ESP (Nelson 10,205, 10 920, 10 964-'5; Ashford 11 503-04). Walker also maintains a cooperative advertising program with its customers to promote ESP sales (Nelson 10 205, 10 965-66; Ashford 503).

257. By 1978, Midas was also engaged in a national advertising for its outlets, using television, and supplementing this with radio and print advertisements (Moore 1277; Nelson 10 966). Walker consumer advertising program was in part in response to this Midas effort, according to complaint counsel's economic witness (Nelson 966).

258. In its five year marketing plan, 1976-81, Walker states that its ". . . aftermarket strength is a result of our superior engineering expertise. our manufacturing and distribution network, our sales force, our product services, and the greater financial strength afforded by our profitability and our relationship with Tenneco" (CX 24B; see CX 104G-D, G).

Compatibility Factors Respecting Shock Absorbers and ESP 259. Much evidence was adduced in this case concerning the existence of commonalities in the production and sale of shock absorbers and ESP. This evidence concerns marketing (56Jchannels and methods, common competitors and customers, as well as similarities in manufacturing, engineering and other technical steps involved in research and development.

260. In the opinion of witness Baker of Arvin, shock absorbers are "very compatible" with ESP in the area of distribution and sales. So are other automotive products sold in the aftermarket, such as spark plugs. And there are other replacement products, such as tires and batteries that are not as compatible (Baker 664-'8). 261. It was the testimony of witness Glassman, a purchasing ,, , , , r..l'1."'.

464 Initial Decision agent for independent automotive service centers, and a man of longexperience in the automotive aftermarket, that, in general everybody that installs exhausts will install shocks. It is the next item after exhaust as an add-on selling feature. It is almost one and the same " (Glassman 1009; see 992 97). 262. Witness Moore, a high official of Midas, testified at 1248: Well, again, I believe that the two product lines are compatible all the way through the process, from manufacturing, distribution, to the sale to the ultimate end user (sic). And I think that there are advantages as I say at each level" (See also Moore 12.35- , 1246-9 1286-90).

26.3. Prior to the merger, Walker s president, Mr. Cook, stated in an office memorandum discussing the proposed acquisition: During the past reviews of Walker s five year plans, we have had discussions with the Tenneco Planning Department reg-arding potential new product lines that would most closely fit with our present exhaust business, and the answer has been collectively agreed to he shock absorbers. As is detailed in the preliminary background attached the product hoe is the most compatible and is significant enough to justify pursuing. (CX loa; see CX5P; CX I.3A; see also CX 4F G; CX 20G; CX 21A 264. A report prepared in July and November 1976 by Tenneco Corporate Development Department, summarizing its view of the shock absorber business and focusing on Monroe, stated: An acquisition of a shock absorber manufacturer would be advantageous to Walker in a number of ways. As pointed out before, shock absorbers are sold through the same channels of distribution that exhaust systems are Bold. Additionally, shock absorbers would support the approved move into the U.S. retail market by Walker. (CX .3C) (57) 265. In a series of three documents, each entitled "Proposal to Acquire Monroe Auto Equipment Co. company officials discussed the various compatibility factors existing between shock absorbers and ESP, and as respects Walker and Monroe in particular, in manufacturing and distribution as well as in marketing (CX 4A CX 5A-Z-22; CX 6A-C).

266. In his presentation to the Tenneco Board of Directors requesting authorization to acquire Monroe, Walker s president pointed out the compatibility between Monroe shock absorbers and Walker ESP in their manufacture, distribution, sales engineering and research and development, and the fact that both Walker and Monroe have common competitors and customers (CX 20A, G H; CX 21C-F; CX 187 A).

267. In 1978, following the merger, Tenneco established the g., Initial Decision 98 F. Tenneco Automotive division to oversee the operations of Walker Monroe and the Speedy Muffer King retail specialty unit that was recently formed for U.S. operations (CX 349, p. 127; Cook 1570-72 1646; Kalupa 3534; Fleuelling 5784; Ashford 11,401, 11,481-82). In particular, Tenneco Automotive performs market research, personnel hiring, accounting and finance functions for the three operating divisions, and is expected to perform purchasing for them (Kalupa 3534, 3537-38; 3558; Ashford 11 649). Furthermore, subsequent to the Monroe acquisition, Tenneco designated Mr. James Ashford, the Executive Vice President of Walker, as President and chief executive officer of Monroe (Cook 1608; Ashford 11 480-82). Manufacturing 268. Respondent presented elaborate evidence, including slide shows and physical exhibits, demonstrating the differences between the production of shock absorbers and ESP (see, e. Hegel 1926-98 1999-2061 in camera 2067-2226; Schultz 1793-1818, 1825--0; RX 243, RX 244, RX 248; RPXs 2, 6, 9, 13, 15, 16, 17, 18). Nevertheless there is evidence of the existence of certain features common to the production of both products.

269. Prior to the merger, respondent's Corporate Development Department reported:

The manufacturing process for exhaust and shocks are very similar, with both products starting from sheet steel that is welded into tubing. This probably is the most important common manufacturing process and one in which Walker has a great deal of proprietary knowledge. Other metal components are fabricated by machining, forming or shaping, and are assembled or attached together. The (58Jexhaust systems probably require more forming and welding, whereas the shock requires more machining, some wire processing, and some hydraulic work. Regardless of the detail process, both products are metal fabricated products with very similar tcchnolo6'Y and production skill requirements.

(See CX 4F; CX 5Z; CX 21D; CX 20G; CX 21D; CX 142F G; Givens 438-39 484-85; Baker 712 13) 270. Both shock absorbers and all major ESP components (muffers and exhaust, connecting and tail pipes) require the use of a pipe or tube mill as a basic manufacturing unit (CX 4F; CX 8; CX 15J; CX 142F; CX 208Z-24-Z-25, Z-37 Z-28, Admission Nos. 237 240 254 257; RPX 2; RX 244; Givens 408-10, 438, 480- , 539; Pond 755; Putman 1134; Moore 1289; Schultz 1795, 1799-1800, 1834 35; Buck 9383 84; Nelson 10 169-70).

271. Tube mill production represents 25-30% of the material value cost of a shock absorber (Givens 410 438; Pond 775; Buck 9384; ,.. , . ..,_ ru' , ,... u, 464 Initial Decision Nelson 10,169). Of the total cost of a shock absorber, tubing represents approximately 13-14% (Hegel 2067-68, 2070). 272. The tubing in exhaust pipes, connecting pipes and tail pipes constitutes virtually the entire material value of those components (Givens 410; Schultz 1795-99; Buck 9384). In the case of muffers which consist of a combination of tubing sections, small stamped parts, and a formed shell and which are assembled by use of welding techniques and in some cases, metal forming closure techniques tubing constitutes approximately 25% of the material value (Givens 410, 438).

273. It is possible for the same tube mill to produce tubing for both shock absorbers and the pipe portion of ESP (CX 4F; CX 8; CX 21D; Putman 1134; Hegel 2211-12; Nelson 10 169). For a period of one and one-half to two years, Questor utilized a common facility to produce both some of its ESP pipe and all of its shock absorbers (CX 42B; Putman 1134, 1155-57). Subsequent to the acquisition, as of July 1 , 1978, a Walker tube mill was in the process of being physically transported to Monroe s Paragould, Arkansas plant, for attempted use in shock absorber manufacture (Hegel 2211-12). 274. The manufacture of both ESP and shock absorbers requires tube cutting and minor stamping operations (RX 244; (59JGivens 401 409- 484; Schultz 1802--4 1807 1817- 1826 1836; Hegel 2138-39). Both also require the extensive use of welding, and both also use drawing, swedging and chrome plating operations in their manufacture (eX 15J; CX 208Z-25-Z-26, Admission Nos. 244-5 248; Givens 409- , 424- , 479 , 484; Moore 1289; see Schultz 1797 1804 1825-26; Hegel 2145).

275. Such minor starn pings are produced on standard type punch presses or stamping presses (Givens 401; Schultz 1817-18). Both shock absorber and ESP producers commonly manufacture the required minor stampings in-house (RX 244; Givens 401--2; Schultz 1802--4 1817- 1830 1836).

276. On the other hand, respondent argues that merely because the above operations for making shock absorbers and ESP may be described by the same "g;eneric names " this is not determinative of whether they are technologically similar as a practical matter. The testimony put forth by respondent's technical witnesses was that a great deal more precision and sophistication was required in the manufacture of shock absorbers." Three of the areas identified, for "' (RPX 2; Given!;, 409; Pond 775; Schultz 1754- , 1foo, 1802--, 183m "' RRI'F 109" . (MJontoc s minor stampin uperations arc of a completdy different nature- For example, thc spring di!;c is made to a thickness of .0012 inch!'" with precision diameter and hoJes, It is made on a high spe automated press which t!Jrns out the part at the rate of three or four a second (Hegel 2022), Another preeiHion stampi gisthereholJndvalve pringHea!." (Hegel2032J. 36 7- 4 f) - R? - . (), "1 , .

Initial Decision 98 F. example, by Monroe s chief engineer (for advanced engineering and research), Mr. Hegel, were welding (2069-70), "' tolerances in testing (2038; see Tompkins 2358), as well as the precision stamping described in the first footnote in this finding (Hegel 2022- , 2032 2039-41, in camera).

277. There are at least some commonalities in research and development technology regarding shock absorbers and ESP (CX 5- A; Givens 484-85)." A Walker study states: "Walker exhaust system research utilizes dynamics of sound dampening, which is quite similar to theory of motion vibration utilized in shock absorber research" (CX 15J; Givens 484). Walker s (60JPresident, Mr. Tom Cook, cited compatibility in research and development for the two products in his presentation to the Tenneco Board seeking authorization to acquire Monroe (CX 20G; CX 210). Commonality in research and development is shown in the instance of Maremont's engineering and product development staff, whose services are expected to and de encompass both shock absorbers and ESP (Givens 395- 484-85; see Buck 9424).

Distribution 278. Shock absorbers and ESP are distributed through identical channels from the manufacturer to the consumer (CX 4G; CX 5P- CX 150-E; CX 20G; CX 210; Baker 589, 664; Moore 1248; Cook 1586; Bush 3259-60; Fleuelling 5774-75; see now chart, CX 5Q). 279. In the traditional wholesale channel of the independent aftermarket, shock absorbers and ESP are sold by manufacturers to WOs, who in turn distribute these products to jobbers for resale to garages, service stations, etc., for installation on the vehicles ultimate consumers (Baker 664; Moore 1248; Cook 1586; Bush 3259- 60; Fleuelling 5774-75).

280. In the retail channel of the independent aftermarket, both products are sold directly to mass merchandisers, chain stores, tire companies, and muffer specialty installation chains (CX 3C; CX 5P- Y; CX I50-F; Moore 1248; Kittridge 1415-16; Jaffe 2804; McAdams 8988; Fleuelling 5780-81; Garfinkel 9206). 281. Shock absorbers and ESP are products of major importance carried by WDs, certain mass chain merchandisers such as Sears and muffer installation shops (Baker 540-41; Verner 883; Nedell 929; Glassman 1019, 1034, 1068; Bush 3297, 3315; TerryI4451). 282. However, as respondent points out, shock absorbers and ESP .. Witness Givens, formnly vice president incharlie or research and engineering at :'arernont described the welding processes for ESP and shock absnrbers as " in general, similar" (Givens 410) ' Respondent's witness Mr. Hegf'i, however ,;aw "very little" in ""mm"n (liegel 19311 TENNECO, INC. 523 464 Initial Decision are not sold to all classes of customers in equal amounts. For example, the M.E.M.A. data for 1975 shows that, as between warehouse distributors and nontraditional national accounts, more than 67% of all muffers and 83% of all pipes were sold to traditional customers (CX 121C). In the same time period, M.E.M.A. data shows that less than 38% of all shock absorbers were sold to warehouse distributors (RX 30E-H). In the nontraditional channel, ESP sales are largely to muffer shops, while in excess of 90% of nontraditional shock absorber sales are to mass merchandisers (RX232; RX 550D; RX 551A-C in. camera; RPF 315).(61) 283. There was testimony by certain WDs" that, on an inventory average, ESP ranked at or near the top of all automotive products in tenns of total WD sales, at or around 10%, whereas shock absorbers accounted for but 3 5% (jf sales (Bush 3297, 3315; Stapleton 3476-79).

284. Successful competition in replacement sales of both shock absorbers and ESP requires the ability to supply in a relatively short period of time;. an order. fill of close to 100%; and national distribution (CX 4F G; CX 15D-E; ex 27N;Baker 544-5, Pond 777 79; Moore 1235 , 1248; Cook 1627- , 1630-32; Stapleton 3477). 285. There is testimony and documentary evidence in the record that shock absorbers and ESP can sometimes be effectively combined in one distribution and delivery system (CX 4F- , CX 5P-R; CX 13A-B; CX 15D E; CX 205; Baker 589- , 666-67; Glassman 1036- 37; Moore 1218-19, 1234-36; Cook 1625 but see 1635; Nelson 247, et seq.

286. Witnesses attested to similarities in warehousing and handling both products (Baker 589; Pond 756; Moore 1218, 1234, 1236; see CX 13A. With respect to this, Midas' Mr. Moore stated: They (area relatively easy to handle. In fact shock absorbers and muffers are not dissimilar-They are - both boxed palletized, andean be moved by forklifts, arid are relatively easy to handle from a material handling standpoint. The warehousing technique would be very similar. Shock absorbers and muffers would both go intocanbe stacked very high, good cubing utilization Qut of them. Their out processing from the standpoint of order picking and loading back onto a trailer for a customer order are similar. (Moore 1236) 287. Both shock absorbers and ESP can be and are stored by manufacturers in regional warehouses (CX 13A; CX 205; Pond 756; Verner 886-7; Nedell 935; Putman 1104-05, 1108, 1118; Moore ". Only four WDs testified in this cas, Messrs. Bush, Stapl('tQn, Kornafel and Fauty(See Appendix Ato RPF) Initial Decision 1218-I9). Prior to the Monroe acquisition 98 F. warehouses handled and shipped together, threeboth shockof Walkerabsorbers and s regional ESP (CX 13A; CX 208K, Admission No. 22; Cook (62)1635; Jaffe 2804; Terms4467; Nelson 197; Ashford 11 considering the use of its ESP distribution538). Infacilitiesaddition toWalkerdistribute was Monroe shock absorbers (CX 4F; CX 208Z-30 72). A single Admission distribution system for both shock absorbersNos.and ESP271was proposed by transferring a portion of Monroe physical distribution. functions for shock absorberss warehousingto Walkerand existing ESP distribution facilities (CX 5V; CX 208Z-30 Nos. 271 272; Ashford 11 , Admission 460 466). )t w,asrecognized that Monroe by Walker s three 'production facilities existing shipping and manufacturing facilities"are reasonably close to Our warehouse and ship their products from, and it is proposed to OUr distribution, K; CX 5V, Y, Z-14-Z-16). Subsequent to the acquisitionpoints" (CXof Monroe, a major portion of the warehousing and shipping function for Monroe shock absorbers was transferred to the Walker distribution centers "with very little additional fixed cost" (Cook 1625- Fleuelling 5786-87;

Nelson 10,197; Ashford 11,460). 26; all Walker distribution centers contain both ESP andThus,shockcurrentlyabsorbers (Cook 1625-26; Fouty 9475, 9492-93). 288. Walker, by warehousing and distributing all aftermarket shocks sold by Monroe, projected annual cost savings from lower freight costs to be $495 000, and annual savings of $100 combining Walker s and Monroe 000 by Admission Nos. 275- s traffic departments (CX 208Z-31 277; see CX 5X, Z-14; Ashford 11466). 289. All of Maremont's field warehouses store and ship ESP and shock absorbers together (Pond 756 1037; Stewart 9281). Maremont makes, 762;combinedNedellshipments935-36; Glassmanof shock absorbers and ESP to its nontraditional shipments of its shock absorbers and its World Parts accounts and combined includes ESP to WDs (Pond line which 762; Nedell Kornafel 9431; Fouty 935-36; Glassman 1037; 9475-76; Nelson 10943-44), Arvin ment warehouses handle both shock absorbers and ESP sandreplace-ship them together to the nontraditional channel of distribution (Verner 887, 892, 921; Glassman 1037; Cook 1635;

nine distribution centers which warehouseNelsonand combine9857). Questorshipmentshas of both shock absorbers and ESP (CX 205; Glassman 1037; Putman 1104--5, 1108, 1118; Teryl 4433operates eight warehouse locations, which4465; serveGarfinkel 9207). Midas installation shop franchisees and its WD customers, both its muffer Each of these locations warehouse both shock absorbers(Mooand ESP and 1234-35). ship them to al1 of Midas' customers (Moore 1234-35; Nelson 10 960). TENNECO, INC.

464 Initial Dccision 290. There was testimony that on shipments of shock absorbers and ESP, these products are generally received on the same dock warehoused in the same facility, handled by similar personnel in the warehouse and, in the case of WDs, reshipped together from the same dock to jobbers or retail outlets (Goodman 9077-79; Kornafel 9441-43; Fouty 9493- , 9500). (63) 291. Use of common shipments of ESP and shock absorbers can result in outbound freight savings, as shock absorbers can be added to an ESP shipment for virtually no additional cost (Baker 576, 589- 666-7; Nedell 936, 955-56; Moore 1236; Kittridge 1416-17; Cook 1634; Teryl 4466; Nelson 10257 et seq. Ashford 11 466-8). If only ESP are shipped, a manufacturer may pay for a full weight load (24 000-30 000 lbs.), even though a van filled with these bulky parts may weigh less than the maximum truck load weight (CX 208Z-32 Admission No. 281; Kittridge 1416-17; Cook 1634; Teryl 4466; Nelson 257-61; Ashford 11 466). If both shock absorbers and ESP are combined in a single load, the high weight density of the shock absorbers in comparison to ESP would operate to raise the load weight up to the legal limit with little sacrifice of carrying capacity for ESP, thereby achieving several thousand pounds of additional freight at no additional cost (CX 4G; CX 5V, X; ex 13A; CX 77; Baker 576; Moore 1235-36; Kittridge 1415-17; Cook 1634; Teryl 4466; Kornafel 9436; Nelson 10 257-61; Ashford 11 466). 292. Combining shipments of ESP and shock absorbers to mass merchandisers and muffer installation shops, even for "1. TL" (lessthan.trailerload) shipments, enables customers to place orders more frequently, resulting in a reduction in inventory, and hence costs and in obtaining more complete order fill (CX 4G, P; CX 5X, Z-13- 14; Verner 919-20;, 922; Nedell 956; Glassman 1021; Cook 1632; Garfinkel 9207; Nelson 9853- , 10 257; Ashford 11 537), The ability to obtain combined shipments ofLTL lots is especially important to a muffler installation shop in its first few months of business operation where merchandise is frequently ordered in small amounts (Ned ell 956; Nelson 10 628-29).

293. There was testimony that the ability to offer combined ESP and shock absorber shipments is of some advantage to the manufacturer in obtaining new customers in the nontraditional channel and in retaining old ones (Pond 763-64; Kittridge 1415-18; Jaffe 2805-06; Teryl 4433- , 4466; Nelson 9977, 10 198, 10 262). many buyers of shock absorbers prefer to buy both shock absoJ"bers and ESP from the same source (Verner 887; Nedell 936; Glassman 1020-21 , 1027; Kittridge 1415-18; Jaffee 2805--6; Nelson 9977). In purchasing shock absorbers and ESP from a single source a firm can save , Initial Decision 98 F. oneadministrative expense by having only one order to place, invoice and freight bill to check, and the ability to qualify more easily for maximum discounts and prepaid freight (Pond 763; Verner 887; Nedell 936; Glassman 1021, 1037-38; Moore 1246-7; Kittridge 1415-17; Jaffe 2805-6; Tery14466; Garfinkel 9207; Nelson 9853-54, 9977 257-58; Ashford 11 537). There was evidence that the lack of facilities for combined distribution and shipment of ESP and shock absorbers cost Monroe the J. C. Penney account (CX 5X; CX 21E; but see Ashford 11 ,544-5). ( 64) 294. As noted, purchasing combined shipments of ESP and shock absorbers could result in a lowering of costs for a customer buying in trailerload lots in a number of ways (Fleuelling 3966, 5789; Teryl 4465-6; Nelson 10 271-72; Ashford 11 537). WD witnesses testified that, on payment terms for shipments of Walker s ESP, a WD receives a 15-I6% discount and no dating for LTL shipments, but discounts of 22% to 25% and extended dating terms for full trailer load shipments (Komafel 9436; Fouty 9490-91). Monroe also offers WDs extended discounts and dating terms on truckload shipments (Stapleton 3496; Komafel 9437; Fouty 9491-92; Ashford 11 498). A full load truck also requires less time in transit, inasmuch as intermediate stops are eliminated (CX 5Z-14; Nelson 10 272). 295. Prior to the merger, Walker considered combined order processing for shock absorbers and Walker ESP, and incorporating shock absorbers into its computer system (AIMS) with ESP which would also result in better customer service and in turn should result in greater market penetration" (CX 4G).

Marketing 296. The record demonstrates the existence of similarities and compatibilities in the marketing of shock absorbers and ESP to the replacement market (CX 4E; ex 5P; CX 7; CX 20G; Bush 3305--6; Stapleton 3477; Buck 9385-86). Prior to the merger, Walker management was of the opinion that shock absorbers would be the product most likely to enhance Walker s "superior distribution and marketing system used for exhaust systems" (CX 3B). A Walker study stated:

Marketing Monroe and Walker sell to many of the same customers, and we feel there could be some plusses if there was one merged company. In addition, our selling programs discount structure, and customer financing philosophy are very similar and would require little or no change in order to fit together. Walker s marketing programs stress customer service, while Monroe is promotion oriented. These differences are TENNt;CO, INC. 527 464 Initial Decision due to the nature of the two products. Both companies can benefit by sharing these respective strenio;ths in the future.

(CX4E) Walker s president, Mr. Cook referred to this marketing similarity in his presentation to the Tenneco Board seeking authorization to acquire Monroe (CX 20G; CX 5). (65) 297. Both replacement shock absorbers and replacement ESP are sold to many of the same customers (CX 4E; Buck 9385; Nelson 199; Ashford 11,466). Prior to acquiring Monroe, Walker and Monroe had a number of customers in common (CX 4E; Ashford 11,466). In fact, Walker planning officials compiled a listing of Walker s 50 largest ESP wholesale accounts, indicating the shock line that each carried. Of the 50, 37 are shown as carrying Monroe shocks (CX 4E Z-2-Z-). Similarly, a list of Monroe s major wholesale brand accounts was drawn Ul', indicating the ESP line that each carried. Of the 29 companies named, 15 were identified as Walker customers in whole or in part, nine carried no Walker ESP and five handled no ESP line (CX 5Z-10; see CX 100A-G "Walker Customers Without Monroe Shock Line" and CX 10lA- , a list of Monroe Warehouse Distributors purchasing over $100 000 from Walker as of November 1976).

298. Replacement shock absorbers and ESP are marketed to the wholesale trade through similar selling programs, discount structures and customer financing arrangements (CX 4E, CX 5R; Baker 589-90; Bush 3305-06; Stapleton 3477; Fleuelling 5773-74; Buck 9385; Nelson 10 200-2, 10 298-300, 10 921; see Baker 713; Barna 1353). Cultivation of accounts by manufacturers is important in the sale of both ESP and shock absorbers, as is inventory availability and service (Baker 544-5, 553- , 567--8; Nelson 10 921, 10 950-51). Prior to acquiring Monroe, Walker envisioned the consolidation of Walker and Monroe s promotional efforts, including advertising departments, market research departments, as well as the two firms NAPA and national accounts sales forces (CX 5E; CX 5Z-16-17). 299. Prior to the acquisition, Walker and Monroe advertised their respective replacement lines in trade journals such as Jobler Topics, Motor and Motor Age (CX 316A-D; ex 317A--; CX 3I8A- CX 3I9A--; CX 328A--; CX 329A-D; CX 330A-D; CX 331A-D; CX 333A--).

300. Neither Questor nor Maremont, the two firms in addition to Tenneco which manufacture both shock absorbers and ESP, presently employ a joint sales force in the traditional wholesale channel" e, Mi'remont has ben doing this, however, in Hawaii On a test basis "for some period of time, " At the time of the hearings, Maremont was also using a combined wholesale sales force in Montana (poo.d 754 , 819). Initial Decision 98 VT. (Pond 752-54; Putman 1158-0). In the early 1960' , following its acquisition of Gabriel, Marcmont unsuccessfully attempted to service this cbannel with a combined sales force (Pond 819). The effort was abandoned when it did not result in an increased market penetration in shock absorbers (66)(Buck 9408). 301. Walker employs the same sales personnel to sell both jacks and ESP to traditional aftermarket customers. This arrangement was described in Walker s 1976-1 Five Year Plan as having "served by affording "as an entree for gaining new exhaust customers" opportunity for a Walker salesman to promote the Walker exhaust line when making a jack sales call" (CX 27R; Nelson 10 196). 302. In the nontraditional channel, both Maremont and Questor utilize a single sales force to sell both ESP and shock absorbers to their mass merchandiser accounts (Putman 1158; (67)Schubert 8545 in camera; Stewart 9284, 9288; Nelson 10 198-99). 303. ESP and shock absorbers, along with other automotive products, are often advertised jointly in promotions by retailers such as Sears, K-Mart, Goodyear and Montgomery Ward (CX 195; CX 196; CX 275; CX 320; CX 340; CX 341; CX 348).

304. ESP and shock absorbers are compatible from the stand- 2806;point of replacement installation (Moore 1287; Jaffe 2794, Buck 9385-86; Nelson 10 122. Both ESP and shock absorbers can be categodzed as "under-the-car" service parts, which are subject to the same environmental and repair conditions, and which are replaced by the same person, whether a service station mechanic, a mass merchandiser employee, a specialist installer or a " do-it-yourselfer (CX 5P, Q; CX 15J; Baker 667; Verner 884; Nedcll 930-31; Glassman 1009; Moore 1235; Kittridge 1449-50; Jaffe 2794- , 2806; Fleuelling 5768-9; Buck 9385--6; Goodman 9068-70). Among "under-the-car type parts are ESP, shock absorbers, brakes, and front-end items such as suspension parts (Moore 1293; Glassman 1000, Teryl 4430, 4435 4437 4486; Fleuelling 5768-9). Ofthese products, according to 8/, Under t.he arrangement, Maremont ESP IInd Gabriel shock absorbers, together with brake linings and relmilt parts, were sold by one sales force under the brand name " Maremont" Mr. Buck explained THl': WITNESS: It was diffcult to try to sell them together. In other words, no one had ever heard of a Marem(mt shuck absorber. And there was" 't any public "cceptance of that, per se And just because Maremont made exhaust syst.em part didn t "x.:te the nftermarket about the fact t.hat they had a shock absorber available So as a result, nothing happened Itjust--things went along as t.hey were. We didn t have any goo shock absorber accounts at the beginning, and we didn t get any more by using t.he name Maremont BY MR. JEFFERS Q. So you went back to the name, Gabri"'? Right (Buck 9408) Thereafter separate sales furces were used to std! the two brands, and Mr. Buck testified that I,,, be!icved this to be the more successfL1J marketing method. it should be route that nO attempt wa. made during this time use one sales force to sell under Ix!th theG"brief! and Maremontbrand rlames (luck94069) TImNECO. INC.

464 Initial Decision the record, only ESP and shock absorbers can be and are installed by persons who do not possess any special mechanical skills, but are willing to do dirty work (Pond 822; Verner 884; Nedell 930-31; Glassman 1001, 1005-06; Moore 1244; Jaffe 2806, 2808-9; Garfinkel 9209; Buck 9386).99 The main tools used to install ESP and shock absorbers are identical, namely air guns, torches and socket wrenches (Verner 883- , 913; Glassman 1000-1, 1010; TeryI4473). For a shop installing ESP, shock absorbers can represent an "add " sale that increases revenues (CX 109L-M; Verner 883; Nedell 930; Glassman 1009; Moore 1304; Cook 1665; Jaffe 2806). Shock absorbers and ESP have a similar life expectancy, and thus tend to need (68)replacement at the same time (Verner 883, 915-16; Glassman 1014).'00 Once a car is on a lift for ESP work, the mechanic can easily determine visually whether the shock absorbers need replacement, can demonstrate that need to the customer, and can often expect a sale (Verner 883-84, 886; Nedell 982; Glassman 999-1000, 1013; Putman 1147-48; Moore 1236-37, 1304; Jaffe 2788- 2794-95; Teryl 4437-38; Fleuellng 5769). w, 305. Walker believed that due to the compatibilty of the product lines, offering a combination of ESP and shock absorbers would enhance its penetration of the wholesale and retail channels of distribution, but particularly of the faster growing retail segment of the replacement market (CX 4L). Maremont previously had used its ESP contacts in the retail segment to enhance its sale of shock absorbers to that segment of the replacement market (Buck 9419). 306. Muffer installation shops represent the fastest growing retail segment of the replacement ESP market (CX 103E, G; CX 349 18; RX 232A- in camera; Pond 822-25; Verner 887; Nedell 928- , 973; Glassman 1086; Cook 1656 in camera; Jaffe 2785, 2807; Nelson 9849, 10 997-98; Ashford 11 420). As of 1966, such shops represented 14% of all ESP installations; by 1977 this figure had grown to 16. 2% (CX 27H; RX 232C in camera; Nedell 937; Cook 1656 in camera; Nelson 9846-8 in camera 9871; see Fleuellng 3970). Muffer shop chains such as Midas, Tuffy and Meineke have .0 Compared to other "under-the-ar" work, the insta!lation of "hock absorbers and ESP are not labor intensive (Verner 894; Glasman 1003, 1010). In contrast, brake work, tran5miss\on work and front-end work are considerably more labor intensive and require more highly skiled and higher paid mechanics, as we!! as a goo deal of speializ.d ,xJuipm,'nt (Verner B95; Moore 1244; Jam 2808-; Tory! 4473, 4475, 4478-79, 4494; Bryant 4777 4796; Garfinkel 9209;see Teryl 4444-5). In many state brake mechanics are required to be certified OO(luse ofthe" f(lct th(lt brakes are vita! to the safe operation of a vehicle (Glassman 1004-.0). '00 In contrast to ESP and shock abwrbers, suspension partB have a mljch longer expt:w.d life, so a shop would exped to replace fewer of these on cars that come in for service (Glassman 1015) 10. At muffer installation shops, most shock absorbers are sold to customers who originally come in for ESP work. since it is generally diffcult for car owners to dewrmine whether or not new shock absorbers are needed, in contrast with audib!y.Jetet. ESP defect.(Verner 886; Nede!! 9::12; Glasman 1012; Moore 1236-::!, 1304--05; Jaff" 2794- 2798).

5:10 FEDERAL TRAm; COMMISSION DECISIONS Initial Decision 98 F. experienced rapid growth since 1970 and they, along with Walker (Cook 1596-97, 1654), project continued growth (Verner 888; Nedell 928-29; Moore 1222; Cook 1662). In part such growth has been at the expense of other installers, such as service stations, many of which have either closed or ceased performing ESP services (CX 27H; CX 103E, H, K; RX 232C in camera; Vernet 887-88; Nedell 937; Glassman 1086; Cook 1657-58 in camera; Ashford 11,420; see Jaffe 2807 -D8).

307. The marketing methods and experiences of muffer specialty shops such as Midas, Tuffy, Car- , Meineke, Rayco and Walker own Speedy Muffer King demonstrate the compatibility (69Jbetween shock absorbers and ESP (Verner 889; N edell 937-38; Glassman 1010; Moore 1235; Jaffe 2788-94; Buck 9386; Nelson 9850- , 11 004). Shock absorbers are normally the first products to taken on following ESP, and are the only products other than ESP that are universally installed in muffer specialty shops (CX 4I; CX 5P; CX 113B; Baker 667418; Glassman 1009- , 1044; Putman 1145 1177; Moore 1233, 1235, 1249; Jaffe 2788, 2794, 2797; Teryl 4430 4432; Nelson 9850 122; see CX 109M, R). 308. Walker has recognized this compatibility by stocking shock absorbers along with ESP in its distribution centers for sale to Speedy King and Car-X muffer shops (CX 13A; Jaffe 2804; Teryl 4433-34; Nelson 9857). Walker s Speedy Muffer King operation has advertised the availability of all types of shock absorbers, including MacPherson struts (eX 20'/).

309. As of June 19'/6, Walker s Speedy Muffer King installation shops were to offer only ESP, shock absorbers and cargo coils (CX 111; CX 113B; CX 207; Ashford 11 511). Specific written permission for an outlet to perform other automotive work or sell other automotive parts was needed from the President of Speedy Muffer King (CX 113B).

310. Since at least 1974, Walker has been considering entry into the muffer shop business in the United States (Cook 1651 amera). Such consideration was generated by the increasing share ,f ESP work performed in such outlets (Cook 1659 in camera; Nelson 997-98; Ashford 11 420, 11,424).

311. In 1976, Walker determined that it ". . . must enter the mffer shop segment of the muffer replacement market " and had 8nneco s approval to enter (CX 108N, P; Ashford 11 507-10). When alker was considering the purchase or :Monroe, belief was exessed that shock absorbers would support this approved move into 8 U.S. retail market (CX 3C; CX 41). In 1976, Walker purchased ,ck absorbers from Monroe for resale through Walker s ware- TENNECO, INC. 531 464 Initial Decision houses to Speedy Muffer King shops in Canada, and also for sale to Car-X in the U.S. (CPF 79, 81; CX 166; Nedell 942-43; Jaffe 2804-05; see Putman 1140).

312. Prior to acquiring Monroe, Walker sought to acquire Cara chain of 60 muffer specialty shops operating in 10 states, which Walker planned to expand into a national chain (CX 4I; CX 108C, P; CX 109C; Jaffe 2782). In addition to ESP, each Car-X shop sells shock absorbers (Jaffe 2788, 2803). Approximately 15% of the inventory of a mature Car-X shop consists of shock absorbers while shock absorbers constitute 7.5%-10% of a shop s initial inventory (RX 269; Jaffe 2796, 2803--4). Car-X originally purchased ESP and shock absorbers from Arvin, but in mid-1974 switched its source of supply of ESP to Walker (Jaffe 2793, 2805). Since 1974, Walker has remained Car- s supplier of ESP and shock absorbers (Jaffe 2793- , 2804-05). Shock absorbers, the only product other than ESP sold by (70JCar- , account for approximately 7% of Car-X installation shop sales (CX 108" ; CX 110A; Jaffe 2788; see CX 109R). 313. At the time of trial, Walker had begun an operation to open a network of company-owned Speedy Muffe,' King muffer installation shops in the United States. It plans to sell only two principal products in these outlets: ESP and shock absorbers (CX 271,; CX 349; Verner 891; Nedell 942-43; Putman 1137; Moore 1222; Cook 1571 1649- , 1662-63, 1669; Nelson 9858-59 , 9866, 9868, 10 997; Ashford 510). Walker has had one Speedy Muffer King shop in the United States for several years (CPF 11; Moore 1223; Cook 1651 in camera). In 1978, Walker started to open more Speedy Muffer King shops in the United States (CX 207; Moore 1225; Cook 1651 in camera; Teryl 4495; Ashford 11 510).

314. Midas is the largest franchisor of muffer specialty shops having approximately 911 locations throughout the U.S. (Verner 889; Moore 1221-22; Nelson 10 994 in camera). For many years all Midas shops have installed shock absorbers as well as ESP (Moore 1233). Less than one half the Midas shops have sold a limited amount of brake parts (Moore 1243, 1272). Approximately 20% of the Midas shops perform front-end work (Moore 1243-72). Midas sells virtually nothing in the way of brake parts and chassis parts to its shops, but has very substantial sales of shock absorbers to them (Moore 1243 1245, 1272; Poe 8949). Midas has tried to promote brake and frontend work at its shops, but has met only limited success in brakes and no success in front-end work (Moore 1245). Midas shops prefer to concentrate on ESP and shock absorber replacement rather than brake and front-end work as those items generate twice as much revenue per hour as would brake or front-end work (Moore 1245). Initial Decision 98 F. 315. Tuffy Service Centers, Inc. (hereinafter "TufTy ) began business in 1970 (Verner 879). By 1978, Tuffy had 82 outlets, all of which installed both ESP and shock absorbers (Verner 878-79, 882 889; Moore 1281) The opening inventory of a Tuffy franchise consists of $18 000 worth of ESP and $2 000 worth of shock absorbers (Verner 879). Although some Tuffy franchisees perform other automotive work, the only products Tuffy supplies are ESP and shock absorbers (Verner 879 882 896). Tuffy attempted and failed to sell brake parts to its franchisees (Verner 895). It attributes such failure to the unwilingness of its franchisees to stock brake parts because of the cost of such inventory, the easy availabilty of these parts from jobbers, and the relatively small portion of the shops total work represented by brake work (Verner 895-96). In addition to installing shock absorbers and ESP, a number of Tuffy shops offer brake services and some offer various other types of automotive services (Berner 882). Within the Tuffy franchise system, ESP accounts for 85% of service sales, shock absorbers for 100/0, and the remainder, primarily brake work, accounts for 5% (Verner 883, 885- , 914 , 881 in camera; (71JNelson 9856). For the Tuffy company itself, 9% of its sales of merchandise to its franchisees in 1976 consisted of shock absorber sales (Verner 88A in camera). 316. Meineke Discount Muffer Shops (hereinafter "Meineke commenced its operations in 1972 (Nedell 925). By 1978, Meineke had almost 90 franchisees throughout the country (Nedell 925). The only products installed by these franchisees to any extent are shock absorbers and ESP (Nedell 929, 954). All franchisees sell and install both products (N edell 929). Meineke promotes both ESP and shock absorbers in all its newspaper ads, yellow page ads and in most of its radio commercials (CX 204A-B; Nedell 933-35, 980-81). Ads that feature shock absorbers represent 35-40% of Meineke s total advertising budget (Nedell 983). The opening inventory of a Meineke franchise consists of $7 500-7 600 for ESP and $1 200 for shock absorbers and hardware items (Nedell 929- , 980). For 1977, shock absorber installation represented 6.5% of the average Meineke franchisee s sales (Nedell 929, 978). However, established Meineke franchisees average 12% or 13% in sales in shock absorbers (Nedell 982; Nelson 9856-57).

317. Meineke considered and rejected selling brake parts (Nedell 931). One reason for the rejection was the higher skill and consequent higher level of payment required for brake mechanics (Nedell 931). Meineke s franchise currently prohibits its shops from doing brake work (Nedell 955). Meineke shops do not do any work that requires oil or transmission fluid such as filter changes or TENNECO, INC. 533 464 Initial Decision transmission repair, as these are a "different business altogether (Nedell 932; see Glassman 1002). One reason for this is that to perform such work would require the franchisees to carry more inventory. The second reason is that the buildings housing the franchisees are unsuitable and not zoned for handling fluid (Nedell 932). Fluid handling would require expensive drainage traps in the ground. These traps are lacking in the buildings of Meineke franchisees (Nedell 932).

318. Rayco shops installed basically ESP and shock absorbers. ESP accounted for an estimated 70-75% of these shops' mechanical work, with shock absorbers accounting for approximately 20% (Glassman 1019). These shops almost never did transmission work because of the higher profits and turnover in ESP (Glassman 1017). Likewise, Rayco shops do not replace oil fiters because of danger from torches used in ESP and shock absorber installation (Glassman 1017-18).

Common Competitors and Customers 319. The compatibility existing between ESP and shock absorbers is further demonstrated by the fact that all significant ESP producers manufacture and/or market shock absorbers (CX 208Z- 34Z-35, Nos. 290, 292, 294, 296; Givens 438-39; (72JBaker 535, 537 575 590; Moore 1248; Barna 1353). As one producer stated: Obviously it (the combined sale of ESP and shock absorbers) is compatible. The economic history tells us it is compatible. Why did Maremont do it, why did Arvin do , why did AP (QuestorJ do, why now has Walker done it? Companies don t just consistently make bad decisions. There is (sick four companies that have all done the same thing in a little different way. (Baker 590) In the same vein, another producer stated: I think the marriage of shock absorbers and (exhaust) systems as being compatible lines is already established, because certainly; the AP, with their Columbus line Maremont with their Gabriel line did this for good, sound business reasons. (Moore 1247-48) 320. Two leading firms, Maremont and Questor, which rank in the top four in the sale of shock absorbers and ESP to the replacement market, began as ESP producers, and subsequently acquired shock absorber companies (CPF 183, 257- , 266; Givens 458 461-62; Baker 715; Pond 741-44, 804; Putman 1095, 1109; Barna 1357; Teryl 4433). In both instaJjces, the acquisition of a smaller Ini tial Decision company was the starting point for such 98 F. Putman 1109--1113; Nelson 10 expansion (Pond 742; 214). 321. Prior to 1962, Maremont had examined several options for entering the replacement shock absorber market ing a license, or the purchase of a small company,, includingI-eckethorneobtain- (Buck 9384-85). Maremont management believed that entry replacement shock absorber market " into the Maremont exhaust system parts line duewasto athelogicalfact thatadjunctit wouldto thebe sold through the same types of outlets type of expertise for, and would require the same installation. And as marketing approaches could pe used a result, the same . for both products. 322. .. In 1960, Maremont acquired a 50% interest in the(Bl.ckGabriel9385) Company ("Gabriel"), a producer of shock absorbers acquired the company, and in 1962 s remaining stock (Putman 1110-11 Buck 9369-70; Nelson 10 , 1190; 461-62). Gabriel in 1962 ranked third in the replacement 222; see marketGivens leading seller Monroe (Buck 9378; Pond 742, significantly behind the Barna 1359-60; Borick 4755-56; Nelson 10 , 805-07; Putman 1193; Maremont acquisition, Gabriel Was in financial223-24). (731Prior to the affairs were being administered by a CPA straits, and its 1110 1963; Buck 9381-82; Nelson 10 (Pond 804-05; Putman 323. Gabriel shock absorbers have231-gained, 11,166; see Borick 4757). share since the Maremont acquisition significant market shock absorbers (Pond, in the sale of 743, 857-58; Putman 1193; Fleuel1ingreplacement4123; Nelson 10 235, 10 238, 11 092). Such gain has occurred both with respect to sales to the to the nontraditional traditionalchannelchannel(Pond of distribution, as well as 947). ,"2 7 43; Nelson 10 565, 10696 324. As noted earlier, the ability to market is an factor to success in the indispensable sale of shock a.bsorbers to the traditional channel (Buck 9372). At the time of marketing effort Was considered by Maremontits acquisition,to be in " Gabriel' condition (Buck 9373 cally walked away" from, 9381).se11ingGabriel shockwasabsorbersviewed toas thehavingtraditionalvery"practi-poor channel, in that it had only "a few WD 9378; Nelson customers" (Buck 9372- 10 222- , 10 693-94). Indeed, Gabriel prior to the acquisition, had just lost its largest WD account, NAPA, to Monroe (Buck 9373 , 9376, 9400; Nelson 10 325. At the time of the Maremont232,acquisition10 693). already lost its Montgomery Ward business, Gabriel had 10" Sales of Gabriel shock absorbers to the nontraditional ch.mneJ in ,1976butconstitutedsti11 retained55% of Marernont'the shock absorber sales, in fact, a lower ptfcentag.. than at the time Man'9372- 9417). rnont acquired Gabrie! Wond 820; Buck TICNNECO, INC. 535 464 Initial Decision private label business of Goodyear and Goodrich (Buck 9373-74; Nelson 10 232). However, these two remaining accounts were threatening termination, and, in the opinion of a Maremont official then at Gabriel, would have left if Gabriel "would have continued to service the customers as they had been in the two or three years prior to Maremont's acquisition" (Buck 9373- , 9378-79; Nelson 191- , 10 233). Furthermore, prior to acquisition, Gabriel did not have the Sears Roebuck account (Pond 835; Putman 1110-11; Buck 9383; Nelson 10 567, 10 946-7).

326. Under Maremont's management, Gabriel became the leading supplier of replacement shock absorbers to the nontraditional channel (Nelson 10 192). Among its current customers is the Sears Roebuck account (Pond 793; Buck 9383; Nelson 10 567 , 10 946-7). There was testimony that Maremont was able to achieve this increase in Gabriel's sales of shock absorbers to such accounts in part due to Maremont's contacts (74Jwith its ESP customers (Buck 9383 9419; Nelson 10 191- , 10 236-37). 327. The record shows that at the time Maremont was increasing its share of the U.S. replacement shock absorber market, it was also increasing its share of the U.S. replacement ESP market (CX 353; Moore 1275; Buck 9389; Nelson 11 023). Such increase has occurred in both the traditional channel and the nontraditional channels (Moore 1275). As to the latter, Maremont acquired Sears' ESP business in the early 1970s (Putman 1195; Nelson 10 946 , 11 156). 328. The record Jikewise shows that Maremont, after acquiring Gabriel, expanded its manufacturing facilities substantially (Buck 9372, 9413, 9423; Nelson 10 234-35). The only shock absorber plant operated by Gabriel prior to its acquisition was its Cleveland facility (Buck 9383; Nelson 10 234). The Gabriel Pulaski shock absorber plant under construction at the time of acquisition was completed by Maremont (Buck 9371; Nelson 10 234-35). Neither Gabriel's Cleveland plant nor that at Pulaski was envisioned by Gabriel as having tube mils (Buck 9383; Nelson 10 234). Subsequently, Maremont added tube mils to the Pulaski plant to reduce production costs (Buck 9383-84; Nelson 10 234).

329. The replacement shock absorber product line of Gabriel was substantially expanded under Maremont's ownership (Nelson 9690- , 10 236). Prior to acquisition, Gabriel did not offer a line of springassisted shock absorbers, nor an adequate line of air shock absorbers (Buck 9375-77; Nelson 9690-91 , 9693, 10 234). Since Gabriel's replacement customers desired a line of spring-assisted shock absorbers, Maremont added such products (Buck 9377; Nelson 9674 9690-91; 9693, 10,236). Maremont also helped Gabriel reengineer Initial Decision 98 F. and develop a satisfactory line of air shock absorbers (Pond 778; Buck 9377; Nelson 9690- , 10 236).

330. Following the acquisition, in an effort to improve Gabriel' operations, Maremont installed as officers of Gabriel members of its own top management (Buck 9365--7, 9370-71; Nelson 9674 192). Two of Gabriel's new chief offcers, Mr. Comar and Mr. Buck, were designated as senior Maremont officials (Buck 9370-71). Mr. Buck with an extensive background in ESP design, testing, production and warehousing, was placed in charge of Gabriel's marketing, engineering and manufacturing operations (Buck 9365-67, 9370-72). Maremont' s Marketing Vice President, Mr. Klaus, reorganized Gabriel' marketing efforts (Buck 9380; Nelson 9674). Mr. Klaus placed Mr. Carlton, whose background was in ESP sales, as the official in charge of Gabriel's marketing to the traditional channel of the replacement market (Buck 9380; Nelson 9674).

331. In 1958-59, Questor s predecessor, AP Parts, acquired Heckethorne Manufacturing and Supply ("Heckethorne ) (75j(Putman 1109, 1180; Barna 1357; Teryl 4433; Buck 9384; Nelson 10 214). AP Parts decided to expand its product market into auto parts lines, specifically " under-the-car" type parts, to reduce its dependence on ESP, which then accounted for 95% of its business (Putman 1111- 12). After much investigation and customer research, AP Parts decided to acquire a shock absorber manufacturer, as the next logical step in its expansion (Putman 1111-12).

332. At the time of its acquisition, Heckethorne sold only through WDs and jobbers (Putman 1112, 1186 in camera; Nelson 216). Heckethorne accounted for less than 5% of shock absorber sales to WDs and jobbers, and a much smaller percentage of total replacement shock absorber sales (Putman 1113, 1180; Barna 1358; Nelson 10 214-15, 10 933-34 in camera 027 in camera). 333. Heckethorne not only had a small market share, but it also lacked capital, lacked a minimum efficient scale plant, had little trade acceptance and had a product design that was then unacceptable to most customers (Nelson 10 219-20). 334. For three to five years following its acquisition, Heckethorne s market penetration in the replacement shock absorber market remained essentially unchanged (Putman 1114, 1181; Nelson 936 in camera). According to Questor s Mr. Putman, the company then decided that if it wished to become a significant factor in the replacement shock absorber market, it would have to completely redesign its shock absorbers (Putman 1114-15; Nelson 10 218). Thereafter, Questor did completely engineer a new type shock absorber Hfrom scratch", bought new equipment for its manufacture TENNECO, INC. 537 464 Initial Decision and built up the necessary inventories (Putman 1115; Nelson 10 220). With its new design of shock absorber, Questor was able to promptly increase its penetration in the replacement market, by switching over several of its good nontraditional channel customers (Putman 1115; Teryl 4433; Nelson 10 936 in camera 027 in camera). 335. Midas, a competitor of Walker in ESP, determined that shock absorbers were a necessary addition to its wholesale ESP line in order to better compete with its competitors, Maremont and Questor. Therefore, Midas entered the replacement shock absorber market as a reboxer (Nelson 9785). Shock absorbers are the only automotive product Midas sells to the wholesale channel, other than ESP (Moore 1220, 1245).

336. In early 1973, Arvin began its efforts to enter shock absorber marketing (Baker 576, 708). Since then, Arvin has been a reboxer selling shock absorbers purchased from Monroe, but merchandised under an Arvin label (Baker 575, 708; Pond 771, 779-800; Nelson 9786 9857, 10 210). All of Arvin s sales of shock absorbers have been to customers other than WDs (76)(Baker 575-76; Nelson 9874). Some of these sales have been to muffer installation shops (Verner 886- 87; Nelson 9857, 9875, 9877-78).

337. Arvin added shock absorbers to its product line because they were "a very natural product for us (Arvin) to add to our line. (Baker 576; see Jaffe 2805). Arvin s Mr. Baker believes that shock absorbers " certainly" are compatible with ESP in the replacement market, because of t'good freight savings " the availability of combined shipments, sales to the same customers, and use of the same kind of warehousing and advertising (Baker 576, 589). Arvin also added shock absorbers because its leading ESP competitors already offered them, and its customers wanted them (Baker 576; Jaffe 2805).

338. Muffer Dynamics, a replacement ESP producer, made overtures to Blackstone, a replacement shock absorber producer, to establish a joint marketing program for the two firms (Barna 1353- 54; Kittridge 1497). Muffer Dynamics also considered offering a line of private label shock absorbers along with its replacement ESP, but rejected the idea because the cost of the requisite inventory was too substantial (Kittridge 1447-48). If it were to add any product line Muffer Dynamics would wish to add replacement shock absorbers (Kittridge 1449-50).

339. A prime consideration in Walker s decision to purchase Monroe was that its major ESP competitors, Questor and Maremont were selling both lines to the independent aftermarket (CX 4E, J; ex 5E; ex 7; CX lob; CX 11; CX 17; CX 20G; see Cook 1594-95). Walker , Initial Decision 98 F. documents have recognized the advantages that now to Maremont and Questor from selling both shock absorbers and ESP to the independent aftermarket, stating that a defensive entry into shock absorbers is necessary to decrease the possibility of loss of ESP accounts to firms which offer both shock absorbers and ESP (CX 5E; CX loa-B; CX 11; CX 17; CX 21E; CX 77). Walker believed that "the ability to sell and distribute a dual line of shocks and exhaust is of real benefit In the mass merchandiser and specialist market, which is the fastest growing segment of the market" (CX lob). Walker recognized that a major benefit to it from acquiring Monroe is that we would have one company competit1g with the other major competition in the market who already supply shocks and exhaust systems" (CX 4J; see CX 21E). Walker s president, Mr. Cook, stressed this factor in his presentation to the Tenneco Board in seeking authorization to acquire Monroe (CX 11; CX 20G; CX 21C). Synergistic Savings 340. Prior to the merger, Walker officials envisioned significant cost savings by combining certain operations of Monroe with Walker (CX 4E, G; CX 5G-D; CX 7; Cook 1615-16; Nelson 10 164). These cost savings were quantified by top Walker officials, with the assistance of top Monroe officials, at the insistence of Tenneco s executive vice president, and were (77)presented to the Tenneco Board of Directors (CX 21A, F; Cook 1612- , 1615- , 1628, 1639-40, 1683; Ashford 444-6). In describing these figures to the Tenneco Board, Mr. Cook, then president of Walker advised them that the earnings or the potential savi:ugs and cost savings may not appear exactly in the accounts as we had forecast or exactly in the time frame that we had forecast, but overall that the totals were stll obtainable" (Cook 1640; see Ashford 11,451). Walker foresaw cost savings resulting from combined warehousing, order processing, shipping, manufacturing, purchasing, market research, prod action engineering and also from combined NAPA and national account field sales forces (CX 5Z-2, Z- 22; Cook 1616, 1708; see CX 208Z-33-Z-34, Admission No. 287; Ashford 11,460, 11 466, 11,469, 11 471). Walker expected that savings from these combined operations would be translatable into profits (CX 5Z-2; Cook 1615-16). Walker also anticipated that these synergies would result in increased replacement market penetration for both Walker and Monroe (CX 4G; CX 5Z-13, Z-19-Z-20). Walker recognized that nthe combination of Monroe s operations with Walker wil undoubtedly be questioned by the FTC. However, we feelthe potential profits of this combination are sufficiently worthwhile to pursue this acquisition" (CX 5D).

TENN!,CO, INC. b;j 464 Initial Decision 341. The synergistic savings projected by Walker resulting from combining Monroe and Walker "are attainable and. . . there is potential well beyond that projected" (CX 6B, CX 21A; Cook 1616). By 1980, Walker projected these synergistic savings to be $12 145 000 for cost of goods sold (CX 21F; Cook 1623), $2 075 000 in the marketing area, $1 395 000 in administration, and $1 000 000 in interest expense (CX 20B; Cook 1629). Of the projected $12.1 milion in savings of cost of goods sold, $4.6 milion represented savings. resulting from the transfer of inventory and distribution function from Monroe s plants to the Walker distribution center (Cook 1625- 26; Ashford 11,460). At the time of trial, this transfer had been accomplished and the productive capacity of Monroe for shock absorbers was expanded by 10.4 milion units annually "without adding any hricks and mortar, or without duplicating a lot of the fixed charge that apply to any manufacturing plant, such as plant management, maintenance, et cetera" (Cook 1625-26; Ashford 460).

342. Walker informed Tenneco s Board of Directors that the ability to offer Monroe shock absorbers and Walker ESP under one operation and the shipping of combined loads would within five years improve Walker s penetration of the wholesale segment of the replacement ESP market by 1%, and its penetration of the retail segment of the replacement market by 3% (CX 20H; Cook 1641-42; Nelson 1014). In addition, Walker told the Tenneco Board of Directors that Monroe, over the same time frame, should increase its traditional market share by 2%, and its nontraditional share by 6% (CX 5R; Cook 1631- , 1641-42; Nelson 10 164). (78) 343. The 2% increase in Monroe s penetration of the traditional market was expected to generate revenues of $3 010 000, and profit before taxes of $630 000; while Monroe s 6% increased penetration of the nontraditional market was estimated to yield 10% in a three to four year period, additional revenues of $10 500 000, and profits before taxes of $1 575 000 (CX 5Z-13).

344. Walker projected that its increased ESP penetration resulting from the combination would yield a 1.6% overall increase in market share, bringing added revenues to Walker of $7 400 000, and profit before taxes of $3 200 000 (CX 5Z-19). 345. Respondent's basic response to this pre-merger evidence has been to denigrate their own planning documents, asserting that the projected savings for the most part did not occur, and that the projections were simply erroneous. Two of their top officials, Mr. Cook and Mr. Ashford, testified to that effect (see RPF 369-91; RRPF 152-54).

Initial Decision 98 F. XI. Compatibility of Hydraulic Jacks and Shock Absorbers 346. In addition to other skills, the manufacture of shock absorbers also involves a knowledge of hydraulics (CX 4F, CX 5Z-1 CX 15J; Nelson 9887-88; see CX 208Z-26, Nos. 246-247). Walker possesses certain technical knowledge in this area, both fluid and air by virtue of its position as a major U.8. manufacturer of hydraulic jacks and lifting equipment (CX 5Z-1, CX 15J, CX 2lD; CX 58A, CX 208Z-28, Admission No. 261; Uhen 1866, 1912; Nelson 9887; Ashford 513). Walker has been manufacturing jacks since 1912, and since 1971 has been manufacturing air and hydraulic jacks at its Jonesboro, Arkansas plant (CX 208Z-28, Admission Nos. 262-263; Uhen 1866; Thompkins 2253). Walker also maintains a jack engineering facility in Racinc, Wisconsin (Foster 5139). Prior to the Monroe merger, a Walker document stated that "much of the shock absorber components could be made by Walker s jack and exhaust system manufacturing equipment." (CX 15J) In addition, hydraulic technology is used at Tenneco s J.I. Case and other Tenneco subsidiaries (CX 208Z-26, Admission No. 249). 347. While there are significant differences in the functioning of hydraulic jacks and shock absorbers, both do employ certain similar technology and engineering, and use similar parts made in a similar manner as low-volume shock absorbers (CX 15J; Givens 413-15, 420 491 , 508-9; Uhen 1867- , 1914-15; DeLisle 4829, 4863). The manufacture of shock absorbers also requires the use of hydraulic oil or fluid, a product also used in hydraulic jacks (Givens 400, 420; Hegcl (79)1724; Uhen 1876-77). Walker has the hydraulic oil for its jacks compounded to its specifications (Uhen 1912; see Foster 5033). Walker s President, Mr. Cook, outlined the production similarities between jacks and shock absorbers in his presentation to the Tenneco Board when he sought authorization to acquire Monroe (CX 2lD).

348. To amplify, the piston rod parts and the intermediate cyclinder head in a MacPherson strut are essentially the same size as those required in a hydraulic jack made by Walker, and the strut contains a seal fashioned in a similar manner to that of a hydraulic jack (Givens 426-27, 430, 436, 508-9; Nelson 9888-89, 9895). Both jacks and shock absorbers contain rubber seals, springs, bearings tubing, check valves, screw machine parts and machine rods, and chrome plated parts (CP X3A-L; Givens 400-D2, 413- , 420). 349. Walker manufactures a number of items for jack production which are similar to the components of a shock absorber, including the tube or outer reservoir, some ram assemblies (called pistons on 'H'\ U'lV. v"' 464 Initial Decision shock absorbers), and stampings and screw machine parts (Givens 413 , 420; Uhen 1881-82; see CX 208Z-30, Nos. 269-70). In the instance of the outer tube, Walker purchases the bulk tubing, made to its speeifications, cuts it to length and domes it in a sheet metal press (CX 245G; Uhen 1881 82). Subsequently, Walker finishes the end of the tubing, and taps an oil fill hole in it (CX 245H-J; Uhen 1882-83). Both shoek absorber manufacturers and jaek producers purchase many common-type items from outside suppliers, including rubber seals, bushings, springs, some screw machine parts, hydraulic oil, and eentered components (Givens 400-D2, 413-15; Uhen 1867 1874 1876). These purchased parts are fabricated to the manufaeturs speeifications (Uhen 1906).

350. There are certain similarities in engineering and research and development regarding hydraulic jacks and shock absorbers (CX 15J; Nelson 9893-94). For example, Walker s jaek operation employs a research and development unit that seeks out better seals, and other types of materials to use to improve its jaeks (Uhen 1891). Walker s jack operation also produces prototypes and tests these in its laboratory (Givens 420; Uhen 1894). A Walker document in evidence states that "Walker jack researeh and development teeh. nology is similar to shock absorber design technology in that both products embody hydraulics and air principles" (CX 15J). Both Walker s air jacks and Monroe s air shocks require combined application of hydraulic and pneumatie principles (CX 5Z-1). The Terramatic principle discussed supra which Walker was considering for shock absorbers, was applicable to other hydraulic products including jacks (CX 67B; see CX 3C). 351. Walker possesses several patents in hydraulie processes and devices (Uhen 1913; CX 40A V). Technical (80)similarity is also reflected in the fact that a Walker document analyzing the proposeld) acquisition of Triple S stated that "our jack engineering department can give technical support to their products" (CX58A). 352. The record shows that some producers of hydraulie shock absorbers also manufacture hydraulic jaeks and lifting equipment namely Armstrong, Bilstein and Fichtel & Sachs (CX 84C; CX 981, K; CX 222A B; Petzsch 2444; Diggleman 2590; Cox 4373; Nelson 9886- 87). Indeed, Bilstein originally began as a jack producer; subsequently it obtained a license and then developed a line of high quality shock absorbers (Petzsch 2442-44, 2446-7; Nelson 9886, 9887 090). Prior to producing shock absorbers, Bilstein made no precision-assembly products (Petzseh 2482-83). There was testimony that Bilstein and Armstrong have produced jacks and shock absorb- Initial Decision 98 F. ers in the same plant (Petzsch 2445, 2476; Hooper 2635-36; Nelson 9889).

353. It should also be noted that Walker possesses an affinity for shock absorber production not only due to its manufacture of ESP and jacks, but also due to its production of oil seals (Schultz 1740 1854; Uhen 187). Mechanex, a Walker division, has supplied seals for use in the production of Walker s hydraulic jacks (Uhen 1875). At least one industry witness was of the belief that a shock absorber manufacturer would benefit from having the knowledge and capability to manufacture oil seals in two ways: (1) control of its supply and cost of seals; and (2) possible development of new shock absorber products (Givens 420-21).

XII. Respondent' s Interest in and the Extent of Its Entry into Shock Absorbers Prior to Its Acquisition of Monroe 354. Basically a one product company (ESP), Walker has sought repeatedly to diversify its product line since its acquisition by Tenneco in 1967 (Cook 1585). Walker also sought diversification as a method for increasing its total sales (Cook 1585-86). 355. As previously indicated, shock absorbers were of more than passing interest in regard to Walker s diversification goals. See generally Finding 263 supra. In addition, Walker s discussions with Armstrong Equipment Ltd. w, its negotiations with Tropic Indus. tries and its acquisition of (81)Triple S Industries 105 demonstrate this interest in the consequent steps taken to expand operations into the shock absorber business (Nelson 10 212- 040-1). 356. The evidence shows that in July 1970, Walker s Financial Planning staff conducted a study which identified those automotive parts most attractive in terms of profitability and growth as possible new products for the company (CX 41C). The study, "Profit and Growth Characteristics of Selected Auto Replacement Parts, was limited to the traditional aftermarket (CX 41A, C). The study concluded that "two product categories seem especially deserving of further market research: front suspension parts, which would include shock absorbers, and filters. These two categories are not only outstanding in terms of apparent profitability, but they have experienced exceptional market growth as well" (CX 41F). 357. For some time prior to the merger, Walker had been requested by Tenneco s Planning Department to identify potential new product lines that would fit most closely with Walker ,", Findings 359- infra.

'U' Findings 365-8 infro.

"" Finding"s:!69-l infra TENNgCO, INC. 543 464 Initial Decision s consistentdistribution and marketing system (CX 3B). Walker answer was that shock absorbers were the most compatible product with Walker s ESP business (CX 3B).

358. From 1967 on, Walker believed it desirable to enter the U. replacement shock absorber market, because it perceived itself to be at a relative disadvantage to its competitors Maremont and Questor which offered both shock absorbers and ESP. '" As one Walker official stated:

(Ours initial reason for wanting to buy a shock absorber line is to broaden our base in the exhaust specialty market. As we discussed, in competing with, particularly, Goerlich fQuestorJ who can utilize the Columbus Shock Absorber Line. . . we find we are at a disadvantage due to Goerlich's ability to combine the two product lines exhaust systems and shock absorbers, for freight savings and also the ability to supply specialists both lines from one source, plus the ability to accumulate truck load discount orders more readily.

(CX 77) (82) Armstrong Equipment Ltd.

359. Armstrong Equipment Ltd. ("Armstrong J, a manufacturer of shock absorbers for both the OE installation and replacement markets, has its principal manufacturing facilities in Great Britain and shock absorber manufacturing subsidiaries in Australia, Canada and South Africa, as well as a marketing organization selling shock absorbers in the United States (CX 81A).

360. During 1966-1968 Walker had inconclusive discussions with Armstrong concerning various arrangements by which Walker could use that company as a vehicle to enter the U.S. replacement shock absorber market (CX 83A). Walker and Armstrong also discussed inter alia the possibility of Walker marketing shock absorbers manufactured by Armstrong, or of Walker manufacturing shock absorbers in the U.S. under a license from Armstrong (CX 72; CX 73; CX 74; ex 76; CX 77; CX 78; CX 79; CX 208Z-0 Admission Nos. 320-21).

361. Walker considered paying Armstrong a royalty for the use of that company s patents and know how in the manufacture of shock absorbers (CX 74; CX 76; Hooper 2619, 2637-38). However Walker s interest in and willingness to pay such royalties was limited by profit margin considerations, balanced against the cost to Walker of engineering shock absorbers in-house (CX 75; Hooper 2619).

362. In August 1967 , Armstrong proposed to supply shock IOU See Findings 184-207 supra.

Initial Decision 98 F. absorbers to Walker for sale in the UB. and "as volume increases to assist you lWalkerl in setting up manufacturing facilities in the United States" (CX 73; CX 76; CX 2082-0, Admission No. 322; Hooper 2619).

363. During 1968 these discussions continued. In February 1968 Armstrong s president informed Walker s president that "I am now awaiting your 3 year marketing forecast and am hopeful that we shall be able to quote satisfactorily for your first requirement (for shock absorbers) and then assist you in getting3-4 yearsinto the manufacturing end of the business" (CX 79; CX 78). 364. In April 1968, Walker informed Armstrong that decided to purchase and resell domestic Monroe-made shock absorb-it had ers rather than imported Armstrong products (CX 122; see Hooper 2620). Thereafter, Walker began to market Monroe-made shock absorbers to muffer shops, using Walker s existing distribution facilities (TeryI4433-4; Ince 4981, 4985; Nelson 9744). Tropic Industries 365. In 1973, according to record documents, Walker considered acquiring Tropic Industries, a small company which (83)possessed a shock absorber prototype (CX 45B-; CX 45J; CX 46; CX 47; CX 48). A Walker study analyzing this proposal stated that such an acquisition would enable Walker to compete successfully against the entrenched shock absorber companies Maremont and Questor (CX 45N- ). The study also examined the possibility of Walker licensing shock absorber technology from Tropic, as well as the possibility of Wal'cer entering into a development contract with an option to purchase Tropic at a later date (CX 45N- ). A Walker official, Mr. Fairchild, believed this acquisition to be a "rare opportunity for Walker to enter a new field within the automotive parts industries " (CX 46A).

366. Tropic Industries had a patent on and produced a prototype called a "Loadamatic self adjusting shock absorber " (CX 45A; 46A; CX 47; CX 208Z-39, Admission No. 313). The Loadamatic was designed to adjust the level of the car or truck chassis automatically when the size of the vehicle s load was changed (CX 45A-B; CX 46A). It was envisioned that this device would compete directly with thespring or air-adjustable type shock absorbers offered by the major shock absorber manufacturers such as Monroe and Maremont (CX 45A).

367. On March 8, 1973, based upon his evaluation of Tropic Industries, Mr. Fairchild stated:

, . , TENNECO, INC. 545 464 Initial Decision I am recommending that Walker begin negotiations with Tropic Industries for an option to buy the company and interim rights to guide product development and testing through a loan or equity participation. During the option period, Walker could also proceed with marketing research and other planning to confirm the market and profit potential to its satisfaction. Alternatively, by the time negotiations are in progress we may want to buy the product rights or the company outright. (CX 46B) In Mr. Fairchild' s estimation an initial investment of $2. millon to huy rights and start up production and marketing wil generate $10 million in sales within five years and return nearly 35% on the investment" (CX 46A).

368. Following further discussions, and subsequent search of shock absorber patents, it was concluded that Tropic s Loadamatic had an insufficient degree of patent protection (CX 48; CX 49). On the basis of this, Walker s interest in Tropic Industries terminated (CX 48B; CX 49).

Triple S Industries 369. In early 1974 Walker and Triple S Industries (84J("Triple 107 began correspon- J. whose products included steering dampers dence regarding licensing arrangements or the possible acquisition of Triple S by Walker (CX 52A-D; CX 51; CX 53A-B; CX 54A-C). 370. Walker was particularly interested in the design Triple S had developed for its "Terramatic" shock absorber'"' (CX 51H; CX 52A-D; CX 54A-C; CX 63C; CX 69I--).

371. The Terramatic. shock absorber was seen as offering certain advantages over existing shock absorbers, because the product was designed to permit the consolidation of part numbers for replacement shock absorbers; to have variable automatic compensation for differing driving conditions; and to require half the number of parts of existing shock absorbers, making it easier and less expensive to manufacture (CX 69I-K). Mr. David B. Prescott, the same Walker official who had conducted a technical analysis of Tropic s Loadamatic, '"' declared in favor of the acquisition of Triple S (at the right price),' '" notwithstanding some misgivings concerning (85Jthe value ,", Amung 'friple S' sterling damper customer; were NAPA , other WDs and Montgomery Ward (CX 51D; ex 55A; CX 62B; ex 69NJ. Triple S al$( sold a sterling damper IHiit to Ford for O and DE service US€ 00 truck and bus cha..,si5 (Kody 9325-26) See Finding 371 infra.

'0' ex 49.

Terramatic. This is the original item which cause our interest in the company and is the one farthest out in the Ume frame. Patent has ben appliP. for and a "couple of its features" have bwn tried in a Sterline unit. In my opinion, the features of this unit are tehnically sound-with OIle misgiviog. Leakage path flows wm beome percentae of the flow through his control configuration-I do not know what percentae. Succes (Continued) Initial Decision of the Terramatic patent. 111 372. Although a t sting prototyp of absorb Terramatic had not shock b n produc d as of July 1974,''' docum nts in the cord r Walker ct some confid principle would that th prove rramatic adaptable to both regular shock absorbers and heavy duty, as well as to steering product stabilizers-Triple lin (CX 51D; CX 53A-13; CX 54B; CX 69D). S' principal 373, As of 1974 damping unit in its st Triple controlled th production of ring damp quiring Mar mont, to produc rs by r manufactur unit in accordance ing sp cifications (CX54A; C.x 280; ex with Tripl S erigin er- . 284A'B;CX 292A- 282A-"rex 283A-C; CX D). Tripl S "gave us (Maremontj design parameters nearly all that normally the are involved (86Jon a shock absorber" (Kody 9309, 9315; CX 280; CX 283A-C; CX 284A-B). 281A-B; CX 282A-C; CX 374. A marketing analysis of Triple Mechanex (a S' products Walker subsidiary)'" '" conducted by calculated replacement steering dampers a market potential for applicable million and a market to passenger cars of $21.4 potential for replacement steering damp applicable to heavy-duty vehicles of $3.4 analysis recommended that million (CX 56C). This Triple Walker s salee force be used to S steering dampers to both the OE market and replacement sell market (CX 56C). The analysis estimated Triple S' share of sales of replacement market (CX 56C).steering Thedampersanalysisto concluded all customersthat " to be 50% of the the greatest poten- tial, of Course, which is not included in these projections Terramatic principle as to shock absorbers 375. One of applied, is the " (CX 56A). the reasons cited to Walker s President, in support of d.""nd, nn ,""t """.nto, prototype has ben built. . "nd th, le mnn,'n"",n" p w,"ld loeg,ly d,r,'m,,, it Nn compl,r, I am enthusiastic: as to the possibilities of th some manufacturing absorbers. I emphasizeexperiCflce,that this is notveryproductioflprobably ready.forprouct,heavyDollarsfirstdutyandinshockSt.dinetimeabsorbers--must(particularlybe investedheavyin development.duty) and laterI do fe(!ther"isareasnablechanceofsucces and even automobile shock When this succes movors into faster movers. is achieved.There wouldthere thenis goobe oPPOrtunitydefinite marketing(as HarryadvantageS(Petrak)asclaims)weU asfortheconsolidationtechnical (contro!)ofs/ow advantages he claims in his report (CX54B) '" While CX 53A- , date Fehruary 15, 1974, expres.o;s some rl'S!rvations about the Terramatic patlnt P,oocnU', n",,11 ""'PO" 'oc ,"0 ne9"""" w UIt,m.t"y. th, e,p,,-, ,n " t.t", dnle Mny 15 , Mr we ""e n""", t""" . 1974 which " ex July ont by "n 'n' 15, 1974 memorandum to Mr. 54A- the 0' Tom pn"nt. nod "P "2 (CX63A;CX67C) ("..k which is ed RX "g.""7(See by M,. Shorr 'n . RX 8; RX 11) "3 These design parameterscovcred such tehnical matters as " compresion and extensio direction; the stroke; the length; the mountings;va!vingor the resistant values in both thetype of fluid; the paint; the type of marking nbw,,,, t& ",t it 'n th, d " rKody 93(9). Maremont suppliedthe boreTriplesize;Sthewithoulsidea take:apartdiameter;shocktheimprovenienlsin resistanc,, values'gnand" internalIh" ..I.,n"cOnstructiotKody 93181 T',ple S d,, II. As fault2, 1974. of the shock absorberr,dunitM",em'''t',rhode9316G,b"ol '" m.k, &e Finding suprr- 9354). TENNECO, INC. 547 464 Initial Decision the Triple S acquisition, was to obtain Mr. Harry Petrak, the President of Triple S, for the Walker "team" (CX 58B; CX 64A). Mr. Petrak, who did not possess an engineering degree (Prescott 11, 310- 11), was described variously as "a good salesman rather than a technical man " and "an individual talented in hydraulics and other skills that could be utilized by Walker. " After the Triple S acquisition he became a Tenneco employee, and remained one at the time of trial (CX 58B; CX 64A; Hegel 2103-04; Kody 9299; 9319-21; 9350; 9354-55).

376. Following a July 1974 analysis of Triple S prepared by Walker s Mr. A. E. Robinson, it was reported to top management that:

I would definitely recommend we make a purchase offer for Triple S Industries. The present products (steering stabilizers) are competitive in the market place, the new products (Autolok and Terramatic) represent promising but unknown quantities, and should (87Jbe considered as frosting on the cake if they live up to their potential. In this regard, I have attached a directive from the DOT which was just issued and outlines their program for testing of heavy duty vehicles for front end stability. This has to be construed as a major plus for the use of steering stabilizers. Estimating product profitability is hazardous because of the tremendous growth we would expect from the Triple S products. However, because they are well engineered have been accepted by the marketplace where marketed, and are designed to meet a definite and l:'Towing need of vehicle manufacturers, I would expect to achieve significantly better than average profitability. ... (CX 62E) 377, In August 1974, a further review of Triple S by Mr. Robinson forecast other benefits to Walker in obtaining Triple S including an increased demand for tubing (CX 64B see CX 51D). Another potential benefit would be an "initial step in product diversifkation to reduce dependency on exhaust systems as outlined in (Walker s) five year presentation to Tenneco" (CX 64B; see CX 51B-C). An earlier report by Walker s Mr. Prescott identified the immediate benefits to Walker flowing from Triple S' current, as wen as future, products (CX 54C).

378. In its formal proposal to Tenneco requesting authorization to acquire Triple S, Walker stated that "(sJales and earnings have been outstanding but the vulnerability associated with heavy reliance on a single product line has been recognized by manage ment and an acquisition program undertaken to expand product lines and reduce our vulnerability" (CX 51B-C). The proposal continued:

Triple S fits well with the goals desired by Walker in its acquisition efforts. Its products are well received in the marketplace, are in markets that have excellent 548 FEDERAL. TRADE COMMISSION DECISIONS Initial Decision 98 F'T. growth potentia!, and can be highly profitable with adequate working capital and management support. Triple S has many of the same customers as Walker in the automotive marketplace with the potential of adding major customers in both aftermarket and original equipment market."i with working capital and management strength the sole deterrents. Future products could provide Walker with a toehold in the vast shock (88)absorber market both domestic and international. 1 (CX 51C) Mr. Robinson s analysis describes the prospects of Triple S regarding shock absorber sales and profit potential as "outstanding (CX 5IB).

379. On October 15, 1974 Walker acquired Triple S, its steering damper business, and the rights to the use of the Terramatic principle (Complaint and Answer n44; CX 57 A J; CX 58B; CX 66A- Nelson 9744-6; Prescott 11 291-92; Ashford 11,492-93). 380. According to the acquisition agreement, the patent rights to the Terramatic and to another device, the Autolok 117 would revert to Triple S in the event that Walker failed to take affirmative action in regard to using them in producing a product within a period of four years from the effective date of the agreement. Although Walker acquired Monroe before having actually produced a Terramatic shock absorber, as late as August 12, 1976, Mr. Cook, Walker president, expressed concern that Walker s Triple S patent rights be preserved (CX 70).

381. At the time of its acquisition, Triple S possessed machining, warehousing and packaging facilities (Kody 9298). While Triple S did not have the physical facilities to actually manufacture shock absorbers, the cylinder of its steering dampers being supplied by Maremont, it did manufacture the brackets or attaching parts (Kody 9298-99, 9351).

382. According to witness Tompkins, one of respondent' s experts in automotive manufacture, the role of a manufacturer is generally to design, engineer and develop a product, to make and assemble it and to sell it (Tompkins 2302). Triple S, later Mechanex, performed some of (89Jthe functions of a manufacturer in that it designed its steering dampers, supplied specifications for the damper unit modified some of the damper units received from Maremont before sale, designed and manufactured some of the attaching components packaged and labelled the steering dampers and sold them in competition with other manufacturers to WDs, mass merchants and an OE account (the OE account was for busses and truck chassis) (CX "" The Terramatic device was described as "the product with the grcatc.'t risk and development time required and also the greatest po!.ntial At the very least it could he the unit we would manufacture fur the Steerline and Trailiner devices and at the most it would provide the possible entrance into the billion dollar shock market" (CX 51G) '" The Autolok was a pa!.ntc autumatic veruion of Easy!ok, which permit. free wheeling for the front drive of four wheel drive vehicles (CX 51E, G). TENNECO, INC. 549 464 Initial Decision 54A; CX 69G; CX 280; CX 281A-B; CX 282A-C; CX 283A-C; CX 284A-B; RX 635A-B; RX 636A-B; RX 637 A-B; RX 638A-B; RX 639A-B; Schultz 1746, 1831-32; Kody 9298-99, 9309, 9314 , 9318 9325-26, 9351, 9354; Prescott 11 284--6, 11 290, 11 195-96, 11 329). 383. Triple S, later Mechanex, held itself out to the trade and to the public as a manufacturer (CX 43A-G; CX 44; CX 51L; CX 339A- B; CPX 15; CPX 16H). Triple S advertisements to the replacement market represented that the company s steering stabilizer was manufactured by Triple S Industries" and that the company had been in the business of developing and manufacturing hydraulic steering stabilizers for over 20 years" (CX 43B; CX 339A-B). Later Mechanex advertisements stated that the company offered steering stabilizers "developed for all types and sizes of vehicles, from small cars to largest trucks" (CX 43B-, G).

384. There was evidence that companies such as Ford, International Harvester, AMC, Moog and Cofap regarded Triple S as a steering damper manufacturer (CX 51G; CX 62D; CX 173A; Nelson 9764-7, 1O 161H6, 11 048-50).

385. The November 1976 Walker proposals to acquire Monroe regarded steering dampers as an expanding portion of the shock absorber business, particularly due to their use on recreational four wheel drive vehicles (see Kody 9333-34). Walker felt that its steering damper "was a product with significant growth potential. Walker has certain patents in this area and the embryo of an organization to launch this product. Because of its product components (shock absorber cylinders) and the market served, steering stabilizers are a natural fit with shock absorbers" (CX 5Z-3). 386. Shortly before the proposed acquisition of Monroe, Walker documents indicated an intention to use the Terramatic design concept in the manufacture of steering dampers. II8 Plans to expand the use of the Terramatic (90)principle to other types of shock absorbers were set forth in Walker s 1977-81 Five-Year Plan.''' ". In a "Proposal to Acquire Monroe Auto Equipment Co. " it was stated that "we also hold patents through our acquisition ofTrip!c S Industries of some advanced shock absorption principles which we presently plan to u in OUr steering-stabilizer" (CX4F) During- 1976, we wi! be working on a new concept in shock absorption caUed Terrarnatic. The Terramatic unit which is patented, carne to Meehanex through the purchas of Triple S Industries in 1974, If the Terramatic principle proves successful it could be extended to automotiv!: ;ond hf!avy duty shock absorbers, opt'ning up a tremendm1s new market for Meehan!:x. However, this plan does not reflect any s"les of Terramatic because of development and testinl5stiH to be done (CX 25Z-9; seeCX 3C; Rody 9318) R!:spondent p sented testimony that Tripie S was not acquired for its Terra.matic shock absorber design aione (Cook 1676-77). Aod, in the opiriion of the witness Hegel, the Terramatic shock absorber could not be manufactured at an efficient cost (Hegel 20890). Walker paid $150JJO for Triple S, nuthing for the patent. which was describe before the acquisition by Walker s staff as " very narrow and has very little chance of having a major erred in the industry" (Cok 1676-77; RX 7). Walker s patent attorney Thomas Torphy concluded " there is 001 (Continued) , Initial Decision 98 F. 387. Walker predicted that the Triple S acquisition would provide Walker with a significant entry vehicle into the replacement shock absorber market through sales of steering dampers. Walker identical projections of July 15, 1974 and July 24, 1974 forecast that replacement steering damper sales would start at $4.6 milion in the year following acquisition and increase to $31.4 milion in the fifth year following acquisition, with most of the sales to the automotive aftermarket (CX 59B; CX 62B, E). Walker s calculations predicted that the Steerline steering damper would have a market penetration of 15% in the first post-acquisition year, which would increase to a figure of 27% for the fifth post-acquisition year (CX 59A). These predictions applied only to steering dampers (CX 59A). The sales potential for Terramatic was described as "huge" (CX 59A). However, there were no actual predictions of sales volume made for the Terramatic (CX 59A). (91) 388. Walker expressed an interest in a significant expansion into the replacement shock absorber market both before and after its acquisition of Triple S. '"0 Mr. Cook, then Walker s president h"d followed the business history of Monroe for several years despite his knowledge that the company was not for sale (Cook 1575- , 1580). In Mr. Cook's opinion, during the period immediately preceding 1976, Monroe had a "seemingly lack of concern for the customers wants and desires" (Cook 1581 , 1593-94). Mr. Cook also felt that Monroe s policies and pricing practices invited competition (CX 4; Cook 1593-94). Discussion between Walker and Monroe spanned several years prior to the acquisition (CX 4C; CX 5D). XII. Availability of Toehold Acquisitions 389. As noted in Finding 184 supra a number of foreign manufacturers were engaged in the sale of shock absorbers in the S. replacement market in 1976.

390. In September 1975, an examination of the Western European shock absorber market was conducted for Walker Europe. The study reported the size of the market in each country as well as the ownership of each manufacturer. Among the firms studied were those which sold shock absorbers in the U.s. replacement market (CX 98A-K; CX 187B).

Armstrong mur.h patentable subj..t matter iu the subject application (TcrramaticJ and that any pat!'nt which might issue could not prevent c"mpetition from produdng a shock absorber having identical funct.ions" (RX 8). &egenerolly, l"indings 35 -58 supra) TENNECO, INC. 551 464 Initial Decision 391. The British Company Armstrong,''' one of the leading European manufacturers of shock absorbers, produced a full line of replacement shocks for the United Kingdom and had plants in Great Britain, Australia, South Africa and Canada (CX 84C, E; CX 97E; CX 208Z-7; Admission Nos. 141, 143; Moore 1250; Diggelman 2530-31 2589; Hooper 2613, 2615). In addition to its manufacturing plants Armstrong also had licensing arrangements in several countries (Diggelman 2585; Hooper 2628). In the United States, Armstrong marketed shock absorbers from its warehousing facility in Chicago Ilinois (Hooper 2613-14). (92) 392. Armstrong possessed the technological expertise and proficiency to engineer and design shock absorbers (Moore 1250-52; Hooper 2613 , 2618; see CX 208 , Admission No. 142). At the time of the hearings, its shock absorber line included the following types: double tube, single tube, spring assisted, MacPherson struts and cartridges, steering dampers and a special lever type shock absorber used on a few British cars (Diggelman 2587, 2590, 2603; Hooper 2613 2615; Freeman 8856 in camera).

393. In 1974, Armstrong had plans to expand shock absorber production in its (now closed) Canadian plant, in part to reduce the dependence of Armstrong s Canadian sales operation on shock absorbers made in the United Kingdom, and in part to serve as a better source of supply for its United States distribution facility (CX 84E). Walker estimated Armstrong s replacement shock absorber sales for 1974 to be approximately one milion British pounds or $2. million (CX 84F).

394. A May 1974 analysis of Armstrong by Walker s investment banker in London recommended the firm s acquisition by Walker (See CX 82; CX 84). In July 1974 Walker Europe s President, Mr. Padget, reported to Walker that he had heard that "circumstances could be ripe for a takeover" of Armstrong (CX 80). 395. Walker was informed that an acquisition of Armstrong would reduce Walker Eur-ope s reliance on a one product base and also provide a means for Walker s entry into the U.S. shock absorber market (CX 8IB; CX 208Z-3, Admission No. 335). Additionally, Walker would be enabled to sell ESP through Armstrong s European channels of distribution, while Armstrong could sell shock absorbers through Walker s U.S. and foreign channels (CX 83B). Mr. Padget of Walker Europe also reported that it might be possible for Walker to make shock absorbers in Walker factories and close Armstrong Canadian assembly operations (CX 208Z-4, Admission No. 341). '" Armstrong is a publicly held corpuration whose stock is traded on the London Stock Exchange 2081'r-(CX Admission No. 140) Initial Decision 98 VT. 396. Mr. Padget met at least twice with Armstrong s Chairman of the Board, Mr. Hooper, who indicated lack of interest on Armstrong s part (CX 208Z-3, Admission 336; Hooper 2622-23). 397. Mr. Padget relayed this intelligence to Walker also communicating his feeling that Armstrong "might respond to a specific offer " especially if it were sufficiently above (93)Armstrong quotation on the London Stock Exchange '" (CX 83A; CX 208Z-3 Admission No. 338).

398. On October 14, 1974, Walker s President, Mr. Cook, instructed Walker Europe to maintain its "contact and relationship" with Armstrong, but pending instructions from Tenneco, to take no further action. Mr. Cook further suggested that Walker Europe include the possible acquisition of Armstrong in its five year plan, and to explain fully why such an acquisition made sense (CX 85). 399. In 1976 Armstrong supplied OE shock absorbers for foreignmade vehicles sold in the U.S. (CX 208Z-7, Admission No. 144). It also offered a broad line of replacement shock absorbers for these 3980; seecars in the U.S. market (CX 84B; Givens 467; Fleuelling Diggelman 2526). In 1976 Armstrong was the Jeading foreign shock absorber producer selling in the United States with sales of over 400 000 units (RX 550A in camera). 400. Walker Europe continued to maintain its interest in Armstrong through 1976 (CX 87 A; CX 88).

DeCarbon 401. The DeCarbon Shock Absorber Company ("DeCarbon l is one of two significant shock absorber manufacturers in France, the other company being Allinquant (CX 97C; CX 98A; Bellot 2882-84; see also Diggelman 2567).

402. DeCarbon shock absorbers are of a unique, patent-protected single-tube design which employs oil and nitrogen gas. They can be produced in several hundred different models and applications, but most sales are for approximately 40 models (CX 92C; Bellot 2885; Stewart 9240). '"

403. Gas pressurized shock absorbers, such as the DeCarbon models, arc considered to be of a superior, refined design. There is some replacement market demand for this type of shock absorber in the U.S. (Bellot 2884-5; Petzsch 2467). (94) 404. As of 1976, DeCarbon s production capacity was approxi- ..' The report contained calculationsbased on several differenl prices, all well above.. current market. value, which might lx, off..red for Armstnmg s stock (CX 8301 .. Dearbon supplies OE shocks for Renault, Porsche, Mprctxks-IJnz, Jaguar and some ,Japanese made cars (CX 92D, E; Be!lott 2882, 288, 2919; Stewart 9240). In Europe, approximately 15% lof at! vehicles sold use gas pressurized shock absorbers lDiggelman 25(9) );, r1' , l1 ,)'-0 464 Initial Decision mately 3 million units (Bellot 2883, 2919). Its French facilities manufactured approximately 12 000 shock absorbers per day, of which 50% were purchased by Renault to meet about 15-18% of that firm s requirements (CX 92C; Bellot 2844, 2919). Thus, the majority of DeCarbon s sales are in France (Diggelman 2563, 2580-81; Stewart 9241).

405. DeCarbon licenses the technology necessary to manufacture its shock absorbers in 12 countries (CX 92E; Diggelman 2585-86; Bekin 2846 , 2864; Bellot 2920-21; Stewart 9265; see CX 208Z-8 Admission No. 151). Monroe recently has become a DeCarbon licensee (Bellot 2920-21).

406. In March 1976, a broker, Mr. Gibbons, brought DeCarbon to Walker s attention as a possible acquisition candidate (CX 89; CX 90; CX 92A-B). Thereafter, Walker authorized Walker Europe to pursue the acquisition of DeCarbon (CX 90; CX 91). The broker was authorized to inform DeCarbon that Tenneco has "a five year growth plan which would easily permit, and very quickly, purchase of DeCarbon Shock Absorber Company, providing the asking price was justified by its recent net profit after taxes, plus future probable tax profits" (CX 93A).

407. The record shows that while broker Gibbons and DeCarbon had some preliminary discussion, the matter of price blocked a possible acquisition from tbe outset (CX 95B). 408. In November 1976, Walker Europe wrote the broker acknowledging the impasse, and requesting that he stay in contact with the situation (CX 96).

409. At the trial, there was testimony given by Mr. Marcel Bellot a former chief purchasing agent for Renault, that the French Ministry of Industry had certain control over the acquisition of French firms by foreign companies. Further, he testified that in two instances in 1972 and 1973 where American companies, ITT and Federal Mogul, sought to acquire Alliquant, the French government refused to permit this (Bellot 2885-2890). Blackstone 124 privately owned shock absorber 410. Blackstone is a small manufacturer whose products are distributed throughout (95)the , primarily to chain stores (Moore 1270; Barna 1343-44, 1369-70; Fleuellng 3918, 4124). In 1976 Blackstone produced a standard 1" size shock absorber and a heavy duty 1- " size shock absorber ,,, In 1972, with its facility operat.ing to capacity, running one shift., HJackstone produced approximat.ly 8(X) OO shock absorbers (Barna 1389 in camera). Mr. Barna testifirod in 1978 that with two shifts Blackstone could probahly produce 2.5 million units annually (8arna 1344) Initial Decision 98 F. (Barna 1338). While Blackstone has not produced either air-assisted or spring-assisted shocks, its president testified that they had the technical knowledge to do so, and had, in fact, built prototypes (Barna 1338-39, 1341).

411. Blackstone, which entered the shock absorber business by acquiring the equipment of a defunct producer 125 has been for sale since 1974 (Moore 1256-57 in camera; Barna 1336-37, 1351-52 camera 1373 in camera 1394 in camera; Nelson 10 177, 10 188-89). Blackstone has actively sought buyers for this business, which 128offers manufacturing equipment 127 specifications technology, raw material and finished goods inventory for $2 million or less (Moore 1256-7 in camera; Barna 1351-52 in camera 1355 camera).

412. Blackstone s market share has been declining since at least 1974, and it does not enjoy brand name recognition, or a particularly good name in the replacement market (Barna 1346-9); Borick 4725- 31; Nelson 10 952-53). In addition, there was testimony that Blackstone s equipment was outdated and poorly maintained (Putman 1173). (96) 413. The record does not support the proposition that Blackstone would be a viable toehold acquisition for Walker s entry into the U.s. shock absorber replacement market (See N. Wright 7204-05, 7213in camera).

Other Firms 414. Allnquant, a family-owned corporation, and the leading supplier of shock absorbers to Renault (Diggelman 2603; Bellot 2882 2901 , 2919; see Stewart 9241; Buck 9393), manufactures both gas pressurized and standard dual tube shock absorbers, and has also developed prototypes of MacPherson struts (Diggelman 2512; Bellot 2885, 2904; Stewart 9241).

415. There was testimony that in 1972 the father of the family which owned Alliquant wished to sell the firm (Bellot 2901, 2905-06). However, as noted in Finding 409 supra two acquisition attempts by non-French companies were thwarted by the French government. 416. Fichtel & Sachs, a German firm 75% owned by two or three '" Blackstone acquired itsshock absorber machinery from IIoudailie in 1958, and moved the equipment tu its ChicagoplantiBarna13:J7 I:J89) "" Blackstone beli"vP.J that the most likely purchaser of it! shock absorber operation would be an ESP producer (Barna 1:J5::)- Thus, al! but one of the buyers approached by Hlackstone were replacement ESP producers (Moore 1257 in camera: Barna 1355 in cumem, 1:37::175 in camera), L2 The equipment was describe as old and pOrly maintained (Putman 117:J; Borick 4734; Bracken 429f199 in camera) "" The tehnology would include that for Blackstone s conventional sh,x:ks and presumably the prototypes for it! air-asiste and spring-as. isl. designs (Barna 1336-42) TENNECO, INC. 555 464 Initial Decision members of the Sachs family, is the second or third largest shock absorber manufacturer in Europe (Diggelman 2557- , 2589, 2591; Stewart 9246). Fichtel & Sachs produces conventional shock absorbers, gas pressurized shock absorbers, spring assisted shock absorbers, steering dampers and MacPherson struts and cartridges (Diggelman 2555 , 2587; Cox 4408; Freeman 8856 in camera). It is a major supplier of shock absorbers to the German automotive industry, including Volkswagen, Mercedes-Benz, BMW and Ford of Germany, and a major supplier of replacement shock absorbers in West Germany (CX 97D, H; CX 98A, D, J-K; CX 208Z-9, Admission Nos. 155-156; Petzsch 2470 in camera; Diggelman 2556-57; Fleuelling 3980). It supplies shock absorbers to the U.S. replacement market through the car dealer channel of Volkswagen and others. 417. In 1975 or early 1976, the Sachs family agreed to sell their 75% holdings in Fichtel & Sachs to GKN, a British company (Diggelman 2582 3; Stewart 9247). This action resulted in an antitrust suit in Germany which blocked the sale (Diggelman 2582- , 2608-9; Stewart 9247--8).

418. The record contains no plans by Fichtel & Sachs to manufacture shock absorbers in the United States, nor does the company make direct sales of shock absorbers in the U.s. (Diggelman 2555, 2587, 2596, 2604; Cox 4408; FJeuelling 5796-97; Freeman 8856 in camera; Nelson 9937- 417).

419. Boge, which is 100% owned by the Boge family, is the leading German manufacturer of replacement shock absorbers, with licensees in Brazil and Mexico (CX 97D, H; CX 98A, D, I-J; (97JCX 208Z-1O, Admission No. 159; Diggelman 2585, 2589; Bekin 2846 2863; Stewart 9236-37, 9276). In 1976 Boge supplied replacement shock absorbers direct to th U.s. replacement market and was also a major supplier of OE shock absorbers, including MacPherson struts and steering dampers, to Volkswagen, Ford of Germany, BMW, Fiat and Renault (Bellot 2882; Diggelman 2587, 2590; Cox 4408; Freeman 8856 in camera; Stewart 9243, 9253; see CX 208Z-10 Admission No. 160; FleueIlng 3980).

420. The record reveals no plans by Boge to enter the manufacture of shock absorbers in the United States (Diggelman 2596, 2604; Fleuelling 5796; Nelson 10 418). Indeed, in the opinion of a knowledgeable Maremont official, Boge lacks "the financial strength to build a unit in the United States" (Stewart 9276). 421. August Bilstein KG is a wholly privately owned German manufacturer of high quality pressurized shock absorbers originally produced under a license from DeCarbon (CX 97D, H; CX 98D, I; CX 208Z-1O, Admission No. 162; Petzsch 2442, 2454 in camera; Diggel- ( 556 FEDERAL TRAm COMMISSION DECISIONS Initial Decision 98 F. man 2512, 2531; Stewart 9244; Nelson 10 140 , 10 847). Bilstein is a significant OE supplier of shock absorbers in Europe for such firms as Mercedes-Benz, as well as a line of high quality, high performance replacement shock absorbers, including steering dampers and Mac- Pherson struts, for almost all European cars as well as many American and Japanese made cars (Petzsch 2446-7, 2452- , 2470 in camera; Fleuelling 3980; Stewart 9244-6). Bilstein sold a limited number of replacement shock absorbers in the U.S. in 1975 and 1976 through a distributing subsidiary (Petzsch 2445, 2452; Diggelman 2582; Stewart 9253).

422. The record reveals no plans by Bilstein to enter the manufacture of shock absorbers in the United States (Fleuelling 5796; Nelson 9937- 10,417).

423. A division of Jonas Woodhead & Sons, Ltd. Woodhead" manufactures shock absorbers in the United Kingdom (Cox 4375-77). The shock absorber plant operated by Woodhead is not fully automated and does not have a tube mill (Cox 4401). The product line of Woodhead consists of applications for a major portion of European and certain Japanese vehicles, including struts, steering dampers and conventional shock absorbers. These were sold to all OE producers in the United Kingdom, and were also sold for U. replacement use (98)(Diggelman 2563-64, 2590; Cox 4376, 4404-05). Outside the United Kingdom, Woodhead's shock absorber sales are primarily made in Europe, although, according to testimony, "a little bit" was sold for UB. replacement use (Cox 4376, 4402; Stewart 9253). Woodhead had only a limited line of shock absorbers applicable to cars sold in the United States (Cox 4379, 4384, 4403). Furthermore, Woodhead's former chief executive testified that the firm, was I'not a large enough company" to promote the sale of its own branded shock absorbers in the United States (Cox 4379). 424. In 1976, Woodhead's total shock absorber sales were $12.4 million and its total sales were $56.6 millon. Thus, Woodhead lacks the financial strength to build a plant in the United States (Stewart 9276). Woodhead had never considered nor intended to set up a shock absorber plant in the United States or to acquire a small UB. shock absorber producer (Cox 4401 , 4403; Nelson 9937- , 10 417; see Diggelman 2604). Furthermore, Woodhead had no intention to have a "major launch of the Woodhead brand" in the United States (Cox 4419).

425. The only foreign shock absorber producer who has built a ". Woohead is a widely-held company whose stock is publicly traded on the London Stock Exchange (Digge!man 2603; C'..x 4411; Nelson 10 179) TENNECO, INC. 557 464 Initial Decision manufacturing facility in the United States is ITT (Stewart 9274). lit owns two foreign shock absorber producers, Koni 130 and Wayassauto '" (Freeman 8833; Nelson 9677). Based upon the technology of Wayassauto and lit' s extensive domestic marketing ability in the OE market, ITT has secured a contract for the production of struts for Ford's domestic operations (Freeman 8838 8850-51 , 8853 in camera 8869- , 8874, 8884; Nelson 9829, 10 869- 70 in camera). Such struts are to be built at a new plant erected solely for such production in Macon, Georgia (Freeman 8894 camera). The Ford struts to be built at Macon and any others produced there are to be solely for OE sale. (Freeman 8885 camera, 8897; Nelson 9677).

426. The record does not disclose any other foreign shock absorber producer, other than ITT, which has any interest (99Jin establishing a plant in the United States or in acquiring a toehold producer in this country (Nelson 9937- , 10 417). 427. Shock absorbers are an easily imported item which are readily containerized for low cost ocean transport (CX 208Z-6 Admission No. 357). Ocean freight, insurance costs and tariffs are small factors in the cost of importing shock absorbers (CX 208Z-6- Z-7, Admission Nos. 35&-359; Fleuellng 3984). Currently, the U. tariff for imported shock absorbers is approximately 4- 1,% valarum (CX 208Z-7, Admission No. 360; Fleuelling 3983-84). Foreign manufactured shock absorbers are currently sold in the U. (See RX 550A in camera). In the period 196&-1976, imports accounted for approximately 4% of the U.S. replacement shock absorber market (Fleuelling 41 11; Nelson 9928; see Stewart 9253-54). XIV. Other Possible Entrants in the Shock Absorber Market 428. Midas examined the possibility of manufacturing shock absorbers before Tenneco acquired Monroe (Moore 1288; Nelson 089 , 10 998). Midas and the management of its parent, Ilinois Central Industries ("IC Industries ), surveyed the manufacturing capabilities of IC Industries including Abex, which produced brake linings (Moore 1285- , 1288; Nelson 10 090). Midas felt that it possessed the requisite ability to produce the tubing components of a shock absorber, as an extension of the company s ESP production "" Koni, a Japanese company. ;.' a manufacturer of speciillty, high performance shuck "bRorbers sold in limited quantities for racing and similar "pee;!!1 non-OF. applications in the United States (Freeman. 88:J4-35, 8878; Stewart 9242, 9253; Nelson 9677-- , 9940, 10 140), KOlli hm; recently Oplmcd a facility at Culpepper, Virginia to produce its SpI'Cialty shr;ck absorbcTS (Freeman 8837; Nelson 1O, HHO-Bl in camera). This facility engages in only limited processing and " is not a major manufaduring facility" (Freeman 881:1) ,a, Wayassauto, locate in Italy, is primarily an DE supplier of shock absortwrs, including sl.rut. (Freeman 8833-.34).

Initial Decision 98 FTC. (Moore 1289; Nelson 10 089). However, neither Midas nor Abex possessed the ability to produce rods, nor did they have the necessary design and engineering personnel (Moore 1289). After some consideration, Midas decided against such an expansion "because we felt that before we departed into a secondary manufacturing effort, that we ought to become more expertise (sick in our primary effort" (Moore 1289). Midas has plans to review entry into the manufacture of replacement shock absorbers from time to time (Moore 1256 camera).

429. After Midas discovered that Blackstone s shock absorber business was for sale, Midas sent four officials "over to Blackstone to see whether or not it would be to our (Midas ) advantage to consider its purchase " (Moore 1257 in camera). Later, Midas' President, its Director of Operations for the Automotive Group, along with the President of IC Industries, visited Blackstone to consider the purchase of its shock absorber business (Moore 1257 in camera 1265..8 in camera).

430. As of 1976, Arvin considered itself far behind Walker in customer acceptance and merchandising skill (Baker 578; Pond 864- 65; Nelson la 088). Likewise, Arvin was less able or willing to provide financial assistance to its muffler installation shop customers to promote their expansion (Verner 909-10; Nedell 94G-1 , 974). In fact, Arvin has stopped providing real estate assistance to its muffer installation (IOOJshop customers (Verner 910). Arvin did reject de novo entry in 1973, but, according to its chief official, if its program of selling shock absorbers had been as successful as anticipated, Arvin would have by now reconsidered de novo entry into shock absorber production (Baker 710-11 , 728; Nelson 10 099). 431. Complaint counsel' s economist, Dr. Nelson, who is also accepted as an automotive expert, testified that brake parts manufacturers are not considered as likely entrants into the domestic manufacture and sale of replacement shock absorbers (Nelson 9661 105- , 10 929-31). This statement is supported by the following: Marcmont sold its brake friction material business; IC Industries maqc a decision not to combine Midas and Abex; DBA' 132 lack of success in handling shock absorbers along with its brake line; and the lack of interest and incentive for Bendix, one of the leading manufacturers of brake parts to enter the manufacture of shock absorbers (RX 187Q; Stewart 9270; Nelson 10 105- 603, 10 929- 31).

432. Bendix is a major domestic manufacturer of braking compo- L" DBA is a French subsidiary of Bendix (Joines 9111 12; NclsotllO 105) (.

TENNECO, INC. 559 464 Initial Decision nents, including hydraulic components, powersteering units, universal joints, electronic fuel injection systems, oil fiters and spark plugs (Joines 9100, 9102, 9142). Bendix has eritered into the domestic sale of antis kid braking systems, el ctronic fuel injection systems and wiper blades on a de novo basis (Joines 9103-04). Outside the United States, Bendix has extensive foreign automotive parts operations producing primarily brake components (Joines 9109-11). Two of Bendix s foreign operations involve shock absorbers, DBA, and LIPMESA. In 1973 Bendiberica, Bendix s Spanish subsidiary, ac- '33 a Spanish company whose only product wasquired LIPMESA, shock absorbers (Joines 9112- , 9164). LIPMESA and Bendix have no plans to enter the manufacture and/or sale of shock absorbers in the United States (Joines 9119, 9122, 9133; Nelson 10 104). Bendix considered importing LIPMESA shock absorbers into the United States, but did not feel it could be successful in such an effort, in part, because Bendix considers shock absorbers as " a separate product line from our current product lines" (Joines 9137, 9139 9169- 9193; Nelson 11 036-37).

433. Bendix has never sold shock absorbers in the United States, either as a reboxer or as an installer ( 101J(Joines 9148). A major consideration at Bendix, in detennining whether it can successfully introduce a new product line,. is whether Bendix can market that product successfully (Joines 9148-9; Nelson 10 039-40). Bendix concluded it could not successfully market LIPMESA shock absorbers in the United States (Joines 9189-90; Nelson 10 039-40). 434. Bendix possesses little, if any incentive to enter the domestic sale of replacement shock absorbers. Bendix owns no retail outlets which install shock absorbers (Joines 9148; Nelson 10 105-06 111). Bendix has no defensive motive to enter the market because none of its major parts competitors are in the replacement shock absorber market (Joines 9146; Nelson 10 105-06, 10,109). Shock absorbers are not considered compatible with Bendix s major product line of replacement brake parts (Joines 9137; Nelson 10 105-6 110).

435. TRW, a major domestic manufacturer of automotive engine parts 134 and replacement chassis parts, has been in the replacement shock absorber market since .1955 (Poe 8927 29; Nelson 9786, 9790 112). Questor supplies TRW's shock absorber requirements (Poe '" Bendix acquired LlPMESA when Bendiberica wm; approached tracquire LIPMESA koop the busines going Joines 9117). LIPMESA, a licensee of AHinquant, sells almost 0.11 of its output in Spain and none in the Unite States (.Joines 9115-17).

'"' In addition, TRW' s Replacement Division sells WDs and job rs engine and chasis part which it dde not manufacture, as well as a general service line, timing gears and chains and shock absorbers, all of which it dQe riot produce (Stapleton 3485; POO 8928-29; Nelson 10 112-13) Ini tial Decision 893O-31). TRW's shock absorber line has not had any appreciable98 F. growth in sales, and has not achieved any penetration (Poe significant market 8932-35; Nelson 9787). TRW has not been making a substantial effort to promote and sell replacement shock absorbers (Bush 3294, 3320; Poe 8933; Nelson ing skills including the 114-15). TRW lacks marketnecessary to become a successful;sales forcesignificantand promotionalseller of replacementprograms shock absorbers, as TRW' s primary business is the sale of engine and chassis parts which are not highly 3466-7; Poe 8933; Nelson 9789- promotable items (Stapleton also lacks substantial sales to mass merchandlset-s, 10 039-40, 10 (Poe9;29 971). TRW 10;112-13). 8938; Nelson 436. TRW has no absorbers, and has neverplans seriouslyto enter the manufacture of shock 8971-72). One of TRW' considered such a move (Poe s replacement market that "it get out of the shock absorber businessoffcials recommended Nelson 11 036-37). TRW's volume of shock absorbers" (Poebusiness8935- simply, 8957; would not be sufficient to justify the investment in a shock absorber plant (Poe 8957-58). f102JFurthermore, TRW lacks the patents, desire, "background produce shock absorbersfactories,(Poe(anda8957).pooledTRWresourcesalso lacks tube mills and " necessary to shock absorber engineers (Nelson 10 437. Moog, a leading 049). seller of replacement chassis parts cessful1y attempted to sell replacement shock absorbers as a reboxer, unsuc- and subsequently withdrew from being a reboxer of most types of shock absorbers (Bush 3259;

073). Like TRW Stapleton 3469; Nelson 9789 , Moog lacks the skils necessary to Successfully, 10 115 market replacement shock absorbers (Nelson 9789- 438. Suppliers of tune- up parts are not, 10 929). in the manufacture of shock absorbers. Tune-uplikely shopspotentialdo notentrants shock absorbers (Nedel1 926). Tune- install and more highly paid than those whoup mechanics are more skilled ESP (Nedell 93O-31; Glassman 1005-6).instal1There shock absorbers and such tune-up mechanics would not be general1yWaswilingtestimonyto instal1that shock absorbers or ESP (Nedel1 93O-31).

439. Suppliers of likely potential entrantstransmissioninto shockparts absorbers.would Transmissionnot be considered far more labor intensive than is the replacement of ESP or shock work is absorbers (Glassman do not install shock absorbers1003-(4). (Nedel1Transmission926). Therepairmechanicsshops whogeneral1ywork in transmission shops are more skiled and more highly paid than thos who install shock absorbers and ESP (Nedel1 93O-31; Glassman TENNECO, INC. 561 464 Initial Decision 1002). In general, transmission mechanics would not be wiling to install shock absorbers or ESP (Nedell 930-31). 440. The leading tire companies sell few if any parts to WDs (McAdams 8988; Goodman 9067; Garfinkel 9201; Nelson 9790-92). B.F. Goodrich and Firestone manufacture no automotive parts sold to retail outlets although they sell a wide range of automotive parts including shock absorbers and ESP, to their stores and franchised retail outlets, (Goodman 9068-9, 9074; Garfinkel 9203; Nelson 9944 014, 10 020). Firestone once manufactured brake friction materials, as well as fan belts and hoses, but has ceased such activity (Goodman 9076; Nelson 9944, 10 021). Goodyear likewise sells a wide range of automotive parts, including shock absorbers and ESP to its stores and franchised retail outlets (McAdams 8988). The only automotive parts sold by Goodyear which it manufactures are fan belts and hoses, both rubber products (McAdams 8993; Nelson 9944 014, 10 016). With respect to its line of fan belts, Goodyear is a small factor (Nelson 10 016).

441. Specifically, B.F. Goodrich, Firestone and Goodyear do not manufacture either shock absorbers or ESP (McAdams 8993; Goodman 9075; Garfinkel 9203). These firms have (103Jno technological input into the shock absorbers which they purchase and have no technical expertise with regard to the design and production of shock absorbers (Garfinkel 9206; Nelson 9944-5 , 10 013- , 1l 01O). No tire company has been shown to have any intentions or plans to enter into the manufacture of shock absorbers (McAdams 8995; Goodman 9076; Garfinkel 9204; Nelson 10 013-14). 442. Mass merchants and tire companies would not be considered likely entrants into the manufacture of shock absorbers (Pond 866; Putman 1133; Buck 9422; Nelson 9940-5, 9975-76, 10,007- 021-24). Such firms lack design and manufacturing skills and, as a rule, do not manufacture any automobile parts (Kody 9350, 9355; Nelson 9791, 9943, 9976, 9983-4). Mass merchants do not have the warehouse organization or a suitable brand to sell to other wholesalers or retailers, and might encounter problems sellng to their retail competitors as well (Nelson 9791 , 9976, 9985, 9999, 10 001-04 1l,01l). Mass merchants also lack the experience necessary to promote automotive products through the traditional channel of distribution (Nelson 10,003, 10 005). There is no showing in the record of any interest in entering the manufacture of shock absorbers on the part of any mass merchant or tire company (Nelson 9976). These firms have no incentive to enter the manufacture shock ahsorbers, other than whatever is provided by their own purchases (Nelson 9977 10,006).

Initial Decision 443. As . one muffer chain stated 98 F. T. would sort of keep the other manufacturersconcerningon theirsuchtoesentry: " 944).

(Nedell xv. The Perception of Walker Deconcentrate the Shock Absorber as the Firm Most Likely Replacement 444. Walker Market Was perceived as One of the few most likely entrants into the manufacture and other producers of shock absorbers and ESP (Givenssale of replacement shock absorbers by 771-73; Putman 1145;

480-4; Moore 1248-9, 1325; Barna 1356; Pond 128-29);c . 445. In the Nelson last ten Arvin and TRW as years, Maremont considered Walker absorber business aslikelymanufacturerscandidatesontoa entersignificantthe replacementbasis (Pond, Midasshock771- , 799-800;

Nelson based on the fact that Maremont and Questor59IA, 11 129). This business judgment Was market as manufacturers and Arvin and already were in that reboxing shock absorbers (Pond 771- TRW were already 446. Maremont and Midas, 799-800). and capable perceived Walker as the most likely firm to enter the manufacture and sale of theshock absorbersESP aftermarket;because of its abilityWalkerto dominant marketreplacementposition in shock absorbers; its hydraulic know- manufacture (104J ubing for ity derived from how and manufacturing capabil- Walker s hydraulic of ESP and shock absorbers in their jackdistributionbusiness; the compatibility point of sale; the fact that Walker already, warehousing, and shock absorbers; Tenneco markets and distributes of the fact that Walker s strong financial capabilities; and because replacement s major ESP competitors were shock absorber market (Givens already in the 864-5; Moo 1247-49; Putman 1145-6). 480-4; Pond 771- 447. Maremont regarded Walker turer of ESP as a highly effcient manufac- , with extremely good technical Thus, Maremont perceived credentials (Givens 482). Walker likely, entrant into shock absorbers fromas onethe ofstandpointfew if, notof engineer-the most ing and manufacturing capabilities (Givens 438-0 Pond 775-76).

Walker , enter into the manufacturewas also perceivedof replacementto be as shock absorbers480-84, 520-22;On a likely as TRW to significant basis that a number of, baseditsonchief Walker marketing expertise; the fact competitors hadbecause of its experience in dealing with under-already entered; andcomparable types of service items (Pond 773-75). the-car parts and 448. Because of its high level of historic profitability, Maremont TENNECO, INC. 563 464 Initial Decio;ion felt that the replacement shock absorber business "would be an enticing one to be in" (Pond 777, 856-57). The attractive nature of the replacement shock absorber business caused Maremont to invest very heavily in that business from 1968 to 1978, not only because of the business opportunity for Maremont, but also because "if we didn t invest, someone else would " and "to make that a less exciting or less, desirable business for competitors to expand in" (Pond 777- , 857; Nelson 11 128; see Fleuelling 4022). Thus, Maremont expanded its plant and equipment as well as its inventory levels to provide a very high degree of availability (Pond 777-78; see Cook 1581). Maremont also invested in research and development on new replacement shock absorbers (Pond 778). Over the past eight or nine years, but more particularly over the three to four years prior to 1978, Maremont embarked on a "very aggressive cost reduction program for its replacement shock absorber business (Pond 778-79 855; see Cook 1581).

449. The ultimate consumer has been the chief beneficiary of Maremont' s efforts in the replacement shock absorber market (Pond 779). Marcmont' s cost reductions have been passed on in the form of lower prices and, indeed, Marcmont and also Monroe have been increasing their seIJing prices less rapidly than costs have been increasing (RX 58; RX 215; Pond 779, 854; Fleuelling 4071-72). The consumer also has benefitted by Maremont' s enhanced availability of product (Pond 779-80).

450. The lower prices charged by Maremont have become industry wide prices (Pond 858-59; Putman 1132). The effect of (105) Maremont's pricing actions as well as those of Monroe have served to make the replacement shock absorber business both more com petitive and less attractive to potential entrants than it otherwise would have been (Pond 858-59).

451. Based upon its own past history, Questor believed that Walker had the ability to become a significant manufacturer of replacement shock absorbers (Putman 1145). '" 452. Midas and Blackstone officials were of the opinion that if Walker had acquired Blackstone instead of acquiring Monroe ,os Questor schairmant"stifiedasfoJlows.

Q In your opinion, Mr. Putm"" , did Walker or TENNECO have the ability to enter into manuf8cture and sale of shock absorlw.rs without 8acquiring Monroe'! A Yes, sir. We did it, in our "econd phase of getting into the two-tube shock Q In your opinion, how could TENNECO or Walker have p.netratL"C the replacement with shock absorbers A In my judgment, they could have done the same thing we did in OUr second phase. They !:ould have set up a facility and hired the proper tehnical people and the production penple and marketing people, to set up an organization and go out to some of the national ac!:"unl where their c()ntacLarc as goo as oun; and offer them a quality produd at a fair price, and I think they would have gotten their share of bUHineHs, Harne a. did (Putman 1145-6) Initial Decision 98 F.TC. Walker could have become a significant seller of replacement shock absorbers in thc United States (Moore 1325-26; Barna 1356). Blackstone believed that Walker s reputation in the traditional segment of the aftermarket would have assisted Walker in becoming a significant supplier of replacement shock absorbers in the United States (Barna 136O-1 but see Finding 413 supra). (106) 453. Blackstone does not consider TRW a likely entrant into the manufacture of shock absorbers because of their lack of success as a reboxer of shock absorbers serving the replacement market over an extended period (Barna 1367). Furthermore, TRW had informed Blackstone that the firm was not interested in buying shock absorbers from Blackstone as they were "having difficulties" (Barna 1362, 1366). TRW had also informed Blackstone that they "would love to sell us (Blackstone) their inventory (of shock absorbers)" (Barna 1362--3, 1366). Maremont did not consider TRW to be as likely an entrant into the significant manufacture of replacement shock absorbers as Walker (Pond 773-76). As stated by Maremont' then senior vice-president (now president): "My estimate would be that it would be a much easier entry for an exhaust manufacturer into the shock absorber business from a manufacturing standpoint than it would be for a suspension parts manufacturer (TRW)" (Pond 776).

454. Maremont did not consider any foreign shock absorber manufacturer as likely to become a significant factor in the United States replacement market (Stewart 9255, 9263, 9276-77; Nelson 9940). A knowledgeable official testified that such firms lack the necessary domestic distribution system, knowledge of the U. replacement market, proper sales force, marketing programs and sales promotion programs (Stewart 9256-57, 9277- , 9288-89). 455. No witness identified Sears Roebuck, the leading purchaser of replacement shock absorbers, as being a likely entrant into the manufacture of shock absorbers (Pond 866; Putman 1133; Buck 9922; Nelson 10 007-08).

XVI. Monroe as a Potential Entrant into the ESP Market 456. Monroe had been considering diversification of its basically one product company for a number of years '" (Fleuelling 3948). In ". In its 1972 Annual Report Monroe state that: "(w)e plan to continue looking for products with goo polRntial in t.h€ aftermarket whi :h could be fitted into our rrHlrkding struct.url' '' (CX 145EJ. , J.J.!.Il"4D\..A,., U"I.,. 565 464 Initial Decision 1975, after its entry into oil filters, the company reaffirmed its goal of continued diversification. '" (107) 457. Monroe sought to add a second or third major automotive product line, which could be built into a strong second or third industry position (CX 178A). The type of financial return looked for was one which would result in $2 million in profit after taxes (CX 178A).

458. Monroe considered diversification through acquisition, and established acquisition criteria'" (CX 177B-). 459. Monroe preferred to acquire an "under carriage" producer (CX 179A). By adopting this acquisition strategy, Monroe felt it would be in a position to supply the large, emerging retail chains with an "under carriage" package for their installation shops, and thus mitigate any threatened loss of its market penetration (CX 179A). Front-end equipment and parts manufacturers, brake and brake parts manufacturers, and ESP producers were included in the under carriage" category by Monroe (CX 179A-B; Fleuelling 5768- 69). ESP producers were considered to be compatible with Monroe because of the success Midas was enjoying in selling both ESP and shocks (CX 179B).

460. Following its determination that ESP met its acquisition criteria (CX 177 A-B), Monroe took steps to acquire (108)the Arvin Company, '" hiring a broker to assist in this effort. On February 13 1974, the broker transmitted to Monroe a comparison of Monroe and Arvin s financial data, and an analysis of the effects of offering differing amounts of Monroe stock in exchange for Arvin stock (CX 182A-E). On February 25, 1974, Monroe s Chairman of the Board met with Arvin s President and Chairman to discuss the acquisition of Arvin by Monroe (CX 183; Baker 579-80; Fleuelling 3947-48 3963 5767-68; see CX 208Z-7, Admission No. 360). On March 29, 1974 Monroe s broker submitted additional statistics to the company pertaining to the possible Arvin acquisition, along with other relevant considerations (CX 185A-D; see Baker 582). The proposed Arvin acquisition proceeded so far as discussing the mechanics of L'1 MOnTOt' stated in its 1975 Annual Report that (tJhe Company will continue to be alert to opportunities represented by addilional product lines with goo sales pot.'nlial,suitable for marketing through our wellestablished world-wide distribution system " (CX 142E; seeCX 2087-- , Admission No. 361). ,,' Someofthc "acquisition criteria were: - The prof,t potentialshould be at least an immediate return of 10% on investnH'nt - Producl involved must IX involved in a growth.h phas.., not a static "r d !ining phase. - Acquire brand n11me producl of a specialty character which are related tn our current area of business - Products which could re pond to aggrcs ive advertising and merchandising. - Products which could lend themselves tDour distribution channels and manufacturing skills (CX l77R) "" Arvin, which sells ESP primarily tD the OE market, accounted for approximately 10% of ESP stiles to the replacement market in 1976 (CX 265in camera; Nelson 11 027-28 in camera) Initial Decision 98 F.T.C. putting the two firms together organizationally, such as selecting a name for the comhination, a proposed Board of Directors, a list of officers and a corporate organization structure (CX 186; Baker 582). However, the merger was never consummated, and, according to Mr. Fleuelling of Walker, was never seriously considered (Fleuelling 3947-48 3963 5767).

461. The combination of Monroe and Arvin would have strengthened Arvin s position in the ESP replacement market by adding Monroe s excellent merchandising ability to the lesser marketing skils possessed by Arvin (Baker 588-89).

462. The record identifies an additional ESP acquisition candidate. During 1975, the parent of Muffer Dynamics was attempting to sell the company (Kittridge 1411- , 1441 in camera). Muffer Dynamics is a small replacement ESP producer, manufacturing four lines of muffers, all of which are consolidated lines designed for sale primarily to mass merchants and muffer installation shops (Kittridge 1403-05, 1409). Muffer Dynamics does not sell to the traditional segment of the replacement market (Kittridge 1452). Muffer Dynamics has the present capacity to make about two milion muffers per annum, having an approximate value of $15 million (Kittridge 1405-06). Muffer Dynamics has no tube mill, but does possess bending equipment which could be used to produce pipes (Kittridge 1406-7). Sales of Muffer Dynamics ESP are made primarily through independent sales representatives, rather than by salesmen of its own (Kittridge 1429).

463. In the opinion of Muffer Dynamics' official, Mr. Kittridge the combination of his company and Monroe could (109)have become a substantial factor in the U.s. replacement ESP market (Kittridge 1424).

464. Prior to its own acquisition, there was some interest on Monroe s part in acquiring Walker (CX 4C). As noted, only Monroe among the major shock absorber replacement marketers did not manufacture or sell ESP prior to its acquisition in 1977 (Moore 1258 in camera).

465. Armstrong, a leading British shock absorber producer acquired a British ESP producer in 1974 (Hooper 2614). At the time of its acquisition, that ESP producer had 4 to 4.5 percent of the ESP replacement market in the United Kingdom (Hooper 26I6). Under Armstrong, the share of market held by that ESP producer has risen to 9% (Hooper 2616). (110) lL'.L'U'OCA..V, llrl.. 567 464 Initial Decision XVII. Legal Discussion The Commission s complaint advances three theories of violation of Section 7. "" These involve: (1) horizontal aspects of the merger; (2) the doctrine of potential competition, both actual and perceived; and (3) allegations of entrenchment. Under my view of the facts and controlling legal precedents, none of these theories are viable in this case.

Before discussing these points, however, two issues regarding relevant product market require attention. 141 The Shock Absorber Cluster Market As discussed at length in the findings, shock absorbers and ESP are manufactured for both OE installation and replacement purposes (Findings 55-169). To assess the competitive consequences of Walker s acquisition of Monroe, the complaint focuses on the replacement category, declaring the relevant markets for both products to be their manufacture and sale to (1) the entire U. replacement market, and to (2) the independent aftermarket segment thereof (i. the replacement market minus DE service sales). 142 In the case of shock absorbers, while MacPherson struts and steering dampers are not interchangeable with conventional shock absorbers, it is clear that they perform the same type of function on vehicles. Each is used for hydraulic dissipation of mechanical energy arising from road imperfections and vehicle dynamics. The production of each involves the same or similar technology, and each contain common working components (a metal cylinder filled with hydraulic fluid, into which a piston mechanism is inserted, with valving to permit a measured flow of (lll)fluid). Each is marketed together by the leading shock absorber manufacturers, through the same replacement channels to the same customers (Findings 25-54). Accordingly, it is not inappropriate to consider these products as being in a single cluster market.

There is legal precedent of long duration to support the recogni- "0 Violation of Section;; FT Act was also al!pged, re.'ulting from the alleged S..ctioo 7 Clayton Act viol"tion This wa. not independ.-mtJy pun;ued at the hearings. and thus ncquires no independent r\'o\ution in the initia! decision, 14' There is no di pute that the relevant geographic markd for both shock absorbers aod ESP is the United St"tesasawho!e(Finding24), ,o, QE service refers to those products manufactured for Hae to OE vehicle producprs for diHtribulion to their dealer outlet Winding 170) , Initial Decision 98 F. tion of a cluster market, where technical or commercial realities permit such classification. In its 1963 decision in Philadelphia 144 the Supreme Court did not have any difficulty inNational Bank determining that (374 U.S. at 356):

'" '" '" the cluster of products (various kinds of credit) and services (such as checking accounts and trust administration) denoted by the term "commercial banking" H* composes a distinct line of commerce.

Commercial banking was found by the Supreme Court to be a distinct line of commerce even though the various services and products offered by commercial banks are distinguishable from each other, and in some instances are also provided by financial institution other than commercial banks. The products and services in question, such as personal loans, checking accounts, estate and trust planning and safety deposit boxes, are clearly not interchangeable. The Court emphasized that it was the cluster of products and services which commercial banks offered as a full line that made commercial banking a distinct line of commerce as a matter of trade reality. The Supreme Court later reaffrmed its holding that the commercial banking industry as a (112Jwholc was a proper line commerce for Section 7 purposes. 145 The Commission has used simi)ar rational in numerous cases. As long ago as 1960, for example, in the Spalding case, H" the Commission found the existence of an athletic goods market, which contained all manner of non-interchangeable sports equipment. Recent Commission decisions include Brunswick Corp. Dkt. No. 9028, Nov. 9, 1979, Slip Op. at 6-10; Kaiser Aluminum and Chemical Corp. 93 F.TC. 764 , 833-39 (1979); Coca-Cola Bottling Co. of New York, Inc. 93 F. C. 110, 199-205 (1979). Supply Cross-Elasticity for OE and Replacement Shock Absorbers and ESP As regards both shock absorbers and ESP, it is respondent' elaborate contention (1) that the concept of cross-elasticity of supply Liggett Myers lnr:. 87 F. C. 1074 (1976),afrd 567 F.2d 1273 (4th Cir, 1977);Rrit ,h Oxygen Co. Ltd" 86 C. J241, I:J4.'i-46 (1975) reu d an a/her grounds and remanded su/;. nom, ; BOC Inl, Lid. v. Pfc 557 F.2d 24 (2d Cir. 1977);United Stalesv. Ford Molar Co. , 286 F. Supp. 4U7, 411- 16 (KD. Mich. 1968) afrd, 405 S. 562 (1972); LG. Balfour Co. v, prc 442 F.2d 1, 10-12 (7th Cir. 1971); andUnited States Grinnell 0"'1'. 384 U,S. 563 (966). cy Sterling Dr"u, Inc. 80 F.TG 477, 555 (1972);United Slales v. Bethlehem Sleel Co/p., supra J68 F. Supp. 576 594 (S. Y. 1958).

". 374 1.. :121 (1963).

Uniled Stales v, Phillipsburg National Rank Trust Co., 399 U.s, 3. O (2970) (commercial banking);see also, United Sif!les Grinnell Corp. J8 U.s. 566 (1966) (centra! station protetive services); British Oxygen Co. Ltd. 86 F, C. 1241 rev un "thergrol1nd. , sub nom., HOC' lntl Lid v. 557 2d 24 (2d Cir. 1977) (industrial gass); Unit"d States v. Hugh"s Tool Co. 415 F. Supp. 637 (S.D. Cal 197fi) (Hpeciali7.cdHunace rotary drilling equipmo.nl); United Statesv. Bethlehem Sleel Corp. 168 F. Supp, 576 (S.D.N.Y. 195R)(iron and sr.el industry). '40 A. G. Spalding Bros. . Inc. 56 F, C. 1125 IJ60(1960); alld :JOI F,2d 585, fi (3d Cir.1962) _.

464 Initial Decision is invariably co-extensive with production flexibility, and (2) that the evidence shows such a degree of shifts in production as between OE and replacement products that the latter simply cannot be regarded as being in a separate submarket (See RPF 27- 38-114, RRPF 16- 30). Complaint counsel differ sharply on both points (CRPF pp. 2-12). It is difficult for me to equate production with supply in the (,verall sense. To focus solely on production factors would overlook other factors involved in supplying a product, such as distributing and marketing. As to these, the record shows significant differences as to OE and replacement products (Findings 58-97). In the Budd case, 86 F. C. 518, 571-72 (1975), the Commission decision not to further subdivide the overall "van (113Jtrailer market into submarkets for "open-top" and "closed-top, was not based solely upon considerations of production flexibility. Its evaluation of cross-elasticity of supply included the "interchangeability of production and distribution facilities" between the two products, enabling a manufacturer of one to "shift readily to the production and sale of the other (emphasis added). The Commission stated: Because the record establishes such a high degree of cross-elasticity of production and identical marketing ease among van trailers, we conclude that "open-top" and closed-top" van trailers do not constitute separate submarkets. (86 F. C. at 572, emphasis added) Apart from this consideration, there is much testimony and data feasibility ofin the record concerning the ability to, and the switching OE and replacement shock absorber and ESP production (Findings 98-116, 156-69).

Complaint counsel maintain that even if the record demonstrates re- complete production flexibility between OE and replacement, spondent' s contention based on this assertion must fail as a matterof law. I agree with their position.

141 referred to production The Supreme Court in Brown Shoe facilities as but one of seven enumerated submarket criteria. 148 Indeed, as complaint counsel point out, in that landmark case the Court upheld separate submarkets for men, women s and children public recognition, separate shoes based upon four criteria viz. plants, peculiar product characteristics and distinct customers. This was despite the fact found by the court below that "the history of without Brown s own factories reveals that a single plant may * undue difficulty be shifted from the production of children s shoes to men s or women s shoes or vice versa. "149 Rr"fvn Shoe Co,v, lfnitedSlates 370 VB 2!J4(l962). "" 370 S. at 325 ,," 370V.S, at;!67-68(Harlan, dis1enting in part and concurring inpartJ. 3r,,i- lJ' jli (; OJ 3 Initial Decision 98 F. In United States v. Aluminum Co. of America 377 U.S. 271 (114) (1964), the lower court had found that:

(TJhere is complete manufacturing interchangeability between copper and aluminum and manufacturers constantly review their product lines and "switch readily from one product or conductor metal to another in accordance with market conditions. Nevertheless, the Supreme Court found separate submarkets on the basis of only two criteria, distinct prices, and peculiar characteristics and uses. 15t Based upon such precedents, together with the decisions of lower courts 152 and those of the Commission, 153 it is clear that production flexibility is but one factor to consider in determining the relevant product market in any given case.

We turn now to consider the theories of violation. (115)115j Horizontal Aspects Among the alleged anticompetitive effects of the Walker-Monroe merger is that: " actual competition between Tenneco and Monroe and between Tenneco and other producers of shock absorbers for domestic sale to the replacement market and the independent aftermarket has been eliminated.

This allegation cannot be sustained because at the time of the merger Tenneco was not a producer of shock absorbers for the following reasons:

(1) In 1975 and 1976, Walker sold a small number of shock absorbers to muffer shops which it had purchased from Monroe as a reboxer (n. supra). It did not manufacture those units. (2) Through its Mechanex Division, under which the assets acquired from Triple S Industries were placed, Walker purchases steering damper cylinders, adds bracketry and sells a line of steering dampers (CX 43A-H). This does not make Walker a shock absorber "u 377 U,S. at 285 (Stewart dissenting) ,., 377U.8at277.

'52 See, eg. United Stale..v. Black Decker Mfg. Ca.,430 F. Supp- 729, 1:36-1 (0 Md. 1976); see alsu L.G. Balfour Cu. v. Vl'(: 442 1'.2d I, 9-11 (7th Cir. 1971);ReyT101d. Meta/$ Co. v. iJ09 2d 223, 225-29 mc. Cir. 1962); Cmwn 7_ellerbach Corp. v. VIr, 296 F.2d 80, 812- 14 (9th Cir. 1961J. red.denied 370 U,S. 937 (1962). Additional cases on point includeUnited Stales v. Pennzoil 252 F. SUpp- 962, 975 (w. Pa. 1965); andColumbia. Metal ClilupriC,, v.Ka.i:er Aluminum Chemical Corp. 579 F.2d 20 (3d Cir. 1978), wherein the court state at p29 It is true there was testimony that the sam", production racilities can be used lo turn out both steel and aluminum culvert, and that the same companies often manufacture both. This, however, is not enough to prP.,lude the existcnc" of sub markets as a matter of law '00 See, e. , Kuiser Aluminum Chemical Curp. 9:1 FT.C. 764, H34 (1979); Com-Cola Bouli71/?C". of New York 93t" C.1l0 2U4--5(1977) y.

i.i.LlV""

464 Initial Decision manufacturer, even though the Mechanex Division manufactures bracketry for mounting the product (Prescott 11 284-85). '" Nevertheless. even if one were to assume that respondent were a shock absorber manufacturer, and were to look at its shock absorber sales in best light, these would total in each of the years 1975 and 1976 approximately 100 000 units, less than 0.2% of the replacement unit market (RX 550A 550D in camera; N. Wright 849-52A). dollar figures, the market share would be less than .3% in 1975 and 1976 in both the replacement market and independent aftermarket submarket (CX 261A 262, 263 , 266 in camera). This seems clearly to fall within the de minimis concept recognized by Brown Shoe, 370 S. at 329.

Nor are the cases cited by complaint counsel of assistance on this point. '" In each case, the small company acquired (116Jhad at least some firm base or facility which could be utiized for expansion by the acquiring firm. In the present case, respondent in this case to expand" its role as a !Cshock absorber manufacturer " would be tantamount to entering the market de novo (See Nelson 10 785-86). Accordingly, the complaint's allegation based upon an alleged horizontal overlap" must be rejected.

Potential Competition Both branches of the doctrine of potential competition, actual and perceived, are in issue in this product extension merger case. The actual" theory involves the elimination of entry into a market by an actual potential competitor a company, but for its acquisition of an existing competitor in a market, would itself have entered that market either by de novo means or by toehold acquisition. The perceived" concept involves the elimination of a firm situated at the edge" of a market, perceived to be a threat to enter that market and thus exercising a procompetitive discipline upon the activities of companies presently operating therein. See United States v. Marine Bancorporation 418 U.S. 602 (1974); United States v. Falstaff Brewing Corp. 410 U. S. 526 (1973); Ford Motor Co. v. United States 405 U.s. 562 (1972); FT v. Procter Gamble Co. 386 U.S. 568 (1967); ,.. The shock absrber cy!indDr, or coun;, is the heart of the sterling damper, and the basis for including it in the shock absorber duster market supm.

United States Y. Aluminum Co. of America (Alcoo-Rume), 377 U.S. 211 , 2III (196) (27.8% acquiring 1.3%); FT' Pepsico Inc. 477 F.2d 24, 27- 28 (2d Cir. 1973) (40% acquiring 0,3%); Stanley Wo ks v. 469 F2d 498 (2d Cir. 1972), cerl. denied 412 U.S. 928 (1973) (1% acquiring 22%);Retail Credil Cu"92 F, C. 1, 143 (1978) (2.8% acquiring 49,:1%).

, p 572 FEDERAL TRAm COMMISSION DECISIONS Initial Decision 98 F. United States v. Penn-Olin Chemical Co. 378 U.S. 158 (1964); United States v. El Paso Natural Gas Co. 376 U.S. 651 (1964). While the Supreme Court has fully endorsed the "perceived" test, it has expressly reserved ruling upon the validity of the "actual" potential theory in both its Falstaff and Marine Bancorporation decisions. Nevertheless, it is a viahle approach in the eyes of numerous lower federal courts and the Federal Trade Commission (117) Actual Potential Entry , the Marine Bancorporation case According to complaint counsel sets forth certain elements which must be satisfied before the p. 114):doctrine of potential competition may be applicable (CPF, (1) The market in question must be concentrated; (2) There must be feasible alternative methods of entry other than by the merger in question; and (3) The alternative means must offer a reasonahle prospect of long term structural improvement or other benefits in the target market. There is no question that both the shock ahsorber and ESP replacement markets are highly concentrated. As set out in the findings, for shock absorbers in 1976 the top four figure was 92. (95% in the independent aftermarket); for ESP in 1976 the top four figure was 73.5% (78.7% in the independent segment) (Findings 185 186, 208, 219).

As for the second point, the criterion concerning feasible alternatives, this, according to complaint counsel, involves an assessment of entry barriers and the acquiring firm s capabilities, characteristics and economic incentive to enter the market in question. 157 Since there is no dispute between the parties that entry barriers for both shock absorbers and ESP are high, let us turn to the other indicia concerning feasible alternatives.

According to Professor Brodley,''' the question of whether the acquiring firm had the capability, interest and incentive to enter the market by alternative means, and the feasibility of (118)this, has invited: 159 ",," Virtually open-ended inquiry into a broad spectrum of financial, technological and marketing issues * * * Among the issues explored in recent cases are technological ". See cases and authorities citedin the second paragraph of footrJotl' 25 in the Coromi$sion s decision in the BrurI$wick case, Dkt. No- 9028, November 9, 1979 (Sip Op. at 17-H!)194 FT.C 1174 at 12671 ,., CPF 114 95.

". Brod!ey, Potentia! O:"npetitionMerg-e,n;: A Structural Syothesis, 87 Yall' LJ. 1 (1977). ld. at23 TENNECU, u 464 Initial Decision capability, capital availability, marketing and advertising abilities, market overlap between the target and acquiring firms, predicted returns from entry as compared with benchmark, or target returns, other incentives or disincentives to entry (such as diversification needs), growth patterns of the acquiring firm (including past entry into similar markets), growth of demand in the target market, availability of smaller or toehold" acquisitions at prices acceptable to both buyer and seller, specific entry barriers (such as scale economies, product differentiation, and high absolute cost requirements), and managerial interest and intentions as to entry. There is evidence in this record respecting most, if not all, of those points. Detailed findings have been made concerning, inter alia technical similarities in producing shock absorbers and ESP (Findings 268-77, 346-53); their distribution processes (Findings 278-95); their marketing and merchandising methods (Findings 296-318); their common competitors and customers (Findings 319-39); and synergistic savings (Findings 340-45). The findings have covered points such as respondent's substantial interest in the shock absorber business, and the steps taken in this regard, including the acquisition of a small company (Findings 354-88). Other findings have covered respondent's economic incentives (at least in its eyes before the merger) regarding shock absorbers (see, e. Findings 199- 200, 203, 356).

In fact, the evidence adduced by complaint counsel as to respondent' s capability, interest and incentive is in my judgment, impressive, and amply substantiates those points. That is, except for one particular: absent the Monroe merger, how was respondent, as a practical matter, to enter the replacement shock absorber market in any meaningful way? (119) In this connection, there is no reliable record evidence of which I am aware, that Walker was actually planning to enter the shock absorber market de novo.

As for toehold acquisitions, what shock absorber manufacturers were available for purchase which might offer a viable entry vehicle My reading of the record convinces me that there were none at least at the time of the Monroe acquisition.

As for Armstrong, the record shows some interest on respondent's part in that company, going back to 1966-68 discussions (Findings 359--4). Respondent continued to maintain its interest prior to the merger, but the record shows a lack of interest on Armstrong s part (Findings 389-400).

As for DeCarbon, while some preliminary discussions occurred, the record shows that failure to agree on an initial price blocked a possible acquisition from the outset (Findings 401-(9). As for Blackstone, the only non-foreign toehold cited in the record as possibly available, this company has apparently been for sale Initial Decision 98 F. since 1974, with no purchaser thus far. There was evidence that Blackstone was an unattractive candidate for entry (Findings 410- 13). The record does not indicate any interest on the part of respondent to acquire that company, or any effort made in that direction.

The names of other shock absorber manufacturers (all foreign) appear in the record. Their prospects as toehold acquisitions for respondent are unclear (Findings 414-27). Thus, it has not been established in this record that feasible alternative methods of entry existed for respondent, at the time it acquired Monroe. Under presently governing case law, violation has not been shown. See, e.g., United States v. Siemens Corp., (1980) Trade Reg. Rep. (CCH) TI 63 287.'60 (120) Perceived Potential Entry The record in this case contains testimony by a number of industry witnesses that they perceived Walker to be one of the most likely entrants into the shock absorber replacement market (Findings 444 et seq.

To the elements of proof recited by complaint counsel respecting actual potential competition supra p. 117, another element must be added respecting the perceived potential entry theory, a "probability that the acquiring firm prompted premerger procompetitive effects within the target market."'6' In support of this proposition, complaint counsel rely to a great extent upon the testimony of Mr. Byron Pond, a senior Maremont official (see Transcript pp. 771-79, 858-59, 864-5). Respondent interprets Mr. Pond's testimony to mean that the requisite effects were not shown.

I have examined this testimony carefully, and while it may not be entirely clear, it appears to support respondent's view. The crucial testimony was given at Transcript pp. 776-77: Q. Did the presence of Walker, IPC or Midas and/or TRW as likely potential entrants into the shock absorber market, have any effect on Maremont's decisions business decisions? A. I don t think that we looked specifically at competitors on a periodic basis or potential competitors, in developing our strategy. I think we developed our strategy and approach to the business based on how we perceive it and how we perceived the opportunities.

'60 Similarly, I can find no reliable evidencIo establishing, ufJder current legal standards, that Monroe was planning to enter the ESP replacement market. de novo. As for its possible acquisition of Arvin, the merger was never cOnsumml1t€, aod, according to the testimooy of witness Fleue!liog, never seriously contemplated- See Findings 456-5.

IS' CPF,p. 114.

J.-' n-'vll, U 464 Initial Decision To me, this testimony means that Maremont did not take potential competitors, including respondent, directly into account in making its business decisions.

Mr. Pond further testified concerning the attractive nature of the shock absorber business, and Maremont's heavy investments in it over the past ten years. He stated that "if we didn t invest, someone else would " and that such investments by Maremont would make the shock absorber business "a less exciting or less desirable business for competitors to expand in." (Pond 778). (121) This latter testimony can be read to refer to potential competitors or it can be read to refer to competitors presently in the market, or to both. It is simply unclear. '"

Accordingly, I find the record evidence insufficient to sustain the allegation as to "edge" effect. '"

III Entrenchment There is legal precedent for declaring a mer!re"-"T. awful which confers a decisive advantage on a dominant competitor, which creates a reasonable probability of entrenching that company market position. FTC v. Procter Gamble Co. 386 U.s. 568 (1967); General Foods Corp. v. FTC, 386 F.2d 936 (3d Cir. 1967). See legal analysis set forth in United States v. ITT Corp. 324 F.Supp. 19 24 (D. Conn. 1970), and in the court's earlier opinion in that case, 306 Supp. 766, 775-76 (1969). In order for this theory of liability attach it must be demonstrated that the acquired company was prior to the merger, an already dominant competitor in the relevant market. Beatrice Foods Co. 86 F. C. 1 66 (1965). In the present case, the record shows that Monroe did not dominate the shock absorber replacement market at the time of its acquisition by Walker. It was facing aggressive competition from Maremont, which already had ESP products in its arsenal. (Finding 197). Thus, the entrenchment theory does not apply to Monroe. While Walker is the !cading ESP producer (Finding 210), its replacement market share at the time of the merger was just over 30% (Nelson 10 377 in camera). In no sense can it be considered a giant among pygmies or to dwarf its ESP competitors. None of its major competitors, Maremont, Arvin (122)Questor, and Midas (IC Industries) can be considered as small companies. Its two largest ." Compliiint cQuno.l relyupon certin liinguagc inUnited Statesv. Phillips Petroleum Co. 367 F. Supp. 1226 1257 (C.D. Cal. 197:J),affd 418 U.S. 90 (1974), that the necesry "edge" effect may be presumed. Whatever the preEOnt validity of t.his holding, it conflicts with the Pond t. timony, that Maremont's bu ines deci ions were not speifica!ly influenced by potent.ia! competitors, including respondent '" There wa. nO record evidence that Monroe wa. perceived as a potential entrant into the replacement ESP replacement market Opin ion 98 FTC.

competitors in the replacement ESP market, Maremont and Questor, already possess shock absorber facilities. It is difficult to see how Walker automatically becomes entrenched by acquiring this capability.

XVIII. OrWER It is ordered That the complaint herein be dismissed. OPINION OF TI-IE COMMISSION By DIXON, COMMISSIONER:

This matter involves a challenge to the acquisition of the Monroe Automotive Equipment Company by Tenneco, Inc., under Section 7 of the Clayton Act, 15 U.sC. 18, and Section 5 of the Federal Trade Commission Act, 15 U. G 45. At issue is whether the merger was likely to reduce competition in either the market for replacement shock absorbers or the market for replacement exhaust system parts (ESP) through the elimination of potential competition in either market, the elimination of actual competition in the replacement shock absorber market, and the entrenchment of Monroe in the replacement shock absorber market. I Despite the variety of the allegations, the focus of the litigation, and of this (2Jopinion as well is on the effect of the merger upon potential competition in the market for replacement shock absorbers.

The Administrative Law Judge (ALJ) below, although making extensive findings favorable to Complaint Counsel, dismissed all counts in the complaint, and Complaint Counsel appeal. We reverse in part, finding that the acquisition eliminated potential competition in the sale of replacement shock absorbers. Thefollowin abbreviationsareusl'rlhereio' Initial Dec;sion inrling of Fact No LIJ Initial Decision Page No Transcript of Testimony Pag" No Complaint Counsel's Ex:hibit Nt) Respondenl s Ex:hibit No.

RAH Respondent s Answering Brief Page No RP)" Respondent's Pror1os,.rl Finding No RRPF Respondent's Reply Proposed Finding No CCP Complaint Counsel's Proposed Finding No , We affirm infra, the AI J's dismissal of the claim that the merger lessened actual comp€tition ;n the replacemenl shock absorber milrket. However, given t)ur analysis or th" ;mpaet of th" merger On potenhal competition in that market. and the remedy which necessarily enmes, it. is Uth1CCessary 1.0 reach the further claims t.hat the merger unlawfully entrenched Monroe and that MlInroe was a pot.entia) entrant into t.he replacement exhaustsysLemmarket .L.LU..'.LYV'J, H''-.

464 Opinion Potential Competition The term "potential competition" encompasses two distinct but closely intertwined theories of violation: actual and perceived potential competition. A merger may be challenged for eliminating perceived potential competition when it removes from the edge of a concentrated market a firm likely to have been exerting a salutary policing effect upon conduct within the oligopoly. To determine whether a firm is so positioned, and thereby so perceived, requires an examination of its "characteristics, capabilities and economic incen- United Statestive" to attempt entry into the market in question Marine Bancorporation 418 U.s. 602 , 624 (1974); see also, United States v. Falstaff Brewing Corp. 410 U.S. 526, 533-34 (1973). Moreover, for the loss of this firm to be significant, there must be few other firms similarly positioned, see, e. , Heublein, Inc. 96 F. 385, 588-89 (1980). A challenge based on the loss of an actual potential entrant involves a similar inquiry, but two additional factors must exist before there is the probability that the merger wil substantially lessen competition: that the firm had means to enter other than through the challenged acquisition and that those alternative means were likely to have had a procompetitive effect on the target market. United States v. Marine Bancorporation, Inc. supra 418 U. S. at 633.' The inquiry also differs in that we are unconcerned with how target (3Jmarket firms are likely to perceive the actual1 potential entrant; the procompetitive benefit lies in the future, when entry is attempted, rather than in current reactions by fearful target market firms. Moreover, a firm may be an actual potential entrant without meeting all the requisites of a perceived forpotential entrant. The apparent objective economic evidence, example, may exclude a firm from being seen as a potential entrant yet it may possess plans and hidden capabilities which establish it as an actual potential entrant.

This case involves charges that Tenneco s acquisition of Monroe eliminated both actual and perceived potential competition in the replacement shock absorber market, and we find violation on both counts. Our analysis of the evidence, necessarily lengthy given the voluminous record, focuses first on Tenneco as a perceived potential entrant. As discussed, however, there is considerable overlap between the two theories, so our examination of the characteristics , Although the Supreme Court has delineated the element oj actual potential doctrine, it has ,.expressly reserved approval of the doctrine itself.Uniled Slates v. Marine BanmrpIJw.ti"", supra, 418 U,S. at G2.';;Uniled Siaies v. Falstaff Brewing Corp. . supra, 410 U.S. at 537. We believe, however, that approval wi!! eventually cum" See, Heublein, Inc. , sup/' a, n22; Brunswick Corp.. 94 F, C. 1174 , 1267 n, 25 (19791, "Itd, Yamaha M"tur Co . Lid. Federal Trade C"'nmi. siul!, slip "p. (8th Cir. , July 29, 1981) and authorities cited therein Opinion 98 F.

capabilities and economic incentives which relate to Tenneco as an actual potential entrant will be included in the discussion of the perceived case. Although the great bulk of the evidence related to these elements applies with equal force to either theory, certain aspects do not, and these points wil be highlighted as they occur in the discussion.

The Firms Tenneco, Inc. is a diverse enterprise with interests in inter alia shipbuilding, farm equipment, automotive parts, petroleum, chemicals and packaging. Tenneco was the 15th largest industrial concern in the United States in 1975 with assets of over $6.5 billion. LD. 3. One subsidiary, the Walker Manufacturing Division, manufactures a complete line of exhaust system parts for passenger cars and light and heavy-duty trucks. LD. 4. The Mechanex Corporation, a subsidiary of Walker, distributes a line of automotive steering dampers, a type of shock absorber mounted horizontally between the front wheels of a vehicle. LD. 5. Walker also manufactures a line of automotive lifting equipment, including air and hydraulic-powered jacks. LD. 6. (4) Monroe has long been a major manufacturer of an extensive line of automotive shock absorbers, including conventional shock absorbers, steering dampers and MacPherson strut cartridges. See discussion infra 5. Monroe produces high quality products, and the brand name is well known. The bulk of Monroe s output, 81 percent in 1976, is sold in the replacement market through warehouse distributors, chain stores, other private brands, and vehicle manufacturers. Although it has long been a single product company, it added a new line of replacement automotive oil filters in 1975. In fiscal 1976 Monroe s net income exceeded $5 million on domestic sales of over $128 million. Its total assets that year were valued at over $185 million. The acquisition of Monroe by Tenneco was announced on December 20, 1976, and was consummated on July 29 of the following year. LD. 16- 21- , CX 143G, 175. The Relevant Markets Automotive shock absorbers are devices which dampen motion by converting mechanical energy into the controlled movement of a hydraulic fluid, and disperse that energy as heat into the atmosphere. LD. 26. Shock absorbers consist of one or more steel tubes which contain the hydraulic cylinder, a piston and rod which moves through the cylinder, hydraulic valves, hydraulic fluid, springs, seals .L.L.L H.L""'- , u,...

464 Opinion and bearings. CX 220 to Z-16. I.D. 348-9. Shock absorbers have no substitutes in automotive applications. I.D. 25. A shock absorber is mounted vertically at each wheel between the vehicle body and the wheel. See, e. ex 220 Z-8 to Z-10 , I.D. 42. Mounting methods vary; there are conventional and newer "Mc- Pherson strut'" designs. The latter design has seen growing popularity in recent years, particularly in front suspension applications, because it is a more compact method of suspending a wheel than conventional suspension designs. J.D. 35. Despite external differences in mounting and appearance, the inner shock absorbing parts of a McPherson strut are like those of conventional shock absorbers, and like conventional shock absorbers, wear out and require periodic replacement. ' I.D. 84. (5) As noted above, steering dampers are another form of "shock absorber." Mounted horizontally between the front wheels of certain vehicles, this device absorbs road shocks and oscillations in the steering system. I.D. 42, 45. Steering dampers differ from conventional shock absorbers primarily in that different hardware is used to mount them, and a "gas bag" is sometimes added due to the product' s horizontal positioning. The internal workings of steering dampers, however, consist of much the same components as conventional shock absorbers. I.D. 47.

Exhaust system parts" (ESP) comprise the muffers and pipes which convey and quiet engine exhaust gases from the motor to the rear of the vehicle, and also include the clamps, brackets and other hardware necessary to connect the pieces and attach them to the car body. I.D. 55. Exhaust system pipes consist of hollow steel tubing bent to follow a prescribed path through a vehicle s undercarriage and fashioned at the ends to attach to the engine exhaust manifold other pipes, or a muffer. Thus, the end of a pipe may bear an additional flange or simply have been expanded to slip over another pipe. Mufflers are oval or round cylinders fabricated from sheet metal, and contain various sheet metal baffles to absorb sound. See fienerally, Tr. 1796-1809.

The ALJ found these two overall product markets of shock absorbers and ESP. See I.D. pp. 110-12. The ALJ also found three submarkets within each product market , In addition, there are variants on the conventional shock absorber ie- spring-assisted conventional shork absoTiwrsandair-adjustableshockabsorbemI.D. , Th"re are thrl-'t methods ofservi"inl; a h"rson strut. One is to discard lhe entire strut and repla,," it with a new unit. Anot.her is to disassemble t.he old st.rut., discard the old " plumbing" (seals, valves, nuid and t.hp I;kel assemble new internal workings from a kit of new part. and reassemble the strut. Th.. most popular meth",! however, is to disasemble the unit, discard the old, internal workings. and replace them with a factory assembl"d and scaled shock absorber cartridgp, much like the way a refill is ins.'rt.ed in a ball- point pen.See ex 17' A -C, 22r, 274 LD_ :!8 ;, y,, Opinion 98 F.

based on whether the part was for the manufacture of a new vehicle or replacement installation, and within the replacement market based primarily on lines of distribution. The (6)original equipment (OE) submarkets for both shock absorbers and ESP, which involve sales to vehicle manufacturers, are very distinct from the respective replacement markets. Product line, production technique, customers, prices, distribution methods and product demand vary significantly between each OE and replacement market, and these differences between markets are similar for shock absorbers and ESP.

Buyers in both OE markets are highly sophisticated in terms of the engineering and price of the parts they purchase. I.D. 69 132- , 136. Profit margins in the OE market are lower than in the replacement market. LD. 73- , 82, 122- , 133-39. Design is largely dictated to the would-be OE supplier by the vehicle manufacturer LD. 68-70, 131- , while replacement market manufacturers determine their own spedfications, construction methods and materials within the overall constraints of a vehicle s configuration. I.D. 85 141-42, 145, 147.

There are additional major differences between the OE and replacement markets for these products. To supply the OE market, a manufacturer need only be able to manufacture a limited line to fit contracted-for applications, I.D. 67, 126-27 , while a replacement market supplier must produce a broad line of types and sizes to fit a very high percentage of all vehicles on the road. I.D. 87- , 144. In the case of shock absorbers, thousands of different part numbers are produced by a single manufacturer. Monroe for example, boasts having over 5 000 part numbers for the domestic market alone. CX 143L, I.D. 226. These variables cause differences in the production methods and machinery used in the OE and replacement markets. The OE supplier needs but one plant and little warehouse space or inventory to supply a vehicle manufacturer, and geographical proximity to the vehicle assembly plant is important. I.D. 78-79 137-38. A replacement market supplier, on the other hand, needs (7) warehouse facilities, a large inventory and distribution lines across the country. I.D. 124, 153-54. See also ex 5W, 5Z-8 to 9. The replacement supplier must also label and package his product, while f. In OE shock ..bsorber productiun, suppliers must LJse high speed production lines to meet the volume demanded by manufacturers at competitive costs. Supplying t.he shock absorber replacement market, however r"quires a mix of high and low-speed production facilities to maintain inventory in the broad arrllY of siles and design needed for vehicles in USn. In ..dditiun, the O:E market for shock Hbsorbers is typically limited to one size and design. the '" diameter conventional shock absorber, while manufacture for the replacement market demands a variety of size" "nd desigrl features for each application 1- and 1-%" sizesanuconventional springand "ir- t.ed desip;ns Of these, the 1- " size is thc most popular. LD. 6" , 7,)-77 86-9 101--3, 1069 1 r,1'l'jJcAJ\..J !1'jv.

464 Opinion DE product is simply shipped in bulk, without even mounting parts. I.D. 66, 90 111 130 148 152.

A further significant distinction between these markets lies in methods of sales and marketing. In the OE markets, sales of both ESP and shock absorbers are made by bidding on specifications provided by the vehicle manufacturer; advertising and other product DE sales forcepromotions play no part. I.D. 69, 72, 122, 131-36. The moreover, is small and has a technical, engineering orientation to deal effectively with similarly oriented DE buyers. I.D. 71, 132. In the replacement markets, however, marketing and product promotion are important considerations. Replacement market manufacturers advertise heavily to develop brand name recognition and consumer demand for their product. Promotional efforts are also aimed at warehouse distributors and jobbers, to build brand loyalty and create incentives for their sales elforts. I.D. 91- , 149, 152. Demand for both shock absorbers and ESP also varies substantially between the respective DE and replacement markets. Demand in the former markets is strictly a function of new vehicle production while demand in the latter markets is dependent upon the number of vehicles in use, their age and mileage. I.D. 64, 84, 125, 140. There is no cross-elasticity of demand between the markets. I.D. 63, 118. factors distinguishing these DE and Given this multitude of replacement markets, it is not surprising that the industry itself regards the markets as separate and categorizes sales accordingly. I.D. 59- , 120-21. (8) These "practical indicia " differentiating DE sales from replacement sales in both the ESP and shock absorber product markets amply satisfy the criteria for economically meaningful sub markets set forth in Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962). The ALJ found additional submarkets within the replacement market: an "OE service" submarket and an "independent aftermarket" submarket. DE service is defined as parts purchased by the vehicle manufacturer for resale by its dealerships as replacement parts. The independent aftermarket includes all other replacement sales, to warehouse distributors, mass merchants, and chains of franchised specialty installers. I.D. 170. A number of the same Brown Shoe criteria which distinguish from replacement sales also distinguish OE service transactions from those of the independent aftermarket. For example, sales in the technicallyOE service submarket are made by the same small, oriented sales forces used in OE sales. Similarly, widespread warehouse facilities are unnecessary for OE service sales; delivery is made to the vehicle manufacturer which redistributes to its dealers. Opinion 98 F.

LD. 174, 178. A manufacturer can compete for OE service business without manufacturing a full line of replacement parts, while broad coverage is needed in the independent aftermarket. LD. 180. Finally, industry members and trade publications recognize OE service as a distinct market, reporting sales in it separately from the independent aftermarket. LD. 171-73. Given these factors, we agree with the ALJ' s finding of these two economically significant submarkets within (9)the replacement market. ' (10) Moreover, the ALJ correctly grouped replacement steering dampers, conventional shock absorbers and McPherson struts within the replacement shock absorber market. These items are all produced by the leading shock absorber manufacturers as the items which comprise a complete line of replacement shock absorbers. They are designed by the same engineering staffs within each company, and as discussed above, share a common technology" They are marketed together through the same distribution channels to the same customers. LD. 37, 46, 50, 51 , 53, pp. 110-11. Ample precedent supports viewing such closely related products as a relevant market for antitrust purposes. g., United States v. Philadelphia National Bank 374 U.S. 321 , 356 (1963); G. Spalding Bros., Inc. 56 F. 1125, 1160 (1960), aff'd 301 F.2d 585, 606 (3d Cir. 1962). The ALJ found that the relevant geographic market for both products to be the United States as a whole. LD. 24. The parties do not contest this finding. See, e. RPF, n.6. We concur with the ALJ , Respondent urge that only overall product markeb may properly be found. relying on an assert high cross-clasticity of supply between QE and replacement market production. The ALJ, however. Wa. correct in rejeding this contention. Even '1. uming, arguendo that gn.at flexibility cxists between DE and replacement market production, other economically ignificant distinctions between th"m remain.See, Brown Shoe Co. v. U.S. supra 370 U.S. at 325. For example, an established DE shock absorber manufacturer would lack brand name acceptance, an appropriate sales force, warehousing, and the diverse and siz.",ble inventory needed to obtain replac"ment market s3les. See dioc",;;ion pp, 10-11 infra. Factors such as thos" are important obstacles to entry inu, tbe automotive aftermarket, and are well recognize in prior d&isions. See,Ford Motor C". v. Uniled Slates 405 U,S, 562, 565-7 (1972) (spark plugs);Ben.dix Corp. FTC 450 F.2d 534, 537 (6th Cir, 1971) (filters) (reversing on other grounds);SKF Induslries. Inc. 94 F, C. 6, 14 n. , 78 (1979) (ball bearings).See also. United Stules Aluminum (,'0 of America a77 U.S. 271 , 277 , 285 (1964); Uniled Stalesv. Black DeckerMfg (.h, 430 FSupp. 729 736-1 (D. Md. 19761. Compare, Budd Cnmpany. Rn VTC 518, 572.("1'hc interchange"bility of productionan.d di.triblllion facilitiesbetwe-n two products (is important in market definition I since the manufacturer of uno' can shift readily to the prmjuctionund sale of the other " (emphasis supplied) inally, there is considerable evidence that. thp cross--laslicity in question is substantiaHy lower than respondent contpnds. The record reveals numerous fadors impeding cTOo.--lasticity: some replacement production is cione most efficiently in smail batches on low speed, !es. automate asembly lines ("short lines ). while DE production is best done in larger batches On high spe lines ("long lines ) l.D. 101 03, 1067, 109. act(Js such a. lead time to win contracts and the need to m"intain on-going relationships with customers prevent "brupt switching between DE and replacement production, absent subst.ant.ial excess capacity. l.D. 112-14. Finally, it is more dficient to speialize plant product.ion "ccording to rroduct si?.e "rid Monroe has moved to such specialization LV. 110, 116. OE and replacement shock absorbers are typically 1" and 1-7",," r"spcctively, l.D. 65, 89 Respondent 1Iiso urges thatDE sales must be included within the relevant market bllsed on the assertion that entry intu the replllcement mark"t. cannot occur without the aid uf additional volume from DE sales, and the further assertion that" "submarket must support new "ntry on an economically viable ba.is " HAB 44. Whatever the ml'rit of the latter proposition as 1I matter of law, respondent's factual predicate is incorrect.See discussion infm ..

with L.'-'' 464 Opinion that this is the appropriate geographic market in which to analyze the effects of the acquisition.

Market Structure Examining either the overall replacement market for shock absorbers or the submarket comprised of the independent.aftermark- , one finds a substantial sales volume concentrated among very few firms. In the overall replacement market, sales by manufacturers totaled $250 milion in 1975 and $290 milion in 1976. I.D. 183. Fourfirm concentration is extremely high in this market; the top four firms accounted for 91.4 percent of replacement market sales in 1975 and 92.9 percent in 1976. I.D. 185. Two-firm concentration is also extraordinarily high, the top two firms enjoying 77.6 percent of the replacement market in 1976. Id. (11) Monroe is the number two firm in the overall replacement market a close second to Maremont. I.D. 185, 195. The remaining firms in the top four are Questor and General Motors, which sells under the Deleo brand. I.D. 184, n.77. This concentrated market structure has been stable over time; these firms have held the top four positions in this market at least since the late 1960' , and Monroe has occupied either the number one or number two position since the beginning of that decade. I.D. 188-9. There is, in addition, a trend towards increasing concentration overtime. Although some existing firms have been acquired by ESP firms-a point we wil return to laterthere has been no new entry since at least 1958. J.D. 190. In addition some firms have exited the market, narrowed their focus to a single product, or found themselves suffering diminishing market share as fringe firms. I.D. 191-92.

In the independent aftermarket, the marketshares held by the top two and top four firms are even greater. In 1976, these shares were 80.9 percent and 90.5 percent respectively, while in 1975 they were 81.9 percent and 94.4 percent, Dollar volume of sales in the aftermarket was $235 million in 1975 and $275 milion in 1976. J.D. 186. It is in this independent aftermarket where the anticompetitive consequences of the Monroe acquisition are clearest, and the aftermarket is the focus of this opinion as well. This opinion also uses the terms !!afterrnarket" and " replacement market" interchangeably, inasmuch as the aftermarket accounts for nearly all of overall replacement market sales, 94 to 95 percent of replacement market sales in the years cited above.

These levels of concentration are, by any measure, extraordinarily Opinion 98 F.

high. Four firm market shares in the range of 50 percent (12)are sufficient to raise concern over the loss of potential competition. The level of two firm concentration in the present case far exceeds this measure. The high two finn concentration, moreover, skews the distribution of market shares among the top four firms in a manner which further facilitates oligopolistic cooperation among the industry leaders.

Very substantial barriers to entry, especially into the independent aftermarket, accompany these high levels of concentration. The scale economies involved in the production of shock absorbers impose a high barrier to entry. A minimum efficient scale (MES) shock absorber plant would have capacity to produce over 6 milion units annually, a volume which would comprise approximately 10 percent of annual unit sales in the replacement market, Tr. 9914, RX 230 LD. 222. Barriers of a different sort are found in the time and technology required to establish a manufacturing facility, and the time needed to garner a necessary market share. Acquiring design skills and manufacturing know-how present real but surmountable obstacles, as existing producers can and do provide licenses and manufacturing technology. See discussion infra 57-58. A manufacturing plant can be constructed in under two years, LD. 224, but gaining significant market share would obviously extend considerably beyond that time frame. (13) Additional major obstacles surround the independent aftermarket and involve many of the same factors previously considered in distinguishing the relevant product markets. Some of these factors include the need to establish a large nationwide sales force relationships with buyers, advertising and other promotional efforts geared to consumers, retailers and jobbers, and ultimate acceptance of the new entrant's brand. Tr. 10193, LD. 225, 233-41. Existing firms have established high levels of product differentiation, and continue to advertise extensively to consumers. LD. 237--0. A successful new entrant into the aftermarket must also create a national distributional network, including very substantial investments in warehouses and inventory. As discussed above, an invento- " In (,-bleif(. /ric. supra we held lhal a four firm r;:tio or 47 9 percent '\.rguably faUs at the edr;e of a reasonab!f' derinition of those markel where the 10$ through merger of a potentia! entrant may substantially lessen future competition:. 96 V. C. at 58W5. See also. United Stales v. Phillips PetroleumOJ., :-67 F$upp. 1226 (CD. Ca!. 19731,af(d f",rcuriom 418 S. 906 (1974) (four firm ratio or 58 percent is r:oncenlratl'd1:(lnited Stales v Wilson Sport;nR Goods Co. 28H F.Supp, 543 (N. D. lJ. 19681 (four finn ratio of 6:! percent is concentrated!. Unil('d Statesv, Hughes TU(l1 Co,.415 "Supp. 637 (GO, C..lo, 19761 (four firm mtio och percentnot concentrakd) " An examination of the distribution of market share has be.'n LIsed increasinglyto weigh the likely competitive impact of a given level of concentratioll.Sef'. eg.. Heublein. Inc., supra ;:t 5H45 (a " high two firm mtio of 41,9 percent" was considered suffcient to invoke Se:tion 7. although the four firm ratio of 47.9 pen:ent was oth"r.i e borderline); Warner Lambert C(J,. 87 F. G 812, 870 (1976). See aL Kwnka The Effed of Market Share Distribution Qn Industry Performance 61 Review of Economics and Statistics JOJ 0979J. TENNECO, INC. 585 464 Opinion ry of replacement shock absorbers involves thousands of different parts, and sufficient numbers of each must be warehoused to provide a high rate of order fill. J.D. 225-26. A new entrant in the aftermarket would also face the expense of "stock lifting." buying out the existing stock of a warehouse distributor or jobber, and other promotional costs in order to gain entry into the existing distributional network. See ex 4" , J.D. 227. Further demands upon the new entrant are the need tauffer credit terms and other financial assistance to new accounts. J.D. 228-29.

These barriers to entry are consistent with the high level of concentration found in the replacement market, and with the trend towards still greater concentration. Moreover, the existence of substantial barriers at both the manufacturing and distributional levels operates as a two-edged sword, keeping out both foreign shock absorber manufacturers and domestic manufacturers of other automotive replacement parts. See discussion infra, 40-43. High levels of concentration, of course, are not to be analyzed in a rigid, mechanical fashion, causing an inevitable conclusion of poor competitive performance. Concentration ratios do, however, raise a serious concern that the market performs in a noncompetitive fashion, which may be rebutted by proof of competitive market performance. United States v. Marine Bancorporatiun, Inc., supra 418 U.S. at 630-31. See also, United States v. General Dynamics Corp. 415 U.S. 486, 494-504 (1974); United States v. Penn-Olin Chemical Co. 378 U.s. 158, 176-77 (1964). Respondent argues strenuously that the performance of this market did become fiercely competitive in the years just prior to the merger. RAE 46-60. We too, find that economic performance in this market improved substantially in those years, but, as we will discuss below, we disagree with respondent over the cause of that new competitive vigor. In brief, we find that the source of the improved economic performance lay in (14Jindustry fears that Tenneco was likely to attempt entry-an actual "edge effect"-rather than in the buyer power supposedly asserted by mass merchants against their suppliers. See discussion infra 52-57. An edge effect. of course, can be expected to continue only so long as there are firms to be feared at the edge, and the elimination of Tenneco as a potential entrant thus reduces the probability that the increased competition and resultant lowered profitability in the premerger period will continue. In other words, absent the salutary impact of a Tenneco at the edge, it is highly probable that the oligopolistic cooperation which is to be expected in concentrated markets will soon reemerge. Thus, continued reliance upon high concentration ratios is appropriate where an ), Opinion 98 F.

actual edge effect is found, as those ratios indicate the ease with which oligopolistic cooperation can be expected to resume in the post-merger period.

We turn, then, to those factors which establish Tenneco as a likely potential entrant into the replacement shock absorber market. This entails an examination of Tenneco s capability, interest and incen tive to enter this market. As we have indicated, these factors must be present for Tenneco to be considered either an actual or perceived potential entrant, so we will discuss them but once and in the context of the perceived case. " (15) Capabilities Tenneco was uniquely capable of de novo entry into the replacement shock absorber market. As discussed above, its Walker Manufacturing Division already manufactured rolled and welded steel tubing for ESP production, tubing which is also a major input in shock absorber manufacture. I.D. 270-71. There is little doubt that Tenneco possessed substantial existing capability in terms of tube production know-how and manufacturing equipment; the firm was regarded as a very efficient ESP manufacturer. See discussion infra , n.41. Tenneco gave great weight to this common factor of production in the premerger period, and found its existing skils in ESP manufacturing were highly relevant to shock absorber production. " (16)Tenneco s Walker subsidiary provided additional design and manufacturing skills relevant to shock absorber manufacture; Walker is a major manufacturer of hydraulic and air-powered jacks which rely on hydraulic principles and internal construction closely related to the internal design and construction of shock absorbers. '0 British Oxygen Co. 86 F. C. 1241, 1251 'j6 (1975), rev d and remanded on other /:rowuh; sub ""m. ROC Int /. Ltd. 557 F.2d 24 (2d Cir. 1977); .IF. Brodley,Potential Competition Mer,;ers: A 8/rud!truly Synthesis 87 Yale L.J. 1 23 (1977). Other deeisions hav," us difr,"ring terminology to describe thc same inquiry,f!.g, Unilf!d Sioies Marinf! Banrorporolion, Sllpro at 624 (characteristics, capability and economic incentive);Unitpd Siaiesv. Phillips Pelroleum Ca. supra at 1239 1 (capability, mativation and interest) " Generally, this arganizationpoes no. problems as much of the evidenceofioterest, capabi!ityand incentive bears equally on each theory. At some points, however, this is not so, given the differing- viewpoints of two.the thearies what the firm is likely to do ven;us what other firms are likely to asseelikelyit to do. These points wih be discussed as they arise " Respondent's position in this litigation has ben to diminish the significance of its ESP productio.n see, e. RAB 20-21 , but its view before the acquisitian was to the contrary. According to Tenneeo s Corporate Ikvelopment Departm,"nt (tJhe manufacturinr; process for exhaust and shocb are very similar, with both products starting from sheet stel that is welded into tubing This probably is the mast important cornman manufacturing process and ane in which Walker has a great deal af proprietary knowl ge. Other metal camponents are fabricat",d by machining, forming or shaping, and are assmbled or attached together. The exhaust systems probably require more forming and welding, whereas the shock requires more machining, some wire processing, and same hydraulic work Regardless af the detail process, both products are metal fabricated producl" with very similar w.hnalagy and production skill requirements. ex 4F Se also 1.0. 269, 273-75. C(, 0. 276. g., ;:. g.. TENNECO. INC. 587 464 Opinion LD. 346. For example, both hydraulic jacks and shock absorbers contain piston rods, rubber seals, springs, bearings, check valves screw machine parts, machine rods, chrome plated parts, and hydraulic fluid. LD. 348-9. Further similarities exist for the engineering and research and development skills required for both jacks and shock absorbers. LD. 347, 350. These similarities were not lost on Tenneco, at least prior to the Monroe acquisition, when it considered its jack capabilities transferable to shock absorber production. 13 In distribution and marketing, as well as in manufacturing, Tenneco was extremely well.positioned to enter the shock absorber aftermarket. In addition to its 8 manufacturing plants, it had 2 distribution centers and 22 field warehouses nationwide in 1975. LD. 10. This network was well suited to distribute shock absorbers along with ESP see, LD. 287, and promised synergy savings from joint distribution. In the warehouse, for example, both muffers and shock absorbers are stored and moved in "cubes" of packages stacked on pallets. LD. 286. See also LD. 290. In shipping, heavy but compact shock absorbers combine well with bulky but light ESP, allowing 291. Theseoptimum use of trailer space and weight limits. LD. theoretical freight savings may be realized, moreover, given that shock absorbers and ESP move in the same distribution channels to the same customers. LD. 278-1 , 296-97. C(, LD. 282-84. For example, at the retail level, muffer specialty chains nearly always offer shock absorbers as a second line of merchandise, LD. 280, but only occasionally offer other types of automotive repair. " LD. 307 309 311- 318. (17) Other segments at the retail level also offer both shock absorber and ESP service, including service stations, mass merchandiser automotive centers, and other repair garages. LD. 303-4. Some of these retail segments, particularly mass merchandisers and muffer specialty shops, are supplied directly by the manufacturer, and an account may be handled by a single sales force. LD. 292- , 302. At the wholesale level, WDs also handle both ESP and shock absorbers creating further opportunities for combined shipments. LD. 290 297-98. In addition, those accounts, too, may be handled by a unified sales force, although the record on the success of this practice with " Iv with ESP, respondent in this proceeding h8J attempted to diminish the significance of its jack manufacturing capabilities. RAll 25-26. NonethP.es, its internal, pre-merger memoranda paint a remarkably different pidure.See, e. ex 5Y-Z-l, ex 15.. Such pm-acquisition statements art' inherently more reliable than views proffered in defense of a merger " The record explains in "reatdetail why this is so. Briefly, both shock absorbers and ESP arc "under-the-ar items requiring the same type of tols and shop configuration to service. Bot.h jobs require little skill, allowing the shop to employ low paid installers who lack the training or ability to perform other, more complex type of repairs transmission, brake or tuneup services. LD. 304.See also, e. D. 317 g..

Opinion 98 FTC.

WDs is mixed. LD. 300. Compatability in marketing is also seen in the use of the same trade journals to promote both ESP and shock absorbers. LD. 299.

Further, the same factors are important in both shock absorbers and ESP in gaining and keeping wholesale accounts the inventory management necessary to provide a high level of "order fill see discussion infra, 54- , the financial resources to provide credit terms, and the salesmanship necessary to cultivate accounts. LD. 298.

Determining the compatability between different product lines and thus the probability of entry, need not be limited to an examination of only the individual factors set forth above; past decisions by other firms in these industries provide such a useful check on our findings. Here, two separate lines of historical data point to the compatibility of Tenneco s operations to the replacement shock absorber market.

First is the prior merger of every other major ESP firm with a replacement shock absorber manufacturer. Thus, Maremont, originally only an ESP manufacturer, acquired the Gabriel Company in 1960, LD. 322, and then successfully expanded Gabriel's share of the shock absorber replacement market. See generally, LD. 322-29. Maremont is now the leading manufacturer in the shock absorber replacement market. LD. 326. At about the same time the predecessor of Questor Corporation, AI' Parts Corporation, another ESP firm acquired Heckethorne, a struggling shock absorber firm. I.D. 331-33. Again, the combined venture successfully expanded its share of the shock absorber replacement market. LD. 334. The records established by these firms corroborate the compatibility in design and engineering outlined above; both firms successfully applied their skills in ESP engineering and manufacturing to the redesign of their shock absorber product line. See discussion infra 62-64. The compatibility in distribution and marketing is further corroborated by the (18Jbehavior of smaller ESP manufacturers, which distribute shock absorbers as rehoxers. 1 Another line of historical evidence also points to the compatibility of Tenneco s pre-merger product line with entry into shock absorber manufacture. That product line included air and hydraulic-powered automotive jacks which, as discussed above, have much in common with shock absorbers in terms of engineering and construction. The significance of these similarities is borne out in practice; the record " The remaininr- flrms in the replacement ESP market, Arvin "r1d MirJ;s. dist.ribute reboxed shock ahsorbers. 1.0. 335- , and Midas has considered entering intQh"ck absorber manufacture from time to timp See discussion i,,(ra , !. \\,.

TENNt;cu 464 Opinion reveals that several shock absorber manufacturers also manufacture hydraulic jack products. These firms are Armstrong, a British corporation, and Bilstein and Fichtel & Sachs, which are German companies. J.D. 352.'" (19) Additional Capabilities Although the combination of objective factors and observed entry provide ample reason to find Tenneco capable of de novo or toehold entry into shock absorber production, Tenneco had additional attributes which would have assisted such entry. These include Tenneco s ownership via previous acquisition of Triple S Industries (a "manufacturer" of steering dampers), its ownership of a subsid. iary manufacturing oil sealsj and its planned expansion of its Speedy Muffer King" franchise of muffer specialty shops. Speedy Muffer King, originally limited to Canadian operations, was being expanded into the United States at the time of trial. While relatively few Speedy shops had by then been opened in the U. , J.D. 313, Tenneco intended to expand the chain to national proportions CX 27L, 500 shops within five years. " Tr. 1651-52 in camera. " See also J.D. 310-13. There is little reason to doubt that these plans wil '. Such evid !'c, when available, has repeately OOn used by courts weighing th probability that future business conduct wiJI take a particular cours. Thus,Unitedin Slatesv. Black Decker Mfg. Co. supra, the Court examined the ca.pability of Black & Decker, a manufacturer of electric"powered hand tools, to enter de nouo thf' two cycle gasoline-powered chain saw market by the objectivl' factors of engineering, manufacturing, marketing and distribution compatibilities, but also gave considerable weight in it. finding of non-compatibility to the fact that no succesful entry had ever occurred from the supposedly a.djacent market into thl' t.rgct market.fd. at 158. The Court went on to note that a manufacturer with great familiarity with four yde gasoline engines had tried unsucces;fully tv enter through a tohold acquisition the two-yde gasoline engine:powered chain saw market. fd. at 773. The Court al o observed that recent entrants had blnforeign firms which already had considerable expertise in two-ycl..enginl's. fd. Similarly, inUnited Stalesv. Phillip.. Petroleum, supra, the Court looked to the de nova entry by another firm into the California petroleum market to corroborat.e objective factors pointing towards the feasibility of a similar entry by Phillips, and to rebut Phillip' contention that unique factors in the California market. precluded it. entry by means other than throljgh acquisition. 361 F$upp. 1226, 1241-49. See also, United Slates v. Ca,,..,lidaled Fao Carp. 455 F.supp. 108 (KO. Pa. 1978), in which the Court found that the acquiring firm s Sara Le division was not a likelyde novo entrant into the institutional fr07.en pie market, given that its past effort atde nalco entry failed due to an inability to master the requisite "tehno!ogy," speifically, manufacturing the pie crust.fd. at 139.

!7 Tenneco s interna! plans to expand its mumer shop chain do not, of cours, bear directly on its statusas perceived potential entrant, absnt some indication that t.hose plans had beome known to target market firms. On the other hand, its ownership of the then smanSpedy Muffer King chairi was, of cours, public knowledge, and target market firms could reasonably expet Tenneco not to remain content with a relative. handful of muffer shops, given the rapid growth of this segment of the replacement ESP market. ," This opinion makes limited disclosure of relevant and material in cumera information beyond that already utili:u by the AU in his initial Dedsion. Commission . authority to make such disclosures is speifically re served by Setioo2J(d) of the Federal Trade Commission Act, 15 C. 51b-z (d) and Section ::I.45(a) of the Commission Rules of Practice, 16 C:F. 3.45(a). Such disclosure i made in order that the Commission s decision-makiog be " the record" to the greatest extent possible, to aid the public s evaluation "fthe wisdom and fairness of Commission decisions, and to provide clearer guidance to affected parties. Balanced against thesefactors is the Potential harm disclosure could cause to the party previously protecte by inancamera order. See RSR Corp. B8 F. C. 734 (916). Here, w, believe the risk of suc:h harm is slight given both the age of the data (generally now three to five years old) and the circumscribed nature of the disclosures that are made. In these drcumstallces, WI' believe that the public interest in providing the full factual underpinnings of our decisions must prevail. g., Opinion 98 F.

be realized. Retail muffer shops are the fastest growing segment of the replacement market, LD. 306, making it very desirable for a major ESP manufacturer such as Tenneco/Walker to be assured of a significant share in that segment. Moreover, the feasibility of vertical integration in that segment is demonstrated by the strong position of the Midas chain, which manufactures its own line of ESP. See, D. 314, 207 and n.90.

Tenneco s plans further show an intention to install shock absorbers as the only other major line of merchandise in its muffer shop chain, LD. 309, 313, as is the common practice in muffer specialty operations, I.D. 307. Although Tenneco forecast that its chain would achieve the majority of its sales in muffers, it also foresaw substantial shock absorber sales; at trial, the president of Walker Automotive testified that within "several years" its muffer shop chain could achieve a shock absorber sales volume comparable to the level Monroe supplied to Midas-$7 to $8 million annually, Tr. 1669, a level which corresponds to roughly 1.5 milion units annually. Tr. 1267 in camera, 10186-87. The reliability of this forecast is (20Jenhanced by its consistency with the actual experience of existing muffer shop operations. See, e. LD. 312, 315-16 318.

The operation of a major chain of muffer shops would be of significant assistance to entry into shock absorber manufacture. As discussed above, the minimum efficient scale of a shock absorber plant is in the neighborhood of 6 milion units annually. Supra, 12. Thus, Midas' volume at the time of trial, while insufficient on its own 19 would be of considerable help into merit in-house manufacture achieving volume suffcient to support a MES plant. Tenneco s acquisition of Triple S Industries in 1974, LD. 379 further enhanced its capabilities to enter the shock absorber market. Triple S produced and distributed a line of steering dampers and other automotive accessories see, e. LD. 369, 380, and was regarded in the industry as a manufacturer of steering dampers, I. 383-84. It should be noted, however, that Triple S performed substantially less than all the operations normally considered as part of the manufacturing process. Although it did draw specifications and reviewed and modified the design of its steering '0 A witn,,!;,; from Mid,, addressed this point diredly. te tifyillg t.hat Midas looked from tim", to time at the feasibility of entering shock absod)\r production, hut found that its internal demand for shock absorbers was insuffcient. to justify production. 'fr. 125, in camera. (Almost an of Midas' shoek absorber purchases were dishibutt., to its muffer soops; very few reboxe- shock absorbers were r(mold W wholesalers. 'fr. 128:J- -B) Additional facturs inhibiting in-house manufacture of shock absorbers were that Mid38 had not yet accomplished complete in-house ESP manufacture and Jacked certin areas of shock absorber engineering unrelaU' to ESP production. 'fr. 128R9U. Tenneco, of cours, Was not so narrowly circumscribed in either its sales opportunities or it. HnKineering capabilities I'J:N1\1 l';L.U, INL..

464 Opinion damper cylinders, and did attach installation bracketry to finished cylinders, I.D. 382, Triple S did not actually produce the cylinders themselves. Rather, cylinder production was contracted out to a shock absorber manufacturer, Maremont at the time of the Triple S acquisition. I.D. 381. Despite this important lack of manufacturing (21)capacity,W Triple S still contributed to Tenneco s capabilities to enter shock absorber manufacture. Triple S possessed more than familiarity with shock absorber specifications; its president, Mr. Petrak, had created and patented a new shock absorber design-the Terramatic"-which promised several improvements over conventional shock absorber designs. I.D. 371. One such improvement would be an ability to consolidate replacement parts numbers, id. which could save significantly on inventory expense both to the manufacturer and its customers. This design feature would thus be of obvious import to a new entrant by reducing two major barriers to entry: the capital cost and product differentiation barriers. Respondent disputes the value of the Terramatic design, arguing that its patents were "narrow " that its ability to be manufactured successfully was uncertain, and that Mr. Petrak' s talents lay more in sales than engineering. See RAB 3-. Respondent further asserts that it instructed its negotiators not to pay additionally for the Terramatic patent when purchasing Triple S Industries. Id. (22) Nonetheless, the record demonstrates that respondent considered the Triple S acquisition as adding to its potential to enter the shock absorber market before it acquired Monroe. For example, Tenneco/Walker s 1977-81 Five.Year Plan stated: During 1976, we will be working on a new concept in shock ab::orption called Terramatic. The Terramatic unit, which is patented, came to Mechanex through the purchase of Triple S Industries in 1974. If the Terramatic principle proves successful it could be extended to automotive and heavy duty shock absorbers, opening up a tremendous new market for Mechanex. (CX 25Z-9) Our conclusion that respondent's capability to enter shock absorb. er production was enhanced by its acquisition of Triple S, Mr. '" It is for thislack of manufacturing capability comhiner with the t'xtTt' mely small sbare of the shock absrber market held by Triple S (between .1 and .3 pertent) that we dismiss c:complaint counsel's appeal that the Monroe acquisition should be viewed as a merger between actual competitors. While an assembler of componenb may be considered a "manufacturer in the propercircumsulIce Beatriee Foods Co" 86 F. C. 1 71 (1975). and the appropriate line betw l'n an assembll'r/manufacturer and a reboxer is not always crystal cll'r.r, we find Triple S' uperation closer to tbe latter rather thr.n the former. Triple S's ability to expand sales. or to move into conventiunal sh,x:k absorbers was obviously dependent upon the willingness of another manufacturer to supply complete shock absorber cylinders at a competitive price Tbus, a move hy Triple S into eonvelltinnal shock r.bsorbersales would be obviously limited to that ofa rebox.'r, absent themnstruetinn ofa plant to manufacture the shock absorber cylinder-in esseneean entryde novo. For these reasons, we find that Tenneco s prior acquisition of Triple S is best viewed as an addition to its df'si and engineering abilities to enterde novo rather than as the acquisition ofr. manufacturer with existing ability to compete in the shock absorber replacement market g., Opinion 98 FTC.

Petrak' s services, and the Terramatic design is not diminished by the fact that design and testing work lay ahead on the Terramatic shock absorber. I.D. 372, Tr. 2088-90.

Tenneco s capability to enter shock absorber manufacture was further enhanced by its existing production of hydraulic seals, I.D. 353, a necessary component in shock absorber production. Tenneco would have an information advantage over other firms from e.possessing this additional area of manufacturing expertise see, I.D. 353, even granting Tenneco s assertion that its oil seal products were not then suitable for use in shock absorber manufacture. Significantly, there is no indication that firms in the shock absorber market were aware, or had any reason to be aware, of Tenneco s doubts as to its ability to produce oil seals suitable for shock absorbers, or of the technical problems which remained to be overcome with respect to the Terramatic shock absorber. (23) A final area of additional Tenneco capability, and by no means an unimportant one, is the great financial resources Tenneco could bring to bear on an entry into shock absorber manufacture. As discussed above, Tenneco was, at the time it acquired Monroe, the 15th largest industrial corporation in the United States in terms of assets and 18th largest in terms of net income. Its 1975 net income was $343 million. I.D. 3. Such resources enabled Tenneco to overcome the significant financial barriers to entry into shock absorber manufacture, whether de novo or through toehold acquisition, as well as to implement its complementary expansion into retail muffer shops supra 19. This financial capability increased Tenneco s ability to turn even a relatively undesirable toehold firm into a significant competitor, Incentive Tenneco had substantial incentives as well as capabilities to enter into shock absorber manufacture. Indeed, as we will discuss, there is a close interrelationship between these elements; its capabilities would provide Tenneco with special economic advantages as a shock absorber manufacturer.

Synergy savings from joint ESP/shock absorber manufacture and " For example, Mr Baker of Arvin Indll tries, a minor ESP mimufacturer which distributes but does not mClnufacture shock absorber . discussed the relative abilities of Arvin and T,mneco to turn around mClckstone, a t.oeho!d firm which Arvin found unat.t.ractive: We t.urm-d rBlackstone) down for basimlly that reason: they were a por compl'itor in that marketplace We didn t have t.he horsepower to improve their market. position.. Walker, with their number one position in ESP and with their financial wberewithal. could take a Blackstone and d" wonders with it. They certainly rould move a Blackstone all of an ..ighth or tenth list and move it right up through t.he pack somewhere Tr 601-602 r\jJ: AA. , H 464 Opinion distribution are good examples. Synergy was discussed above as it related to Tenneco ability to enter the shock absorber market, but these special savings also provide economic incentives not available to other industrial enterprises. The record in this matter is unusually clear on the areas where synergy savings exist between the ESP and shock absorber markets and the magnitude of those savings as well. (24) Perhaps the best expression of these synergies is found in CX 5, an internal Tenneco document entitled "Proposal to Acquire Monroe Auto Equipment Company." This proposal, prepared by Walker for top Tenneco management, sets forth a number of areas of projected savings. The proposal discusses in particular the savings to both Walker and Monroe from joint shipments of shock absorbers and ESP, which would reduce the freight hill for shock absorbers alone by $500 000 per annum. CX 5V , Z-22. These combined shipments would produce additional advantages to customers which would in turn increase profitability and market share in both the ESP and shock absorber markets. It predicted that Walker ESP would gain 1 percent in the traditional aftermarket and 3 percent in the nontraditional aftermarket, while Monroe would gain 2 percent and 6 percent in each market respectively. CX 5R, X- Y. Walker also foresaw substantial synergy savings from consolidation of research and development, purchasing, manufacturing and warehousing. These savings were set forth in its Monroe proposal." (25) ". For example, 'In ability to combine shipment" wol\ld allow customers to place orders more frequently, since a smaller volump of each product (:uid be combined to Jill a trailer. More fr"qlJ,nt nrrJering would allow a customer to rl'dOlce its inventory. increasing its profitability by i"creasing th,' turoovl'ron both product lim's Walker forpsaw that this improv"ment in service to its customers would increas" thl' mark,.t share of both ils ESP Jine and thl' Monroe shock absorbl'r line. ex 5R, X- " Operations Monroe presently has approximately HXJ OOO square 1'e..t in I'ach of their three plants dpvoted to storage and shipping This represent. approximatl'ly one-third of their domestic floor space. We project we could warehouse and ship for them all of their product, thereby freeing up the equivalent of a new plant in term, of space. To accomplish this, we would add approximately 25 000 feet to each of t.hr.. of our distribution point", for a cost or les.,; than $1 500 000 Not only would there be substantial savings of floor space, buta very significant better utilization of fixed investment in each of their existing plants. Many "iecf'snfequipmpntt.hey presently have in each plant such aH steel slitters, tube mills, et.c., as well 3H support functiolls, such as plant management., personnel. maintenance depeJrtment, etc. , would not. h"vl' to be duplicated- which would be thp cas.' ift.hey had to build a new plant. Monroe estimates the result would be that they could obtain additional shotk productiontbrough incrpased driciency in addition to an equivalent new plant in production capacity. The manufacturin process for I'xhaust and shocks eJre very similar, with both producl" starting from sh..t st.eel that is welded int." tubing. Monroe has a steel slittjn operation in each plant, wh,'areas Walker conlracts this operation On lhl' out.ide. Walker s expertise in hydraulics, with OUr jack operations, al so ties in ciosely with Monroe P"r,.hasing Savings can he realized by combining this function, particularly y since commndities purchased are basically the Rame, being primarily steel, cartons, oil, and rubbpr. Possibilities pxi5t for other Tenneco divisions to increase their sales volumps. The combination of thl'sl' savings should have a profit contribution or" minimum of $600 000 annually by 1980.

Enginf'erin and R liere again the potentials for savings are significant due to the similarity of the product lines. Present rpsearchonmat.rialsisbeingdupJicat.ed aswellasourhydraulicsresearch. Walker exhaust systems research (Continlled) 594 FEm;RAL TRADE COMMISSION DECISIONS Opinion 98 F.

Respondent urges that these synergy savings are largely unique to a Monroe-Walker merger, not to generally realizable savings between ESP and shock absorbers. RAE 24-25. While there are obviously, some areas in which Tenneco expected to gain from a melding of specific strengths from the two firms, such as tbe discussion of Monroe s !!historic strength in promotion infra , the great bulk of the projected savings are plainly due to the nature of the products rather than the (26Jparticular companies producing them. Moreover, even a projected major savings which at first blush seems unique to Monroe, the gains from better utilization of Monroe factory space, appears upon examination generally applicable to joint ESP and shock absorber production. That is Tenneco believed that it could increase the effective capacity of Monroe s plants by storing shock absorber inventory in Walker warehouses, freeing Monroe (27Jplant space for maximum production. We fail to see, however, why this gain from efficient use of warehouse and plant space would not also occur if Tenneco had acquired a toehold producer or entered de novo. Synergy savings alone, of course, could be insufficient inducement to enter a declining market, and respondent urges that the shock absorber market is, in fact, in decline, eclipsed by the rise of MacPherson strut suspension systems, RAE, 10-11. We disagree with respondent's contention on this score with respect to both the Utili7.e dynamics of sound dampening, which is quite "imilar to the theory of motion vibration damJHning utili7,ed in shock absorber research. In both Walker s air jacks and Monroe s air shoeb, the products require combined application of hydraulic and air principles. Admini.,trotiue Again cause of servicing the same customers and the same industry, we can !!expect savings in the administrative area hy combining operations with Walker. Th", elimination of the need for II widely distributed annual report and the other expenses rel!!vant to being a public corporation can 00 ",liminated. These savings alone arc estimate to be from $250 00 to $:JOOOO annually To this can realistically be added the savings from hllving several administrative departments such as credit, order entry, accounts receivable, etc., combined- These lire recappe on the schedule on page 71 ex 5Y- "-1 Finally, Tenneco foresaw significant savings from joint marketing opcrutions. Marketing- lJomewtic Shock absorbers are distribute through exactly the sam!! channels as exhaust, all the way from the manufacturer to the consumer (Exhibit 1) It is the only other product which is universally installed in the muffer specialty shop- A significant rea.on for the compatabiJity of the two products is that they represent under-the-ar" 5frvice items subject to the same environmental conditions and repair conditions and hi.toricaHy arc replaced by the $ame pernn, whether he be a service station mechanic, a mas merchandiser or speiaJist installer, or the 'do-it-yours!fer.' ConSeuently, the distribution channels are extr!!mcJy similar, and Walk!!r and Monroe have basically the same customers and prospetive customers as well as competitors. This similarity of customers is demonstrate in the following Exhibit, , showing our 50 largt"t wholesale account.s as wd! as our larger non-traditional accounts- Our selling programs, discount structure, and custumer terms philosophy are very similar and would be easily merged. Walker s programs stores custom!!r service, an area in which we feel Monroe could benefit from our expertise. Cooversly, Monroe has historically ben an industry leader in promotion activities, an area in which Walker has ben mediocre, and which omes more important as we address our Walker programs to the consumer level ex 5S-R (exhibits omitte) .1r.1V1V.r.. , HVv.

464 Opinion overall growth of the market and the impact of the MacPherson strut innovation within it.

There is little doubt that the future prospects for the shock absorber market, which saw growth and high profitability during the 1960' s and early 1970' , remain bright. Although 1974 saw unit sales fall, CX 5J, that sales drop was attributed to factors extraneous to the underlying strength of demand for replacement shock absorbers: a recession which delayed discretionary shock absorber replacements and the oil embargo, which closed many service stations which promoted and installed (28Jshock absorbers, CX 142D, 143D. Subsequent years marked a period of recovery." CX 5I-J. Respondent' s own analysis of the market's future, performed just prior to the Monroe acquisition, foresaw great opportunities for growth in the years ahead:

Monroe estimates the life of a shock to be approximately two years. With 130 000 000 vehicles on the road, and jfwe assume 30 000 000 are two years old or younger, we can develop the potential shock market as 100 000 000 times two (since only X would be replaced in anyone year and there are four per vehicle), or 200 000 000 units to be replaced per year. Total replacement market sales of shocks have been 46 000 000 and 500 000 in 1974 and 1975 respectively, indicating that only about 25 percent of the potential market is being sold. ex 5-.

Industry estimates foresaw steady sales increases in the long term bolstering this current growth potential. Maremont, for example foresaw a continued 10 percent growth rate, compounded annually, due to growth in the population of vehicles in use, increasing miles driven per year, and increases in consumer disposable income. RX 38F. Tenneco shared this view. See, e. RX 25 at 11. This optimism was not tempered even by rising fuel prices, as analysts foresaw fuel savings coming from increased fuel efficiency in vehicles rather than a decrease in miles driven. RX 187D. Analysts also foresaw no threat to continued reliance upon the automobile as the primary means of transportation in this country, see, e. RX 25 at 9, no substitute to shock absorbers in automobile suspensions, and no risk of reduced replacement demand from a "lifetime" shock absorber, RX 24 at 14 RX 25 at 37-38. Indeed, Tenneco itself foresaw that the trend toward smaller, lighter cars posed increased potential for the replacement market, reasoning that the ride quality of "downsized" vehicles will decrease more noticeably with degradation of shock absorber function, causing increased sales opportunities. ex 3BJ. The advent of MacPherson strut suspensions also does not pose a .. Another industry member, however, did suffer reduced demand in 1977 due to an adjw;tment to shortned supply lines. The shortned supply lines, cause by the move to installation by mass merchandisers, require less inventory. RX 187D.

g., g., Opinion 98 F.

threat to overall demand for replacement shock absorbers. We do find the relevant replacement market t.o include (29)both conventional shock absorbers and MacPherson struts see discussion supra , 10, and respondent's own documents do not raise this distinction as a relevant factor. However, even if we remove MacPherson struts from the market, demand for conventional shock absorbers appears strong. Respondent's own witness projected that by 1983, only 35 percent of new domestic vehicles would utilize the strut layout, and these vehicles wil typically have struts installed at the front wheels only; the rear wheels will continue to be controlled by conventional shock absorbers. Tr. 1952, 1967. This increased use of MacPherson struts would still leave the great bulk of replacement demand for the 130 million plus vehicles-in-use requiring conventional shock absorbers, and, as discussed above, respondent estimates that only 25 percent of this current potential market is being reached. See, e. RX 25 at 20.

Apart from potential unit volume, respondent argues strenuously that the shock absorber industry had, by the time of the acquisition lost the extraordinary level of profitability which had marked the 1960' s and early 1970' s. See, e. RAB 10-11. Respondent's documents reveal, however, that it believed that Monroe s profitability would return, even in the absence of a merger to levels at least as great as those earned by Walker. CX 5Z-12, 6B. Still greater rates of profitability would arise through the synergy savings discussed above. Tenneco s pre-acquisition documents demonstrate, moreover, a belief that many of the factors which depressed Monroe s profits in 1975-76 were temporary problems, unrelated to any underlying weakness in demand for shock absorbers. Tenneco believed that Monroe s problems were due to start-up costs of new plants in Canada and Brazil, a slump in the U.S. economy, a period of excess inventory in the field (also discussed by Maremont, above) and unresponsive management by Monroe, apparently at senior levels. CX 5Z-12.

Tenneco argues that even if this were true with respect to Monroe it does not demonstrate the overall attractiveness of the shock absorber market to an entry by means other than through acquisition of Monroe. RAB at n.ll. The record, however, demonstrates that Monroe s profit history has followed the same general trend experi. enced by Maremont, the other major shock absorber manufacturer. Although allowing only a rough comparison, since the data for Maremont is a summary of overall operations including shock absorbers, ESP, catalytic converters, and other automotive and nonautomotive items, RX 188D, the figures do show a sharp dip in TENNECO, INC. 597 464 Opinion Maremont' s pre-tax earnings (30)Cbefore extraordinary items) in 1974 with a strong reeovery in 1975-77. RX 187M. Thus it would be unreasonable to read Tenneco s optimism over the future profitabili ty of Monroe as Jimited to that firm rather than the replacement shock absorber industry generally. Moreover, this view is consistent with the prospects of continuous growth in overall demand for replacement shock absorbers and the high barriers to entry discussed above.

Another factor which contributed to the decline in profitability in the mid-1970' , and dampened prospects for a full rebound to the Golden Age" of shock absorber profits deserves special mention the actions initiated by Maremont which increased competitiveness and reduced profit margins at the manufacturing level. Maremont made heavy investment in plant and equipment. Investment in inventory was also increased to provide an unusually high rate of order fill." Research and development efforts were expanded to develop new shock absorber products. Finally, and perhaps most significantly, Maremont engaged in a "very aggressive" cost reduction program and passed those savings, and more, on in lower prices. Tr. 776-80, 855-57; J.D. 448-9. These aggressive activities by Maremont were additional factors depressing Monroe s profitability in the mid-1970' , Tr. 10591-91A, CX 21B, by forcing Monroe to cut prices to its traditional channel customers by 9 percent in July, 1975. Tr. 4114. Moreover, there is testimony by a witness from Armstrong, a British shock absorber manufacturer with modest sales in the United States see l.D. 393, 399, that he perceived increased competition and declining profitability among U.S. shock absorber manufacturers in the mid-1970' s. Tr. 2661, 2666-68. Although this evidence persuades us that the replacement shock absorber market did lose some of its sparkle during the mid-1970' we are not persuaded that this dip in profitability was permanent and, indeed, as discussed above, the indications were that tbe long term prospects for this industry were bright and secure. Moreover even in an environment of normal rather than supranormal profitability, Tenneco s unique combination of capabilities made this market attractive to enter. The synergy savings whkh Tenneco calculated with respect to the Monroe acquisition, and which we believe are not limited to a Tenneco-Monroe combination see discussion supra 24- , demonstrate the ability of those savings to enhance profitability.

Tenneco had additional incentives to enter this market, even if we assume a continuation of a "mere)y normal level of profitability. In particular, Tenneco had a defensive motive (31)to enter into shock Opinion 98 F.

absorber manufacture given that its major ESP competitors were already manufacturing shock absorbers. The record is quite clear that Tenneco, beginning at least from 1967, CX 77, and continuing up to the time of the merger felt at a competitive disadvantage vis-avis Maremont and Questor from the lack of a shock absorber line: Walker s major competitors, Maremont and Questor CAP), have shock absorber lines. In the wholesale market channel, these lines are marketed separately. In the retail market channel, Maremont and Questor tend to combine their marketing programs. We have unoffcial information that Maremont will be moving to combine their shock and exhaust programs in the wholesale channel, offering combined discounts, etc. If , we need a shock line to be in a competitive position. ex 5E. Moreover, the most rapidly expanding segment of the independent aftermarket is the non-traditional channel composed of mass merchants and specialty installers. See, e. RAB 54, where combined shipments are relatively more important than in the traditional channel warehouse distributors. I.D. 289, 293. Tenneco had an additional incentive to enter shock absorber production from its planned expansion of its Canadian retail muffler chain into the United States which would generate significant demand for shock absorbers, see discussion supra 19-20. Obtaining a source for that supply from one of its major competitors could be a costly proposition.

Interest Tenneco s interest in entry into the shock absorber market began in the late 1960' , shortly after its acquisition of Walker, and grew and quickened in the years leading up to the Monroe acquisition. The record documents that this interest was shared by officials at high levels at both Tenneco headquarters and its Walker subsidiary. Moreover, this interest was not only expressed internally through closely held planning documents but was expressed publicly as well through negotiation with at least three major and one minor shock absorber firms and the actual acquisition of a fifth firm marginally involved in shock absorber manufacture and holding patents on a novel but untried new shock absorber design. (32) Walker s interest in entering shock absorber manufacturing apparently began in the period 1967-68 when it commenced discussions with Armstrong Patents Ltd., the largest British manufacturer of shock absorbers. Among the possibilities set forth at the time were the purchase of shock absorbers manufactured by .. For a time, Monroe s ability to sell shoek ab. orbers exceeed il. plant capacity. causing it to purchase some of its supply from its competitors at a substantial premium. Tr. 1627-28. g., TENNECO, INC. 599 464 Opinion Armstrong, perhaps at its then-operating Canadian plant, or shock absorber manufacture by Walker under license from Armstrong. The record demonstrates that, in addition to discussions and correspondence occurring between Walker and Armstrong, Walker officials were debating internally whether royalty payment could be offered, or whether Walker wouldn t be better off doing its own shock absorber engineering rather than obtaining a design through licensing, entering de novo. ex 72-75. One scenario under consideration at that time involved Armstrong initially manufacturing for Walker and, as the volume of Walker s shock absorber sales increased, Armstrong assisting a Walker move into shock absorber manufacturing on a royalty basis. CX 76.

In weighing the import of these discussions concerning Armstrong, we find it significant that they directly involved a high Walker offcial, Mr. Thomas G. Cook." These expressions of interest, then are distinguished from and of considerably greater import than situations where the only interest found is at a junior or middle level of management, or even in a "think tank" office. Cf United States Crowell, Collier and Macmillan 361 F.Supp. 983, 1005 (S. 1973). Moreover, the fact that initial interest in shock absorber manufacturing was expressed by an official as highly placed as Mr. Cook adds to the significance of subsequent interest shown by subordinate corporate planning offices by demonstrating that those planners were not indulging in abstract exercises unlikely to be approved by their seniors. Cf United States v. Atlantic Richfield Co. 549 F.2d 289, 296-97, n. 9 (4th Cir. 1977); United States v. (33)Siemens Corp. 621 F.2d 499, 503, 508 (2d Cir. 1980). One such study appears as a report by Walker Financial Planning staff dated July, 1970, and ranks growth and profitability performance in 18 lines of automotive replacement parts. Of these areas the study found:

It is observed that two product categories seem especially deserving of further market research: front suspension parts, which would include shock absorbers, and filters, "" At the time the 1967-- Armstrong discussions tok place, Me. . Cook appears to have ben either the Walker treasurer or vice president for finance. Tr. 1573. Me. Cok became pT!sidcnt of Walker On January 1 , 1969 shortly after these discussions ceased, and remained as president throu h the time of the Monroe acquisition. Mr Cok report directly to the Offce of the President of Tenneco. Tr. 1572-73 " We do not understand these decisions to mean that activity by lower level management may never be taken as sufficient indications of corporate interest. Those decisions dismissing interest shown by lower level management are clouded by objective factors which go counter to entryde nrm" Or via tohold acquisition.&e, e. United Stales v. Siemen.s Corp., supra 621 F.2d at 50:1, 507-Ot! (firm lacke.d nuclear camera tehnology and opportunity had pas.=i); United States v. Atlan.tic RichfieldCo. supra 549 t' 2d at 296 (copper mining" not an appropriate an". for grass roots entry);Uniled Slatesv. Crowell, Collier and Macmillan, supra 361 VSupp. at 999 (reputation a high barrier to entry into musical instrument manufacturing"J. Here, of cours, the objective evidence strongly supports the interest shown at ailleve!s of management.See discussion supra, 15-23 Opinion 98 F.

These two categories are not only outstanding in terms of apparent profitability, but they have experienced exceptional market growth as well. ex 11F. Another examination, prepared by Tenneco s Corporate Develop. ment Department shortly before the Monroe acquisition, discussed the shock absorber market generally as well as Monroe in particular. These Tenneco planners concurred with Walker management that Walker should move into shock absorbers, citing such factors as (1) a projected growth rate for replacement shock absorbers greater than that projected for replacement ESP, (2) an improvement in the marketing and distribution of ESP, and (3) the aid such entry would provide to Walker s move into the retail muffer shop market. 3B-I. (34) Walker s 5-Year Plan, 1977-1981 , also prepared prior to the Monroe acquisition, again demonstrates corporate interest in a move into shock absorbers generally, apart from an acquisition of Monroe. The plan discusses proposed development work on the Terramatic design, acquired with Triple S, as leading to a new market in automotive and heavy duty shock absorbers" for Tenneco. ex 252- During the period 1970-76 when these planning reports were prepared, Tenneco actively pursued various methods of entry into shock absorber manufacture. In 1973, Walker conducted negotiations with Tropic Industries, a small firm which possessed a patented new shock absorber, the "Loadamatic " with a unique ability to adjust automatically to varying vehicle loads. I.D. 365-66. Walker considered various means of entering the shock absorber market with this device, including producing the device under license from Tropic, acquiring Tropic outright, and entering into a development contract with Tropic with an option to purchase the company. ex 45N- . Walker evinced more than a passing interest in Tropic,29 but eventually ceased to consider it; a search revealed that the Loadamatic s patent protection was insufficient. CX 49. (35) Walker s active and continuing interest in shock absorbers is further demonstrated by its acquisition of Triple S Industries in 1974, which, at the time of its acquisition, was marketing three types of automotive products: hydraulic stabilizers for automotive trailers hubs for four-wheel drive vehicles, and steering stabilizers. CX 51G- , 1.- . These items, however, were not the focus of a February 6 1974, letter from Triple S to Walker, apparently the first contact '" Walker believed that this unique feat.ure, combined with il. simple design and reliability would provide a sU!Jri"r produd to existing load-leveling shock Hbsorhcrs marketed by Monroe and Marcmont. ex 4!iA- "0 This included an extensiveevaluatiof1 of t.he current. and potential marketfDr IOCid-levelingshock absorbers "al"s for"ca, profitability calculations, chart'3 of various expenses and stiles, and, of course, profil.. ex 45(' TENNECO, INC. 601 464 Opinion between the two firms. Rather, that letter promoted Triple S's new 0 ex 52A- Terramatic" design for shock absorbers. Walker, in turn, likewise focused initially on the potential of the Terramatic principle to be incorporated in a new shock absorber. (36J That the Triple S acquisition was also justified on its existing products, CX 55A- , 56A, and that Walker did find the Terramatic patent to be narrow, RX 8- , do not in our view detract from Walker s interest in Triple S as demonstrating interest in entering the shock absorber market apart from the acquisition of Monroe. (37J The acquisition of Triple S in October, 1974, has added importance beyond confirming Tenneco s internal interest in entering the shock absorber market; this acquisition must also have been taken by other industry members as tangible proof of active interest by Tenneco in shock absorbers. Significantly, knowledge of the existence of the Among the advantages c1aimprJ for the new desit:n over conventional shock absorbers w re: (Ii more sophistic8ted " response curves," (2) simpler design requiring fe,,'er pllrts, I,1)morpstableperformanCf'overlJ;eful life, and 141 an adjustable feature allowing one part t1Number to be iJlstl,liere in multiple appliCll!ion, which woulrJ reduce inventory requirements by 60% ex 52A- " A Februllry 15,1974, Wlllker memo provided a preliminary eVllluation of the Ternlmatic: ! hllve no doubt thllt excellent working shock llbsorberscan be made as described, Withthe"xc..pt."nofhi cI8ims(ofpasttestingandself-compenHatine;abilityJ, lrJonotargue with "ny of his presentation The use of a variable orifice in controlling a shock "bHorberis not new, having been used in aircrafllanding gear and l1utter dampers for years, His Pilrticular construction, Or method "I' varyinr: the orifk.. , may r", new A copy of the patent was not included. 1 suspect hi.' cl"irns may be narrow ex 53A- B A subsequent interrml memora"dum "f(ain demonstmt.es Walker s interest in entering the shock ilb.'orher market through Triple S. After discussing lhe current Triple S product line, it state Terramatic. Thi the original item which ""uspd our int.erf'st in thp company-and is the one fllrt.best out in the time frame. Patent ha been applied fnrand:J 'couple of it!; ff'aturcs' have been tried in a Steerline unit. In my opinion, the felltures of this unit are technically sound-with one misgiving. Lf'akage path Ilows will be some percentage of the now through his control conligun1t.on-1 do not know what percent.8ge. Success depends ou that percentage, and the selected manufacturing proc HS would largely dptermiTJe it. No complete prototype has been built J am enthusiastica to the possibilities of this product, first in SleerlineIpm.ticulrlrly hp"vy duty I and after SOme rnanufacturingexpPrieIJ:e, vt:ry probllbly for heavy duly shock absorbers -and evpn automobile shock ahsorhns. I emphasize that t.his iH not production re"rJy. Dollars and time must be invested in development. ! do feel tberpi n'''Hnnabl,-r:h,mceofS\1cceHs When their; succpss is achieved, t.herp is good opporlunity (as Harry claims) for consolidation of slow mover into f8ster movers. There would then be rJd,nitc marketing advantages aH well as the technical (cont.rol) lldvantllges heclllims in his report Ovemll, I believe acquiring Triple S' would offer Ml'chanex almost immerJi"le benefit from curretlt products. In longer range, a new shock lIbsorberfortht:Wlllkerlinp cDuldbegained Technically, current producb and manufacturing are sound. The two flew products "ppcar feasible, If the pricp i.' right,' let .' gol ex 54H- Similar !'xpressions of intl'rest in the shoek absorber market vi" Triple SarI' !;een in still other W8lker memoranda ex 5(iA ("The greatest potential, of c,-ur, which is nnt included in thesl' projections, is the Terramatic principle as applied to shock absorbers, ); ex SHH (" (TJhisgive.' UHjust the tiniest foothold in the shock orber industry. While we have no plans at the present. limp, this could he a sped that would grow (:Ar PetrakJ might be the one to spread the fertihzl'r and make th!' shock absorber seed bloom. ); and ex 59A ( B;'H"d on the above ! believe Walker could realizes"lesin excess of $10 mil\ion within three yearsprcscI!ton products. For Tt:rramatic and Autolok thl' sales potential is so hugp, particul"rly Termmatic, I would n"t want to forecast s"lt:s volume until I have had more opportunity to study thp product and iL market.'. ) lemphasiH in original) Sf'" (llso ex 25Z-9!Walker5-Ye;Jr Plan, 1977-RI) g.

Opinion 98 F.

Terramatic design had become widespread by the time of the Triple S acquisition." (38) Thus, Tenneco s acquisition of Triple S would communicate to the rational shock absorber manufacturer" a serious desire on the part of Tenneco to enter into shock absorber manufacture, and is therefore relevant as helping to establish Tenneco as a perceived potential entrant. This aspect is significant apart from Tenneco internal planning" , or the ultimate workabilty of the Terramatic design. See, United States v. Falstaff Brewing Corp., supra 410 U.s. at 532-33 nn.8 and 13. (39) Tenneco s interest in shock absorbers is also implicit in its ownership of over 70 Speedy Mufner King outlets in Canada in the early 1970' , its opening an initial outlet in the United States in 1974, Tr. 1654, 1666, and its plan to expand rapidly Speedy Muffer King into a large scale United States chain by 1983, Tr. 1651-52 camera. 34 Muffler specialty shops were the most rapidly growing segment of the replacement ESP market, which would and did make this market an enticing one for a large ESP firm such as Walker to ,. The record reveals that beginning in l"t., 197CJ and continuing into 1974 Triple S contacted 5 German firms to introduce the Terramatic shock absorber-Volkswagen, Daimler-Benz, GM-Dpe!, FichteJ & Sachs, and Bilstein ex 68A- , CX 67C, and CX 63G Additional "ontad,- in 1974 occurred with Armstrong, the British firm, and Questor in the Unite States, which manufactured hock absorbers under the Goerlich name. CX 678, D-F. Notably, it appears that Triple S's cont.'Icts with all of these firms focused exclusively on the Terramatic shock absorber, not the other products Triple S then had in production.ld. The documentary evidence further reveals interest by these firms in the Terramatic. but at least some of these discussions ran aground due to Triple S' inability to deliver prototypes for test.ing, an inability app,nently stemming from Triple S' s straitened financial condition. ex 68B, ex 67e, ex 63C ,,' f"or example . Wulker s president, Mr. Cook, asserted at trial that his instructions were to pay nothing for the rights to the Terramatic design. (Tr. 167&-77) There are. however, rPaSOnS to be skeptical of this assertion apart from t.he num..rou expref;ions of Walker s interest in Triple S fnr thi very design. For example, alt.hough Mr. Cook asserted that. "nnt a nickle" was paid for the Terramatic, Tr. 1676-77, the parties execute a license agreement providing for royalty.ies On future Terramatic shock absorl..,rs, as well as 4-wheel drive hubs. 'Ihat agreement further provided that t.he patent rights in these products would revert to the licensor if the licensee failed to make its "best effort.s" t.o produce at least one type oftbe liccnsed products within 4 years. ex 57D- , ex 66A. Two years into that. agreement, just. months before t.he Monroe acquisition and perhaps a touch elrcon cioll ly, Mr. Cok prepared a mem"randum to a subordinate which read in its entirety: t a reminder t.hat in our purchase ofTrip!e S, there were certin thing t.hat needed to be done within a specified time frame or certain rights reverte back to Petrak. If you do not have the details, please get them from Jim.

I leave you with the responsibility oftwinglln' we don t lose these rights by default and suggest it might be timely to follow up on them now. CX 70 Ot.her documents prepared at about the Same t.ime acknowledged that the acquisition of Monroe would be certain to be chalhmged by this agency,see, e. ex 50, creat.ing the pu ibility that Tenneco o; premnger ducumenL were prep'-red with t.his litigation in mind.United States Phil/ips Prim/cum Co.. supra :J67 .supp. at. 12:-8. This possibility.y, of COl1r e. makes even more diffcult the task of a certaining the ubjective intent of Tenneco in the relevant time frame The aller;ed disintere t in the Terramatic principle is further cont.radided by the effort Walker made to investigate Triple S's att.empts tAlcll t.he Terramatic in Europe. The record contains report.s to Mr. Cook dated July, 1974 , several. months prior to the Triple S acquisition, from Walker Europe and Walker Deutschland confirming that the companies approached by Triple S w"re favorable to the Terranmtic but that Triple Slacked t.he finances tn provide th."n with prototypes. CX 63A- Additional ifltere t in t.be muffer shop business was C'xpressed in 1976 , when Walker "egotiated the purchase of Car-X Service Syst.em, a chain then consisting of 45 or 50 mllffer shops, alt.hough t.hat. purchase was not approl'cd by Tenneco. Tr 1663. Significantly, Walker planned to expand Car- X rapidly into a major national chain, ex 109G, 108P, corroborating its expan i()n pia oS for Speedy Muffer King. TENNECO, INC. bU;: 464 Opinion move into. Tr. 1654. A large national muffer chain generates significant demand for shock absorbers. See discussion supra, 19-20. Like the Triple S acquisition, Tenneco s at least partially visible move into the muffer shop business could hardly go unnoticed by rational shock absorber firms.

Finally, Walker s interest in entering into shock absorber production, again apart from the Monroe acquisition, was demonstrated by its negotiations in the immediate period preceding the merger with two foreign shock absorber firms which had modest sales in the United States. These firms are Armstrong, a British firm, which produces a full line of shock absorbers, I.D. 391- , 399, and DeCarbon, a French firm, producing a superior quality "gas-pressureized" shock absorber. I.D. 402-D3. See also discussion infra 60-61. Walker s renewed interest in Armstrong, as revealed in correspondence between Mr. Cook and Mr. John Padget, the president of Walker Europe, began in 1974 when it was learned that "circumstances could be ripe for a takeover" of Armstrong. CX 80. Mr. Padget foresaw "substantial synerg-istic effects" from the acquisition between Walker ESP and shock absorber operations in Britain Europe, the United States, Canada and elsewhere. CX 83B. Padget proposed that under the acquisition, Walker would sell Armstrong shock absorbers through Walker s channels, and make Armstrong shock absorbers in Walker s U. S. and Canadian plants. Id. Walker Europe went so far as to calculate acquisition prices which could be offered Armstrong shareholders under various levels of assumed future growth, while providing substantial return on investment to Walker. CX 83D, CX 84A-L. In October, 1974, however, Mr. Cook directed Padget to maintain (40)contact with Armstrong, but on a low-key level, until Tenneco decided how Walker s expansion should proceed. CX 85. Walker Europe remained interested in Armstrong, and reminded Walker of Armstrong s desirability in May, 1976 when Padget responded to information from Walker that Tenneco believed the time was right for investment. CX 88. This period in 1976 also saw Walker interested in and negotiating with DeCarbon, a French shock absorber firm. CX 89-91. As with Armstrong, this interest in DeCarbon was expressed at high corporate levels by both Mr. Cook, president of Walker, and Mr. Padget, president of Walker Europe. Id. ". Walker s broker communicated strong Walker interest to DeCarbon . ex 93-A, aHhough at trial Mr. Padp,d rlen;ed aut!Joril.ing those statements. Tr. 270.,-06. Opinion 98 F.T.

Other Potential Entrants The loss of Tenneco as a potential entrant, actual or perceived, is significant for purposes of Section 7 only if it was one of a relatively small class of such potential entrants. If numerous firms are perceived by target market firms as similarly situated at their market' s edge and of similar propensity to enter, the loss of ODe such potential entrant through merger is unlikely to loosen the restraints against anticompetitive conduct felt by target market firms, and the merger is therefore unlikely to lessen competition substantially. Similarly, the loss of a firm as an actual potential entrant is insignificant if numerous firms are equally capable and likely to enter in the reasonably foreseeable future, as that remaining group of firms maintains the promise of entry and eventual deconcentration. See, e.g., FTC v. Procter Gamble 386 U.S. 568, 580-81 (1967); Heublein, Inc., supra at 58&-89.

The burden of initially identifying a sizeable, plausible class of other potential entrants falls upon respondents Heublein, Inc. supra at 588- , and respondent here urges that many firms are as likely to enter as Tenneco. All of these firms, however, Tenneco included, are said by respondent to be unlikely to enter given profits in formidable" problems of entry and "steadily shrinking" the industry. RAB 27-28. This alleged broad class of similarly situated potential entrants is comprised of vehicle manufacturers, foreign shock absorber manufacturers, and other vehicle parts manufacturers. RPF 407-443, RRPF 190-200. (41) We are persuaded by complaint counsel, however, that none of the firms so identified shared Tenneco s special combination of characteristics which established it as an especially potent and likely potential entrant. Further, very few of these firms can be considered to be even potential entrants, and none were as likely as Tenneco to make the attempt.

Respondent emphasizes that Bendix and TRW are as likely as Tenneco to enter the shock absorber market. Bendix is primarily a manufacturer of automotive braking components, but also manufactures parts for other automotive systems.:!6 TRW, on the other hand, manufactures automotive engine and chassis parts and distributes reboxed shock absorbers. I.D. 435.

The ALJ considered Bendix, as well as brake parts manufacturers generally, and concluded that entry into shock absorber production was unlikely to come from that direction. J.D. 431-34. We concur. These include power steering unjt. , electronic fuel inject.ion 5yslel1s, spark plugs. filters, universal joi!lL and wipe, bladf's. Tr. 9JOO J02 9104 g., g., / , , TENNECO, INC. IjUb 464 Opinion There are significant incompatibilities at several levels between the two product lines which would make entry substantially less attractive to a brake produc r them to an ESP firm. Great differences exist, for example, between the skills and tools required to repair brake systems and those needed to replace shock absorbers and ESP. See LD. 304, n.99. Thus, many shops which install shock absorbers and ESP do not perform brake work, LD. 307, 314- , reducing potential synergy savings from a unified sales force and joint shipments in the non-traditional channel. Further, the very nature of the sales forces differs between shock absorbers and brake parts the latter requiring salespeople skilled in brake repair. Tr. 9108 106.

In assessing the compatibility, or lack of it, between brake products and shock absorbers, we also give considerable weight to the recent exit in 1977 of Maremont, the leading shock absorber producer, from the brake friction material business. Tr. 9270. Moreover, brake parts firms do not appear to have a defensive motive to enter shock absorber production, while Tenneco feels pushed in part by its competitors' production of both ESP and shock absorbers. Tr. 10 109. See also discussion supra 30-3l. In addition, with respect to Bendix, we are persuaded that it considers shock absorbers a very different product line from its current lines of business see, e. Tr. 9137, (42)9139, and one in which it has no interest in entering," Tr. 9137 , 9148, 9168. The trier of fact concluded from this and other evidence that Bendix had little incentive and no plans to enter the U.S. shock absorber market. LD. 432-34. We see no reason to disturb those findings.

Engine, transmission, or chassis parts firms are also unlikely to enter into shock absorber manufacture. Like brake parts, these parts e. Tr. 8929move primarily through the traditional channel see, again eliminating the possibility of synergy savings from joint sales and shipments in the fast-growing (for ESP and shock absorbers) non-traditional channel.

Much of the reason for the disparity in marketing channels used by ESP and shock absorbers versus the continued reliance on the "' That a Bendix subsidiary in Spain acquirNI rI small Spanish shock absorber manufacturer, LlPMESA, does not ,-,,mpel a different conclusion. LIPMESA sells almost exclusively in Spain, Tr. 9115, flot at aU in the United State, Tr. 9116, '-nd its production is focused on a very limited range of European vehicle makes: Renault, Citro"n and Fiat Tr. 9116, Moreover, merdy assert, a respondent does, that llendixs ownership of this firm demonstrates compatibility of brake systems lind shock absorbers in theU"ded Slates market, without mort' requires us to aSSlJme too much e" that the Spanish replacement market for these components are sufficiently analor-olds to their U.S. count 'rparL that the LJPMESA acquisition may be accorded some weight in predicting Bendix s intentions domestically. The rClord, however, i silent on this important aspect. llel,bleinCf. SlIpru al588-9 g.,,, Opinion 98 F.

traditional channel for engine, chassis and front end parts is due in no small measure to the differing level of mechanical skil and shop equipment needed for repairs to these automotive systems. ESP and shock absorber replacement may be performed by a relatively unskilled and low-paid mechanic or by a consumer, and require relatively few tools. I.D. 304, n.99. In contrast, engine, chassis, and transmission parts require skill and sophisticated equipment to install. Id. Moreover, these firms, like brake parts firms, lack a defensive motivation to enter. For example, Moog, a chassis parts firm, carried a line of reboxed shock absorbers without success, and ultimately withdrew from that market. Tr. 3259, 3469. TRW, Moog main competitor in chassis parts, has also been unsuccessful merchand ising reboxed shock absorbers in the traditional channel. Tr. 8932-33. (43)This lack of success has caused internal TRW recommendations that it exit from the sale of reboxed shock absorbers. Tr. 8934-36. Accordingly, we concur with the ALJ' conclusion that Moog and TRW, as well as these general classes of replacement parts manufacturers, are unlikely potential entrants into shock absorber manufacture.

Nor do the automakers, apart from General Motors, which manufactures replacement shock absorbers under the Deleo name I.D. 184, n. , appear to be likely potential entrants into the replacement market. Among the remaining auto makers, the apparent trend is away from in-house manufacturing for even OE shock 39 much less for the replacement market.absorber requirements Nor can foreign shock absorber firms be considered to be as likely to enter as Tenneco, even though such firms possess product designs manufacturing ability and the potential to spread scale economies manufacturing across several continents. The difficulties a foreign firm would face include the establishment of a United States distribution network and winning consumer acceptance. Tr. 9256- , 9277, 9933-37. These difficulties can be seen in the case of Armstrong, a British firm manufacturing perhaps the broadest line of shock absorbers in the world. Tr. 2615. Armstrong began distributing shock absorbers in the United States in the late 1950' Tr. 2613, but by the time of trial had achieved only a one percent share of the United States replacement market, Tr. 2638. Its ,. We ("lld RX 263, which purports to identify potential ellt.rants solely by manufacturing capability, RPt' 414 'Il unhelpful guide, given 0) t.hat it ig"llores the important SYllergie:; in sales, shipping, m"rketing" alld rewil inslallation see discussion. supra. 16-11 . 23-21 , alld (2Jthat. its f ocus is upon the one barrier t" ",ntry which appears most easily hurdl",rl eg, through a lir.ensing arrangement.See discus.ion ;nfra 51-5H Ford dismntinued conventional shock absorb!r production ill 1977, and will manufacture ollly a portion of it: needs for MacPherson strulE in t.he future. Tr 791 862 3130 3778-19 3942--3. Chrysler similarly ceased shock absorber manufacturing in 1915-16 CX 19 - , Tr to IS8 TENNECO, INC. 607 464 Opinion:1 Canadian shock absorber assembly plant which opened in 1974, Tr. 2633, had closed by 1978. Tr. 9254, 9929, 10 159. Indeed, the only other firms which appear at all likely to enter shock absorber manufacture are the two other major ESP producers Midas andwhich currently distribute reboxed shock absorbers, Arvin. These firms would share many of the same synergies attracting Tenneco towards shock absorbers, and both have actively considered moves into shock absorbers, I.D. 428-30, yet neither were as likely potential entrants as Tenneco. (44) Midas' weakness vis a-vis Tenneco stemmed in part from its more tenuous stature as an ESP manufacturer. Midas has not yet accomplished complete in-house manufacture of its ESP line, and aims to achieve this more immediate goal before moving into a new product line. Midas views itself as lacking certain aspects of engineering expertise needed for shock absorber production. Tr. 1288-90. Further, Midas ESP production is heavily devoted to supplying its franchisee s needs; sales of ESP to other replacement market firms accounts for a minor portion of Midas sales. Tr. 1283. Relatively few reboxed shock absorbers are sold in this small replacement market operation, Tr. 1284, leaving Midas' potential for shoek absorber sales largely limited to that needed to supply its franchisees. That amount, however, is insufficient to justify selfmanufacture. Tr. 1255-56 in camera.

Arvin, too, must be considered a less likely potential entrant than Tenneco, given Arvin s primary orientation as an DE rather than replacement market ESP supplier, its relative lack of success marketing reboxed shock absorbers, the decrease in financial support it offered its muffer shop franchisors, and its comparative lack of a defensive motive due to its smaller stake in the replacement market. Tr. 559 576-79 710-11 909- , 1O 088-9. as a We conclude from this review that no other firm raised potential entrant in this proceeding shared the unique combination of capabilities, interest and incentives which established Tenneco as both a potent and highly probable potential entrant into the shock absorber market. Thus, the loss of Tenneco as a potential entrant is highly significant in antitrust terms, as it meant no less than the loss of the single firm most likely and best able to enter and deconcentrate what is now a very highly concentrated market. See, FTC Procter Gamble Co., supra 386 U.S. at 580-1. That a small group of less potent and less likely potential entrants remains does not remove the anticompetitive consequences of the Tenneco-Monroe merger. '0 (45) 40 See, United States Wilson Sporling Goods Co., supra 288 F.supp. at 563 (merger anticompetitive despite (C"ntinued) g Opiriion 98 F.

Industry Perception of Tenneco The strong confluence of objective factors leading Tenneco to enter the shock absorber market, and Tenneco s clear and visible interest in that entry were not unnoticed among firms in the shock absorber market. The record reveals that these firms actually perceived Tenneco as a likely potential entrant, and also perceived that few other firms were likely to enter The most significant evidence in this vein was the testimony of Mr. Pond, president of Maremont, the leading shock absorber firm. He testified that prior to the Monroe acquisition he considered Tenneco as one of only three likely potential entrants into shock absorber manufacture, the other firms being Midas and TRW, and that these firms would find entry tempting." Tr. 771 78. Moreover, TRW was believed to be less likely to enter than Tenneco. Tr. 775-76.

s ability to Another strong and well-based perception of Tenneco enter into shock absorber design and manufacture comes from Mr. Putnam, the Chairman of Questor Corp. Questor had successfully (46Jmade precisely that move in 1958, when it diversified from ESP into shock absorbers with the acquisition of Heckethorne, then a marginal shock absorber manufacturer with a product that was not well received. Significantly, Questor re-engineered t.he product. replacing its "one tube" design with a more conventional "two tube new product. Seeproduct, and gained market share wit.h the discussion, infra 62. Thus, considerable weight is due Mr. Putnam perception that Tenneco was capable of de novo entry. the Flict that three other large sporting goods firms were also inlt'rested in t;,rgPt mark('t, Spaulding, MacGregor and Rawlingo;, plus a fourth, Medaho;t, with actual pan to erJter am! urJdetcrred bv the merg-er):Rrd,:ch Oxy!!('/! C". 86 F.TC. 1241. 1353--1354 (1975),n:v Oil other grOlind., sub 'Prm noc lnlcmali",nd Lid. . FTC 5,',7 f"2d (2d Cir. 1977) (Commissiu!1 finds merger allticompetitive when" t.heart' were only three other potential ent.ranL find none were "very strong" entry candidates\.Sel' al. , v. P. Areeda & D. Turnrr An/rlm.,t Lou' 1123 at 123- (1980) ('a universe exce"ding t.hreesimilarl." well-qualified potenti,,1 pntrant.s sh"uld w presumptively sl!f!cient toobviatI'CQrJcern )(emphasissupp!il'dl " Tenm: co was perc,'ived as a mot!' likely entrant than TRW bt1cause oft.he similarity in manufacturing shock almorbers imri ESP, based on the importance of st.el'llubing in both products Mr. Pond believer! that entry by an ESP manufiwturer would be "' much "asier" from a manufacturing- standpoirJt thim entry by a suspension part.s firm, Tr. 775-76. He s"w this entry coming either by t.he entrant commencing shock absorber manufacturing at the outst.orfirstdistribut.ing-shockabsorb,'rstobuildvolume followed by" move int.om;Jm1f;:u,turing.and belieVf,d that this choice would depend upon t.he entrant s financial re Durces. Tr, 772-.73. Mr. Pond' s p rc"ptions WpIe supported by those of his liJImer vice president for research and enr,inecring, who believed Tenneco had the capilbility to engineer and manufacture sho(Ok absorbers, and that he saw Tenneco s capabilities in this are" as being at. least as good or better than firms which manufactun'd other types of auu,motive products, including broke part and suspension parts.See, e. 'fc 438-40 . 4f10-2, !il forming his perception ofTenflcco S capahil,tips he emphasized Tenneco s hignly effcient prrnJuction of ESP, 'fr. 482 , and the similarity in cn in"er;ng the now of gases in an exhaust system with engineering the now of hydr;mlic Iluid in shock ..bsurb,'rs, based On his own xperieJl:c in transf,'rring his engineering skins from the One product t.o the other. Tr. 484--5 Mr. Pond also perceived W"lker was a mor" likely entr;mt than Arvin, hecause Arvin s orientation Will Jrimarily as an OE supplier, while" Walker Wa. heilvily oriented t.award the rf'pl"remcnt market. Tr .'64- 65. ., Q In YOllr opiaion, Mr. Putman. did Walker or TEJ\NECO have t.hl' ability to enter inln manufacture and sa!" of shock absurbers with'Jut acquiring Monroe? A Yrs, sir. Wedidit il1oursecondphaseafgettingintothetwo-tlJbeshock fC,m/;nuedJ TENNECO, INC. 609 464 Opinion A perception of Tenneco as a likely, capable potential entrant was held hy Midas as well, an ESP firm near the fringe of the shock absorber market which itself has considered from time to time entry into shock absorber manufacturing, see discussion supra 43- , and thus would be well positioned to judge which other firms would be likely to enter. Significantly, Midas saw Walker as one of only two likely potential entrants, the other being Arvin. Tr. 1248-9. (47) In contrast, Tenneco presented the testimony of a senior marketing official at Monroe that he never considered Tenneco a likely potential entrant into shock absorber manufacturing, and that no officers or directors of Monroe ever raised that possibility with him. Tr. 3973-74. He testified further as to an extensive list of firms which he did consider likely potential entrants into the replacement shock absorber market.44 This testimony, however, even if taken at face value, cannot rebut the contrary testimony of actual perception by Maremont, the other major industry member, for the procompeti. tive effects from such a perception by Maremont would still exist and would be lost by the merger." (48) This proof of actual perception, moreover, goes beyond the level of proof found to be suffidcnt in other potential competition cases. Substantial authority exists for the proposition that the perceptions of firms in the target market may be inferred from objective economic criteria which identify a firm or class of firms as likely to enter the target market. United States v. Falstaff Brewing Corp. Q In yom' Dpinion, how could TENNECO or Wak' r helve penetrated the replacement market with shock absorhers A In my judgment, th,' y could have done the same thing we did in our second phuse. They COllid hllve set III' a facility and hired the proper technical people and the production people and marketing people, loset up an organization and go out tD sume of the national accountswher" their eontucts are "s r;ood asour and offer them a quality product fit "' fair price, and J think they would have r;often t.their shar" of business,ame as we did. Tr. 1145- "' Ar1(ther glimpse of th.. industrys perception of Tenneco as one of the f"w I'inns likely to lnt"r shock "bsorber production may be gleam,d from the circumstances surrounding the Triple S lIcquisition in 1974. It appear that in offering ils T rramalic shock absorber design to pmsjwctive purchasers, Triple S went t.o domestic and ror..ign shock ..bsorlwr mflnubcturers.See discussion "'pm, :17. A'O far fI5 we C;:n ddermine, Tenn co was the only firmnot manufacturing shock absorbers which was approached by Triple S. " Induded were vehicle m"nufacturers (Gener,,! Motors, Ford, Chrysler, VoIKswav.en, Toyotfl Nissen, llonda); foreign shock absorber In3nuf"duH,"S Woge, Fichtel & S"chs, Bilsl,'in, Armstrong Girling, Woodhead, Cof3p, Kyaba, Tokiko, Show,,); and ,)ther dom"st;c flutO p3rts m,mufacturf'rs lP.ockwelJ , TRW , Wagner Electric, Dana Ecklund, Eatun, Federal-Mogul, Budd, Bendix, Borg-W"rI,'rl. Tr. 3fJ79- " While it is thus unneC"Hs,JrY store"ch the question ofMonroe str tie percept.;on, wp se" little reaSOll tutreat the slJbjective perception of;: potentially biased t3rget murket fir mdifferently from the subjective intent ofa firm said to be an ach,a! potentia! entmnLTh"t is, purported lack of sub jectivr, perception (ur intef1t to enterl shnuld be given little weight iI' the objective economic evidence points to 3 contr;:ry conclusioo.See, United St41"sv. Fdstaff Hreli';nlf Carp.. supra, 410 U.S, at 566 (Marshall, J. , concurring): ef Uni1ed Slotesv. Siemens Carp.. wpm. 621 V2d ;:t .'08 Isubject.ive evidence" entitler!()meto weight when supported by objective evidence); FTC v. Atlantic Richfield Co.. . lIprn, 549 F.2d at 298 (subj..ctive evidence deserves some weight. where objective evidence is not strongly to the contr ryl. H..re, of course, the purported absence(' of u suhjedivl' "en eption of Tenneco ;:t the fringe lS SU5peet given the obvious self interest of Monroe in prl'serving l he mergerund is (:ountered by the overwhelming objective ,"vidf'nce pointing- to the likelihood of a entry attempt, and the prior history of entry hy ESP firms. 610 FEm;RAL TRADE COMMISSION DECISIONS Opinion 98 F.

v. Marine Bancorporationsupra, 410 U.S. at 532-34; United States S. at 639-40. '6 Here ample objective evidence relatedsupra 418 U. to the capabilities, incentives and interest of Tenneco in entering the see discussion supra, 15-0replacement shock absorber market factors which could hardly go unnoticed by "rational shock absorber manufacturers." The likelihood that target market firms would perceive Tenneco as a likely potential entrant is enhanced, moreover, by an additional objective factor, the prior entries by other replacement ESP firms intothe replacement shock absorber market. See, discussion, supra I 7- infra 62-64. (49) The perception by firms in the target market of a likely potential entrant perched at the edge of their market and the likely present procompetitive effects which flow from that sobering perception may exist independently of the internal plans of the potential entrant, or of other factors which block, at least temporarily, actual entry by that firm. United States v. Falstaff Brewing Corp., supra 410 U.S. at 386 S. at 580--l.532-33. See also, FT v. Procter Gamble, supra In the present case, the ALJ, as we wil discuss in greater detail below, found Tenneco not to be an actual potential entrant because of a lack of evidence that Tenneco was planning to enter de novo and because he believed that no viable toehold was available at the time of the acquisition. l.D., p. 119.

Although we disagree with the ALJ on the issue of actual potential entry, accepting his view would not alter our finding of industry perception of Tenneco as a potential entrant. In particular, he found that the two "viable" toehold firms which Tenneco had under consideration were unavailable because of an inability to agree with one firm over price, l.D. 406-8, and a lack of interest by the other firm, at least at the price offered. l.D. 394-97. These difficulties in negotiation, however, were, by their very nature, unlikely to have been known to anyone outside the immediate parties involved, and so would not diminish the perception of Tenneco as a likely entrant." (50) ,. In Fals/aff " m::jority Dr the Court held that the district court erred in railing to consider whether Falstarf was likely to have been perceived as a probable potential entrant ba$ed upon objective evidence. 110 O.S. at 533- 34, 13.

On remand, the district cuurt reviewed that objective evidence and found that a firm in t.he target market wnuld h3ve perceived l"al taff as unlikely to enter. Thu, the presence of Falstaff on the edge of the market "could not have 3ny procompetilive effect on bf.havior in said market" United, Slnles v, Fo/slaff Brew;'lg C"rp" 383 FBupp. 1020, 1023-24 (OX!. t974).

The Supreme Court's subsequent decision in Marine Boncnrporalion. supra cont.illued to rely upon objective evid,mce which would t.nd t.6 prove or disprove the likely procompet.itive effect of a pQu'ntia! entrant poised at a markd s edge. Skipping over the intermediate step of the p..rception of target market firms, the Court found that t.he district courldid not crr in its conclusion that no "wings erfect" was likely based on its review "f" the eronmnic fart.!. " 418 (i.S. 602, 639-40. In thi" a\SCf5sment., the Court gav,' great weight to regulatory barrierf; to expansion by the acquiring brmk, harriers which bank,; in the target market w()u!d be expected to be well aware or.fa. " Indeed, the record dcmon5tratt'f; the sensit.ive nature of t.he discussions. For example, in iL negotiation:. rCrmlinlledi TENNECO, INC. 611 464 Opinion Further, the unavailability of firms as acquisition candidates does not affect the feasibility of entry through licensing from a foreign firm. See discussion infra 57-60. Thus, even if target market firms believed that Tenneco s talks with Armstrong and DeCarbon would not lead to merger, those firms could rationally perceive that Tenneco could license manufacturing technology from either firm. Thus, we find that objective evidence is fully consistent with the actual perception of firms in and near the target market that Tenneco was a likely and capable potential entrant into the shock absorber market.

Present Procompetitive Effects The importance of the perception by one or more target market firms of a significant potential competitor at their market' s edge stems from the likely beneficial influence that such a perception wil have on decisionmaking within the target market. Such decisions are expected to be more akin to those of a competitive market, to the benefit of consumers and competition generally, as target market firms attempt either to forestall entry by the new firm or to be better prepared fora new, more competitive environment if the feared entry materializes. An instance of the latter behavior was found in Brunswick Corp., supra where a domestic outboard motor manufacturer, OMC, acted to upgrade its 25-horsepower model to the level established by a similarly-sized product of Yamaha, a feared potential entrant. Id. 1222, 1273. Brumwick was atypical in that at least some of the procompetitive effects could be directly traced to the perception of Yamaha at the market' s edge. The more usual case wil not present such a clear showing of causality, given the likely existence of multiple influences on any business decision the influence of existing competitors within the market, the level of overall demand for the product, general economic conditions, and the like. These practical limitations on our ability to trace causality are accommodated by the standa.rd of proof under Section 7 it is sufficient to esta.blish the probability that the acquiring firm prompted premerger procompetwith DeCarbon, n family owned .French firm, Tenneco s broker sought more informatioll to justify an asking price which was high in fl'Jation to reported profits. ex 92, ex 93. He wrote DeCarbon that" TENNECO.WALKlm, and Ameute are sufficiently experienced in Europe to appreciate that II family owned company keeps records differently than the publicly held oompany, andTENNECQ.WALKER would be discrete and ethical enough to keep all confidential disclosurefrom you in absolute confidence.CX 93B (emphasisinorigina!).

.. , Opinion 98 F.

itive effects within the target market. United States v. Marine (51) Bancorporation, Inc., supra 418 U.S. at 625 (emphasis supplied). (52) In the instant case, there are indications that the competitiveness of the shock absorber industry increased in the years just prior to the challenged acquisition, and reasons to believe that the perception of Tenneco at the market' s edge was a significant factor stimulating this new competitive vigor.

These changes appear to have begun with Maremont in 1968, Tr. 777, at the time when Tenneco first began expressing interest in shock absorber production through its talks with Armstrong, see discussion supra 32. Beginning at that time, Maremont began a program of heavy investment in three aspects of its shock absorber program, each significant to defending against the threat of Tenne- s entry. One such area was in inventory levels, which determine the completeness with which orders can he filled. During this period Maremont invested "con iderably more in inventory in order to provide a level of "order fil" in the range of 98 to 99 percent, even though industry practice at that. point demanded only 90 to 92 percent availability Tr. 777- , benefiting wholesalers, jobbers and ultimately consumers through improved availability of product. A second area of Maremont activity was in new product development. During this period Maremont introduced a new "air-oil" shock absorber and engaged in extensive research and development of a self-leveling and self-adjusting shock absorber. Further, Maremont moved strongly into the relatively new area of MacPherson strut replacement cartridges. Tr. 778.

Finally, and perhaps most significantly, Maremont made great efforts over this period, and especially in the years coinciding with Tenneco s greatest interest, to reduce its cost of manufacture. These See aL . United Slatesv- Fuk;lof( Brewing Corp- . supro 410 U.S. "t 526 The District ('.."urt should therefore' have appraised the economic racL about. Falstaff and the New England market in order to deu'rmine whether in I'ny realistic sense Falst.aff could b.. s.aid to be a potentia! competitor On tlwfringe of the market withlikely inj1u\mce on exis.ting competition - The Government did not. produce din'ct evidence of how members of the New England market reacted to potential competitiOiI from Falstaff, but circumstantial evidence is the lifeb!oo of antitrustId,jaw.at 53;1-34, n.13; (emphasis supplied). FTv Procler& Gom/;e Co" supra 386 V.s. at 580---1 (Court found it "clear thl'tthe existence of Procter at the edge of the industry exerte considerable influence on the market based 00 review ofobjectiveevtdence arid assumption that target market behavior would be in!1uenccd);United Siotesv. Phillps Petroleum Co. supm, 367 Supp: at 1232-39, 1254.-56 aff'd per curiam 418 V,S. 906 (1974) (edge effect found based on objective ratters and perception of Phillips as a likely entrant).Cf UnitedStatesv. Siemens Corp.; supra 621 F.2d at 509 (presumption of edge effect rejected where fringe firm neither likely to enter nor perceived as likely to cnwr by target market firms).

The presllmption or an edge dfed in appropriate circumstances b consistent with the overa!! thrust of Section , which is concerned "with probabilities,not certainties RrownShoe (,'0. v United States 370 294, 323 (1962); United Sialesv. Falstaff Brewing Cnrp., supra 410 V,S at 5: 4 n. .. &ediscussion infra 54n51 TENNECO, INC. 01;1 464 Opinion cost savings, and more, were passed on to consumers in lower shock absorber prices. Indeed, there is evidence that Maremont was absurbing cost increases in the period immediately prior to the Monroe acquisition. Tr. 778- , 855, J.D. 449. Moreover, the impact of this edge effect was widespread. Price cutting caused by cost reductions and/or cost absorptions was not limited to Maremont; Monroe and the remaining producers were forced to match Marcmont' s prices to the benefit of consumers. Tr. 779, 854, 4071- , RX 58. (53) Although we need not trace these substantial and varied procompetitive effects directly and solely to the perception of Tenneco on the edge United States v. Marine Bancorporation, supra, United States v. Falstaff Brewing Corp., supra there is evidence indicating that that perception did, in fact, playa role in causing Maremont to engage in the activities set forth above. There is, for example, the testimony of Mr. Pond of Maremont in discussing the cost reduction program:

One of the ways that you strengthen your position in a business and restrict or limit the amount of competition that you are (aced with is to make considerable efforts to become a low-cost producer. We have had as a company very aggrcssive cost-reduction programs over the past eight or nine years, but more specificaHy, over the past three to four years, to reduce the cost of our product, to reduce the cost of our every-day market products. Tr. 778-79. (emphasis supplied) Given Maremont's actual perception of Tenneco as the most able of just a few potential entrants see discussion supra, and objective economic evidence similarly placing Tenneco as the single most likely such entrant see discussion supra 41- , we are persuaded that these efforts to "restrict or limit" competition were in large measure aimed at deterring a destabilizing de novo or toehold Tenneco entry.

Our reading of the evidence is thus contrary to that of the ALJ who found after reviewing Mr. Pond' s testimony that " while it may not be entirely clear, it appears to support respondent's view fthat the requisite effects were not shownJ." J.D. , p. 120. The ALJ found crucial" a carefully couched statement by Mr. Pond that Maremont did not "specifically" examine potential competition "on a periodic basis" in formulating its strat.egy. '" J.D. . p. 120. (54) The ALJ found this testimony insufficient. to establish the present ,,, TIlt ..ele""n! !e li"'''I1:r in i'vll is"sr"lloyd Q. Did thr ",,"E,'ncl' ui' W"lk(. IMid".'1 "lid/oJ' THW ns lik"ly pulp!)I;,,1 e"t,."nish,' inl",huck ab b,,) rna, kt" . h",,(' nny ('T(.d nn MuremDn! sdp("is;uns. hus;lH.s.' drc, s;ons A. I dun 1 Ihink that w I()ok"d p('";f'c,,lly ,,\ ' "'I1I)(lil'"' ' """ ppr;odi,.bns; - 1",IE'nl;,,1 (olnpt'!it'H" dpveloping OU" strat.egy. J t.think we d"\'E'loped t,."t"g\'Our ;!r,d app"""..h ID the blJ ;TWSS busi'd Dn how we percei,.,.;! aJ\dhowwf'PI' I"f'iverJtlwoPPol'tlJnilil's. Tr. 771; 77 , p.

Opinion 98 F.

procompetitive effect of Tenneco because he read it to mean that Maremont did not take Tenneco directly into account in making its business decisions. " LD., p. 120. (emphasis supplied) This standard however, of demanding clear, subjective evidence of an actual direct edge effect is inappropriate for Section 7, which is concerned with the probable anti-competitive impacts of acquisitions. United States v. Falstaff Brewing Corp. , supra, United States v. Marine Bancorporation, supra. Potential competition cannot be put to a subjective test." United States v. Penn-Olin Chemical Co., supra 378 U.S. at 174; United States v- Falstaff Brewing Corp. 410 U.s. at 534 n. 13. The AU similarly dismissed other Maremont testimony as unclear" because it does not establish whether Maremont's heavy investments were to stave off actual or potential competition. LD. 120-21. Although we find that this standard again puts too fine a point upon an inquiry concerned with the probability, not certainty, of a present procompetitive effect, analysis of the investments made by Maremont leads to the conclusion that the motivation behind them can more logically be found in the concern for potential rather than actual competitors.

For example, Maremont testified that it invested heavily in inventory to improve the quality of its service, its rate of "order fill to a level substantially higher than the industry standard then in effect. The record does not reveal competitive pressure from Monroe or others within the replacement shock ahsorber market to improve service, but an extraordinary level of order fill could be a useful weapon against a feared potential entrant. One obvious impact is in raising the investment in inventory needed by a potential entrant to compete in winning over new accounts, making entry more expensive. Providing improved service to its accounts also can reasonably be expected to increase the loyalty of those accounts to Maremont, (55)to increase the diffculty facing a new entrant in winning market shares generally, and to push whatever loss did arise onto Monroe or others. Finally, there is the possibility that Maremont was responding to an expectation that Tenneco, upon entering, would set a high standard of service, comparable to what it was already providing in the replacement ESP market. CX 27N. Similarly, a better explanation for Maremont's cost-cutting and cost-absorption can be found in fear of potential entry than in the " The record demonstrates only that" rate of order fill at the lev.J of 80 percent or below may be unsatist"3ctory in the replacement shock ab orber mark"t Tr. U68, 1627- , 163Q.32. In hj discu sion of the standard of order fill in this ff"rket, J.D. 226, 281 , the AlxJ erred in lumping together pnlctices in the replacement ESP market with the shock absorber market id.. especially if' light of direct testimony that the normallcv.1 of order fill in the shock absorber market i in the range of 90-92 percent. Tr. 777. Th"re is evidence that the standard in the ESP market is close to 100 percent, and, significantly, is set by Walker. See, ex 21N, Tr. 9431- TENNECO, INC.

464 Opinion actual competition which then faced the firm. One would not expect a firm in such a concentrated market voluntarily to absorb cost increases and thereby cut its rate of return. Rather, one would expect Maremont merely to pass such increases through in the reasonable expectation that its one main competitor wil find that enlightened self interest lay in following a similar course. Even investments in cost-cutting, which generally would appear not to be inhibited by a high level of ccncentration, as the payoff from that investment could be retained by the firm, here appear motivated by fear of potential entry rather than by the present competition facing Maremont. Maremont, it must be noted, had a large proportion of its sales, 41 percent, going to one account, Sears Roebuck and Co., and an additional 14 percent going to three other mass merchants. RAB 54 in camera. Although the record does not disclose the nature of Maremont's contractual relationships with these other big accounts, it does demonstrate that the Sears contract provided for payment on a cost-plus basis projected actual cost for the contract (56)year plus a fixed percentage of that cost as Maremont' s return. 52 RAB 55 in camera. This arrangement is significant for it limits the return which Maremont could obtain from investments in new, cost-saving technology. Thus, the benefit to Maremont of investment in this area is substantially less than it would otherwise seem to be.

Investment in cost-reducing technology, however, might be completely justified as an attempt to deter entry by Tenneco, or to be better prepared for more rigorous competition following entry. Indeed, Maremont recognized that Tenneco was a highly efficient ESP manufacturer. Tr. 439.53 (57) In conclusion, we find that the various improvements in the competitiveness of the replacement shock absorber market in the " At the clos of the year, Sears' auditors would examine Maremnnt's actual prorh.1ction costs, and redetermine" the cost-plus figure. If Maremont s costs exc ed the projocliofl at the begil10ing of the year Maremont received only the originaUy projecte cost plus th", fixed percentae. If Maremont succeeed in cutting costs holforthe actual sauings wP.e refunde /0 &an;. Further, it appears that the new, lower cost figures would ome the basis of the calculations for the next year, giving Maremont none of the benefi of these savings in the send and succeeing years, at least in its busines with Searu. RABin 55camera aci'.. theRespondentshock absorberargues thatindustrySuarsin thebuyerearly power"1970' s. instigateSee, e. RAB,the wave54-57.ofTheiocreased"power buyercompetitiondefensewhich" in sweptbrief assert that suffciently dominant buyers can insure th..t even Ii concentrate market behaves competitively, obviating concern over the 1= of potential competition,ld. at I, D. 204. Although the power buyer deferu;e has met at best, Ii lukewarm r eption in cass lacking the extreme concentration present here see. e.g, United State. Black and lJcker Manufadu.ring Co., supra 430 F,Supp. at 754-55 we find it whoHy inapplicable to the present cas. As discu.%d above with repet to cost cutting-, the improved competitiveness in the shock absorber market seems much better explained by the perception of Tenneco at the edge than by presure brought to bear by Sears or other buyers. Similarly, thereis no indication that Sears was unhappy with Maremont's service or otherwiH instigate Maremont's inveotory buildup; if anything, the presence of a large, predictable account such as Sears would seem to permit les, not more, inventory on hand. There is also no indication that Sears provided the motivation for Maremont's pluoge into new prouctdeve!opment. Opinion 98 FTC.

pre-merger period cannot be adequately explained by factors indigenous to that market. Rather, the competitive upsurge appears closely related to the presence of Tenneco poised on the market' s edge, in short, an actual edge effect.

Actual Potential Entry A second, independent violation is that Tenneco, at the time it acquired Monroe, was itself an actual potential entrant into the replacement shock absorber market. The elements of this violation are largely co-extensive with those which establish Tenneco as a perceived potential entrant the prerequisite of a concentrated target market, the need for the firm to have capabilities, interest and incentive such that it is a likely potential entrant, and the requirement that few other firms be similarly situated. However two distinct additional elements are required as well: (1) that the firm had available to it a feasible means of entry other than through the challenged acquisition and (2) that entry through that alternative route carried a reasonable prospect of deconcentration or other beneficial procompetitive effects. United States v. Marine Rancorporation, supra 418 U. S. at 6:3:3.

There were, in fact, various alternative methods of entry available to Tenneco at the time of the Monroe acquisition. We have little doubt that, given its existing capabilities see discussion supra, 15- , Tenneco could have entered de novo without even the aid of technology licensed from another shock absorber firm.'" While Tenneco did not demonstrate interest in attempting entry on such a completely de nooo basis, I.D. p. 119, it did express interest in entry aided by technology licensed from a foreign firm. I.D. 360. International licensing appears to be common in the shock absorber industry, and includes the transfer of product designs, manufacturing know-how, trade names, parts, machinery and training. Tr. 9265 , 4412, 2862 , 9166.

Tenneco did not need all of these elements to enable it to enter the replacement shock absorber market. A license would have been most useful to it in supplying it an initial design" and any details of shock absorber production know-how it lacked, but Tenneco already possessed much of the additional skills and (58Jassets a licensor could provide by the time it acquired Monroe. For example, Tenneco ., Indeed, Tenneco expr('s ed $om(' confidence in its ability tG design and manur"ct\,re its own shock absorbers SI'r', CX75.

, The record demonstrates that a finn rn,:"Y'Ise a licensed design for its rirst ge,wr;;liOfl of shu"k aborbers and I"ter move On to jt own internally developood designs. Se." e.R.. di c\lssion, intra. 62 fI.66, Tenn..,,", in fact. had "'eh a design uflder developmentin the Tt'TrClmatic. See discussion wpm. 20-2J. g., g., TENNECO, INC.

464 Opinion had already established itself as an efficient producer of rolled steel tubing, a major input in shock absorber production, and possessed significant proprietary knowledge in this area. See, e. J.D. 269. See also. discussion supra 15. It also possessed the Walker tradename already well established in the replacement ESP market." Tenneco, had it wished to pursue the license route rather than the Monroe acquisition, very likely could have obtained whatever technology it desired. See, e. Tr. 10172-73. There were a substantial number of foreign firms, at least seven, which did not have any United States licensees at the time of trial. Tr. 2472, 2602- , 2865 10172.

Licensing is not a hypothetical method of entry into shock absorber production; the record reveals that it is in fact common. Tr. 780- 2472, 2584- , 2602, 2628, 2641- , 2845- , 2863- , 4388- 89, 4412 9116- 9232 9265- 9397, 10170- , 10847. Nor is it difficult to see how licensed technology could assist a firm as wellpositioned as Tenneco in completely surmounting the steep barriers to entry which surround the replacement shock absorber market. Those barriers to entry, as discussed earlier, include the need for substantial capital, a nationwide distribution network, marketing ability, brand-name acceptance, technology to produce at a competitive price, and volume sufficiEmt to support an MES plant. There is little doubt that Tenneco could scale or already had scaled, most of these barriers. What remained were aspects of technology, available through license, and the establishment of volume sufficient to support an MES plant. That volume appeared attainable; Tenneco s penetration of the replacement market would be aided by volume from several sources. As discussed above Tenneco had already committed itself to building a nationwide chain of muffer shops, which would alone generate demand for 12 to 25 percent of the demand needed to support an MES plant. addition, Walker already sold Monroe shock (59)absorbers as well as 59 Manufacturing these prod-its own Mechanex steering dampers. ucts from its own plant would contribute approximately another 3 percent to MES volume. Supra 21 n. 20. Additional immediate areas for volume could come from supplying shocks to Tenneco s growing chain of European muffer shops, and the possibility that a foreign licensee would supply its United States sales from Walker. CX 76. While the Tenneco and Walker "Clmes were ohviously not.est.Clb!; hed with resp"ct to shock 'j.bsnrbeF., the exceJ!,"oL reputCition associated with each would laid accept.mce of a new shock ahsorber line, especially wil.h WU' Tr JOHJ, !17, J0:204 !:",'discussion, sllpm 12- " SppdiHcuss;an, .wprn 19-20.

" The Hhack ahsorbing cylinders for Lhose dampers were obtained from Muremont "I'pm. nL 3 (.y.

618 FEDERAL TRAUE COMMISSION DECISIONS Opinion 98 F.

Finally, it would appear that the opportunity for OE sales would present an additional area for Tenneco to build volume at a new facility. '0 Although substantial barriers exist for OE suppliers to enter the replacement market, especially in the need for broad product line, nationwide distribution and marketing ability, see discussion supra 6-7, the barriers are obviously lower when a replacement market firm seeks OE sales. The primary prerequisites for such sales would be some additional, technically focused salespersons, a plant site not too far distant from the recipient assembly plant, and sufficient excess capacity, see discussion supra, 6. This final factor would obviously mesh well with Tenneco s initial replacement market volume. Thus, Tenneco could reasonably anticipate having initial demand for shock absorbers sufficient to supply a substantial portion of the volume needed to support an optimallysized, MES plant.

Entry with the aid of licensed technology could occur very rapidly, potentially even faster than the planned expansion of Tenneco chain of muffer shops into a major national network. Although Tenneco s expansion of its muffler shop chain was planned to take five years see discussion supra, shock absorber production could commence under license in as little as two years. Tr. 2642--3. These time frames, combined with Tenneco s great and quickening interest in the replacement shock absorber market, cause us to conclude that there existed the strong probability that Tenneco would (60)have entered by alternative means within the near term had Tenneco not acquired Monroe. Compare, BOC International v. FTC 557 F.2d 24 , (2d Cir. 1977).

A second mode of entry, via toehold acquisition 62 was also both '" That DE sale might aid a profit.maximlzing entry into the replacement markel says only that such sales are desirable, not that thf'Y arc neceSlary. RAB 44--5. Moreover, the record is clear that the replacement market in the United States is surfcienUy large to support MES production without dependencf' upon OE saliJs, Tr. 9256, and Tenneco s existing replacemiJnt market distribution network made it particularly able to enter without OEsaJes ," We believe, moreover, that Tenneco would, in fact, enter with an M :S-sized plant, even though init.ial df'mHnd would r..u below that level. In this vein, We concur with the vif'w of Dr. Ne!so!1 , complaint "ounse!'s automotive expert, who believed th..t Tenlleco would "hoose to build "n that. scale initi"Hy, and build volume up to Mf':S leve! gradua!1y over a numtwr of years, and accept some cost disadvantage during that time the plant was under-utili ed. Tr. ll0ZU .. Blackstone, with its .4 pf'recent share of the market, clearly qUlllifje as a t.oehold firm.See 'fr. l09 KI camera. For"ign firms wit.h simil..riy mode t sharf's of the United States ' mo;rk,.t. such as Arm5strong and DeCarbon also qualify as toehold firms, even if they posses.'\ very substantial market shares in other countries. The district court, however, in denying a preliminary injum;t.ion in this matter, FTv. Tenneco 433 FBupp 105 (D.D.C. 19771, held that. the Commis ion had not demonstrated the existence of a feasible toehold.Id at 114. The court ddi!1ed a to..hold as. inter a.lia a firm " not dominant or otherwisf' significant in th.. Americanor fiweignmarket " citing Missouri Portland Cement Cu. v. Ca.tgill 498 F.2d 8f (2d Cir. 1974).Id. at 112. Misso"ri Portland however involved firnu; duminant in "th"r geographic market.swithin the Uniled Stale. We see little basis eit.her in law or in logic, to extend the concerns of Section 7 to Ol!1Y conceivable anticompetitive impact upon th.. domestic market in Britain or France Nor do we view II foreign firm dominant position in ij,l domestic market. as highly probative of even its pot.mtiaJ market share in the United States. While some f'xcess cllpacity in a foreign plant could obviously be used (Continued) n;NNECO, ING 464 Opinion feasible and available. A toehold would, like a license, provide technology, but would offer an additional advantage as well: the toehold' s sales volume would be added to the volume Tenneco could already piece together through other avenues. While respondent disputes the availability for acquisition of foreign firms such as Armstrong and DeCarbon, their feasibility as entry vehicles is not contested. Armstrong, for example, produces one of the world' s most complete line of shock absorbers, see I.D. 391- , 399, and Tenneco actively sought Armstrong (61Jtechnology. I.D. 360-61. In terms of volume, Armstrong also would contribute to an additional 400 000 units annually to Tenneco s sales in the United States. See I.D. 399. Armstrong further provided the possibility of supplying initial United States sales from the foreign, MES-sized plant until domestic sales volume rose to a level suffcient to support a new plant in the United States, an option actively considered by Tenneco in its discussions with Armstrong. See, I.D. 360, 362. A European toehold could fit well with Tenneco s expansion of its muffer shop chain in Europe, CX 109F, 106C, by supplying those shops with shock absorbers. See CX 83B. The acquisition of a small, struggling domestic firm, Blackstone also would have served as a viable method of toehold entry, although this route would have been more difficult and less attractive than the acquisition of a substantial foreign firm such as Armstrong. There is no dispute that Blackstone was burdened with aged equipment, a less than complete product line (it produced only 1" and 1-1;," conventional shock absorbers), declining market share and a mediocre reputation. I.D. 410-412. Even so, we believe that the ALJ erred in concluding that the firm was not a viable vehicle for Tenneco s entry into the replacement shock absorber market. I.D. 413.

The ALJ failed to consider how Blackstone s assets, although limited, could have aided Tenneco in surmounting the barriers which remained before it, In making his negative determination, the ALJ also neglected to consider the historical evidence of prior entry into the shock absorber replacement market through the acquisition by an ESP firm, of a troubled toehold. Close scrutiny of an ailing toehold' s capabilities, especially in light of what assets the acquiring firm could bring to it, is necessary, given the strongly procompetitive effects likely to flow from such an acquisition and subsequent efforts tu slipply expanded sates in the United Slates, we truly doubt that a foreign firm wOlJJd devote al! it. capacity to an effort in the Unite States, and thereby abandon its hard.won domestic sales base, and its investments in a domestic sales force, goo wiu, customer r:onu.ct.s, warehouses and 50 forth. Cy. W.M. Landes and RA Posner Market Power in Antitrust Cases 94 Harv. L. Rev- 937 , 963.-70 (191:111. ... , ,, . , , ;, , ( Opinion 98 F.

to improve that firm and to expand its market share. See, e.g., The Renclix Corporation 77 F. C. 731 819 (1970) vacated and remanded FTC v. Rendix, supra; The Stanley Works 78 F. C. 1023 , 1078 (1971). Blackstone, like Armstrong, would have brought to Tenneco another increment of United States sales in its efforts towards establishing unit volume capable of supporting an MES plant. " (62) It also possessed designs and manufacturing know-how for the 1" and 1-3/16" conventional shock absorbers it then had in production as well as prototypes of both air-and spring-assisted shock absorbers and the technical expertise to build them. J.D. 410. These additional items would provide a full product line, save for MacPherson strut replacement cartridges.

The feasibility of entry through a firm such as Blackstone has been demonstrated by Questor s acquisition of Heckethorne in 1958 and Questor s subsequent expansion of that firm. Although such analogies can never be exact, we think the drcumstances of Heckethorne in 1958 and Blackstone in 1976 Were sufficiently similar to provide us some guidance. Heckethorne was successfully expanded to a significant factor in the market even though, at the time it was acquired, it offered less technology to its acquiring firm than Blackstone did to Tenneco in 1976. In particular, when it was acquired, Heckethorne offered little in the way of design and production know-how. co (63) This analysis is further supported by testimony from high officials from both shock absorber'" and ESP" firms. (64) There is, in addition, the example of the extraordinarily successful expansion of Gabriel following its acquisition by Maremont in 1962. , !n this if1shelf1ce,the CDntrih,ltion would have b en less. apprnximtitf'ly 250 000 urlib annually.Yr, 1099;1 mrn",U " For ('x,H1'pl, it "I'!"' s lh:Jt U",,,kpt.hnrnp s market sh..n' Wns con;;iderablyre"ter at the time of it.s acquisili,m than UIi.cb!.f)"e S('t'. (', f... Tr. 10216.17, Yet Tenn"co now, unlike QLlestor then. has the prosp"ct of suust"nli,,1 siiles through its rnurn"r shop chain and throLlg-h other means scf'discussi"n Sllpm EJ-21. roughly cornpt''' at;n I"nl' this M,.,ming difference" in initial volume It. kel shar ein recent ye",.;;i;;in the7 to 9 percent range. T" 36-:J7 "" ''''em. " II, p"od\ld al tl",1 tin1( was 11!1 odn- lf1oking nu",n-tub" dpsign prodLlcpd under license from nec rbon, lhe F,."nch rir 'n. 1'.. J! 14- 15. While" th" (iis;I!'') W'- functio"ul, it., L"llj u'-l ,-pp,' ur'-rLce r;ilVE' it poo.. ..cceptilnce in the lr..d.. and \Im'st".. WJ.' unuhh' t" irHTl'us,' its markPl shan' in the first rive y"..rs art."r - theafquis;\ion. Qucst.ur then designed a rww lint' or c01\\cation,tl !wo. ILJ!a' hLJtk ahsod",,' , and pronufed th"m, t" ,,,t.,,ti,,lly ("'!In scral"h. Tr J !O I ! ", j j 7,1 - Tlw Clmi,.""", oI( u", , M.. Putman, testiril'n to IIw relevanc\' ,,!'Queslor s histon' !o 1'enrlf'co sability to enl", \1". h(Jl CJb ,)j!",r m",.kd. Wlwn tl ked whell",,. T nne('o could h;Jve E'nlf",,'d "'Lthoul Morrw,' , f1f t,, tiri,.d that it could h"\, , ",,1. supp",,!,'d that opinion with hi own f;nl1 exp",.iprH'" in ,-"xpanning f,-om it.s bast' w;lh Jh"'kpthonw, r'dis('u", ',o" ,ur 41i ' 1'11(''"olli,'i,d" It,,,tii,..! tl1,,( BI""k.,WIH' would han' be,. " " vi,lbl,.1.'H'l1old ror Tp""t'('(J. A",' ,,('d;nf to Mr Ihk(' th"J.""CutiH' \'i('. l'n.sirll' tll ,,1 ArVLn W,dk,' , with tl""" lIul1lwr' rare' p(J. ,ili() in ESP ,,,,.I with !Illi.. l'i,,:uJ(;,d w!wr,'",ith, ould ttlkl' Bbckstuf1(' "ud du """, dn-, "',Ih .t. TIH')' n".tdinly could rnmT" Hlark Into nn oj' an eighth or lenth list and mOVl' il right uplhl'ugh II". i'"cksotTH'wh,'e. T" 6(1 Simtlurly, Mr. M.,on' "I ' Midi's, who hnd visited Hlackslor". , pi",,!. , J' LD. 4 . fwlie\i(.d th.1t T""n"co would. wit.h Bj""k l",1l, bl'('U""' " ,;'g"iri('",,( sl1lrk ,-bsorh,' (' prndurn- Tr . J:! :!(i 'l' NN.tvV .0""-.

464 Opinion Although this history is necessarily less relevant than the experience of Questor given Gabriel's significant market share at the time 69 it does merit some of acquisition weight, inasmuch as Gabriel was in a downward trend when it was acquired, Tr. 10225, 10231- , a trend which was dramatically reversed following the firm s acquisition by Maremont, Tr. 10235-39. Gabriel's market share has at least doubled and has possibly increased four-fold. Maremont today is the number onefirm in the replacement shock absorber market. Not only were these toeholds feasible, they were available as well. The availability of Blackstone is beyond question; the firm was actively soliciting firms to purchase its shock absorber at the time of the Monroe acquisition, I.D. 411. The availability of foreign firms, such as Armstrong and DeCarbon is less obvious, yet we believe that either of these firms in all likelihood could have been acquired by Tenneco, had Tenneco wished to undertake the more arduous and less certain competitive struggle which necessarily accompanies entry through a toehold acquisition. Rather than persuading Us that Armstrong and DeCarbon were in fact unavailable, the record demonstrates only that Tenneco broke off negotiations with each firm once it had learned that a gap existed between the prices asked and offered.

In the case of Armstrong, a publicly traded company, the firm management took the position in 1974 that it was not interested in being acquired at even a " normal premium " over the market price the firm s stock. Tr. 2622-23. Management's position was that the firm s prospects were so bright that it would take a 100 percent premium to arouse their interest. But whether it would, in fact, have taken a premium of that size remained to be seen, given that the firm s share was widely held, Tr. 2639, and even management was constrained to admit that the Board of Directors would have had to recommend sale at an appropriate price. (65) What had transpired, then, was little more than offer and counteroffer, accompanied by what appears to be some bluster and posturing by Armstrong. Such a course of events is to be expected in any negotiation, and by no means establishes that the target firm is, in fact, unavailable, especially given that Tenneco was the party which ceased negotiation.

To hold otherwise would, in essence, leave the government unable to challenge effectively the acquisition of major target market firms. 'u Gabriel's m..rklC share if1 1962 was a matter of srime dispute in this jJrc,eedif1g,Compare, 1', RAD at wirh 'Jr. 10224- 25 We find the most n aso"abe estimak of Gabriel's replace ment market share"t that time was that pruvided by Dr, Nelson, wh" believed it to have been in thelr t.o 18 f",rccnt range. See. e.g, Tr. 10224-25; 10230,31. This is cof1sidl'rab!y less than the market share which th.. Commission previously bl'!ievcd Gabriel to have held when it was acquired See, e,Ii.. Tr_ 10635 J0723 , Opinion 98 F.

To protect itself from exposure under Section 7, the well-counseled acquiring firm would need only to approach each toehold firm and engage in a round of negotiation, secure in the knowledge that the inevitable gap between offered and asked prices would insulate in from legal challenge and the eventual shock of a divesture order. In this case, there is nothing which demonstrates that Tenneco negotiations with Armstrong or others were sham 70 but that does not end the matter. Even if numerous rounds of serious and committed bargaining had occurred, and some price gap remained we would be most reluctant to conclude from that alone that the target firm was, in fact unavailable." What a firm is willing to offer, of course, is related to a number of factors, not the least of which would be whether better opportunities lay before it. Here, the acquisition of Monroe, with its already established 38 percent replacement market share, must surely have been seen by Tenneco as an alternative infinitely more attractive than the purchase of Armstrong. Tenneco would acquire, along with Armstrong, years of struggle to build market share, and the prospect of creating a market structure permanently more competitive than would exist if it could obtain Monroe. See, The Stanley Works, supra 78 F. C. at 1072. (66) We have little doubt that had Tenneco believed it could not, in fact, acquire Monroe, it would have successfully closed the gap in price71 which separated it from Armstrong. 72 See, The Bendix Corporation, supra 77 F. C. at 820. Accordingly, we find that the unavailability of Armstrong as well as DeCarbon and other firms 74 has not been established.

Finally, there is no doubt that entry by Tenneco through either a toehold acquisition or a licensing arrangement would both decrease concentration and produce additional procompetitive effects. AJt" There is, though, evid"nce t.hat Tenneco was well aware that its acquisition of Monroe woold result in a almost certain challenge by this agency,See discussioo. supra ;18 11.:J3, and that thb se"ond round of talks with Armstrongoccurred ju t prior t.o t.he Monroe acquisition. " Nor is it th" Commissiun s rule to establish wh,,!' that price wouldn"e,beBritish Uxyr;enco LId. 86 1241 , :J57 (1975), reu "n olh"r wounds, sub nom. RUC IIlernutifJnal, Lid. v. , supra " !o.deed, Teoneco instructed the president of Walker Europt tv maintain "con tad arid re!atiO'lship " with Mr Hooper, the ch"irman and CEO of Armstrong, pending further orders from 1'"nne"o. CX 85. We also note that Tennew did acquire Harmo, a British ESP firm, in 1975 after 'wgotiations which resembled it.s talks with Armstrong. 'Jr. 10178 , 11485. Spe, also, Tr. 11490 CX 230. " The record demonst ates a pattern ofuffer and counte nffer with O"Carbun not unlike that whirh occurred with A mstrong, although J)!'Carbon and Tenneco apptared farther apart on p ice. ex 91-95 Like Armslrong, the DcCarb-on negotiation was left open. ex 96 We are unimpn'ssed hy respondent s assertions that the French government would block a Oec,, bon a"quisition. RPF 363 In fact, DcCarbon propos,x! a maflner of sale tu ease,my government,,1 conccrn, ex 920, and Tenneco ha.d in 1976 aequi ed at least one reneh ESP firm, Bellanger, Tr. 11465. Indeed, Tenneco had demonstrated a farility for acquiring Europtan ESP firms in the early and mid 1970'5, purchasing- firms in Sweden and Germilny, as well as in Rriwin and Francc.See, g.. Tr. 11482- 91. " The record als" identifies still other suitable foreign firms, but dues nut make elea whether any of tho.'.. firmsc!)uld, in fact havebepn purcha.. tx!. LD. 414-27andp. 119 TENNECO, INC. 623 464 Opinion though little evidence demonstrating the probability (67)of such benefits is required when the market in question is oligopolistic, and few markets would seem more oligopolistic than the one in question see discussion supra 10- , there is, in fact, an abundance of evidence pointing to the likely benefits to competition which would flow from alternative entry by Tenneco. The strongest predictor of the likely impact of such entry is found in the strong defensive actions taken by the industry in response to the threat that Tenneco would enter. Tenneco was regarded both within and without the market as the firm most likely to attempt entry, and that perception was the likely trigger of a wave of procompetitive effects, including improved service, new product See generally discus-development, cost cutting, and price cutting. sion supra 45-57. Actual entry by Tenneco would certainly have continued and perhaps even intensified those salutary effects. In addition, deconcentration was also likely, inasmuch as full utilization of an optimal MES plant would require something on the order of 10 percent of the replacement market supra, and we conclude that Tenneco, with all its capabilities, would achieve at least that volume and likely more. In such circumstances, deconcentration would likely occur. '" (68) Conclusion As the previous discussion illustrates, the effect of this acquisition is likely to lessen competition substantially in the sale of replacement shock absorbers through the elimination of both perceived and actual potential competition, in violation of both Section 7 of the Clayton Act and Section 5 of the Federal Trade Commission Act. The necessary and appropriate remedy in such circumstances is complete divestiture of the stock and assets ilegally acquired. United States E.I Dupont de Nemours Co. 366 U.S. 316 , 328-31 (1961); Procter & Gamble Co. 63 F. C. 1465, 1584 , (1963) aff' 386 U.S. 568 (1967). See also, L. G. Balfour Co. 74 F. C. 345 (1968), aff'd 442 F.2d 1 (7th Cir. 1971). Further, a ban on future acquisitions without prior Commission approval is often imposed to prevent repetition of the " See, e.g,BOC International v. , supra 557 F.2d at 27 n. . quoting Profe!;or Turner lTJhe pmbl"", of proving that ihe new entrant would have b,'en a substantial competitive factor Can be overstated. It is highly likely that a new entrant in .. a tight oligopoly industry will shake things up a great deal in th.. pruc..s,,; of trying to acquire a substantia! markeiHhare even if in the end itsinrm,,!share rather modest. 78 Harv. L. Rev. at I:83 H, More precisely, deconcentration would necessarily follow unless th.. overall sales vulume in this mark..t were ripidly io double and redouble, rendc, ing MES-I"vel sales an insignificant I'er"..ntage of ihe newly expanded market.-Needless to Silk, wp uelievethislaU"rseenario highly impla usible, especiallyintbesbortrun. Concurring Statement 98 F.'. violation. See, e.g., Liggett Myers Inc. 87 F.TC. 1074 (1976), aff'd 567 F.2d 1273 (4th Cir. 1977).

Accordingly, we order, as urged by Complaint Counsel, divestiture of Monroe and a lO-year moratorium on future acquisitions by Tenneco of any shock absorber firm without prior Commission approval. CCPF pp. 161-64.

We fail, however, to see the need for, and therefore the appropriateness of, additional order provisions also urged by Complaint Counsel. Complaint Counsel would further burden Tenneco with a requirement that it report, for a lO-year period any acquisition and the product line involved. Such a requirement, however, would not serve to further fence-in respondent from another unlawful shock absorber acquisition; Paragraph V already sees to that. Moreover even if we were to assume likely recidivism in other product lines the provision would not by its after-the-fact reporting aid us in preventing future violations; the pre-merger notification provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.s. C. 18a, provide sufficient advance warning of most significant acquisitions. Complaint Counsel would also have us order Monroe, once divested, to "resist" takeover attempts by any other ESP firm. Although the notion of a target market firm valiantly struggling to preserve potential competition is appealing, the enforceability of such a provision is doubtful at best, and we decline to adopt it. Finally, we decline to adopt the proposed la-year moratorium on any acquisition by Monroe of an ESP firm, inasmuch as we did not reach that theory of violation.

CONCURRING STATEMENT OF COMMISSIONEH CLANTON Introduction I fully support the Commission s decision in this matter, but I would like to elaborate further on some of the thorny issues associated with the potential competition doctrine. In particular, my focus concerns the feasibility and attractiveness of alternative means available to Tenneco by which to enter the independent shock absorber aftermarket, factors that help to establish Tenneco as an actual potential entrant. In light of findings by the administrative law judge and a district court judge that alternative entry routes were not available, it seems useful to compare the facts of this case with the evidentiary standard set forth in previous judicial precedents. The Commission s conclusions here with respect to alternative means of entry are not only reasonable but consistent with those preceden ts.

''-''''''''''-', H"-,. b60 464 Concurring Statement An important consideration in cases of this kind is the relative weight that should be assigned to various forms of objective and subjective evidence. My point in this regard is simply that in assessing the alleged elimination of potential competition, we are always dealing with probabilities and rarely, if ever, with certainties. These probabilities, such as the likelihood of entry by means other than the acquisiiion under consideration, are invariably difficult to pin down with concrete and certain proof. In weighing the evidence-both testimonial and objective-we must always take care to refrain from engaging in substantial speculation about a firm plans for the future. On the other hand, the whole theory of potential competition becomes quite useless if we and the courts are required to find with relative certainty that an acquiring firm would enter the market by means other than the acquisition or the date by which such alternative entry is going to occur. Market dynamics and the vagaries of any corporation s own planning process will almost always preclude us from making such precise determinations. Areeda and Turner have recognized this characteristic of potential competition:

Although we have criticized some decided cases which have not required much proof, truly satisfying proof cannol be demanded. To insist upon it would be virtually to abandon the en-ort to preserve potentinl entrants from elimination by merger. Abandonment, however, would be unwise in those situations where a highly concentrated market needs more compet.ition and where potential entrants are few in number. Wit.h appropriate proof of such needs and numbers, . . . we see alternative to rather modest proof that the defendant outside finn was a potential ent.rant. V. P. Areeda & D. Turner Antitrust Law 1121e at 117 (1980). r21 In some cases, the evidence provides fairly clear answers to the questions posed by the actual potential entrant theory. For example in Heublein, Inc. , et ai. 96 F. C. 385, 587 (1980), the Commission found that Heublein s experience in the marketing and distribution of other alcohol products, together with the experience of similarly situated firms, more than adequately supported the conclusion that it would have been within that firm s capacity to acquire and operate successfully a small wine company, even though we ultimately did not find liability against that actual potential entrant. ' And, in Brunswick Corp. , et ai. 94 F. C. 1174, 1269-70 (1980), modified as to relief, 96 F. C. 151 (1980), afi'd as modified sub nom. Hrunswich Corp. v FTC No. 80-1913 , and Yamaha Motor Co. Ltd. u FTC No. 80-1760 (8th Cir. July 29, 1981), we found it unusually clear that the potential entrant possessed and was exploiting the technology I It sh()uld be noted that inlkub/,,;n the fects "Iso rfv"aled with greater- tharl. urll ci.,r;ty tlw SUbStl\Tti,,1 flumbpr of other polerll.ial Pfltrant- at t.he mark"t s page, which of course djminished t.he competit.jv" ;JJportance of the loo of Heublein as One actual potential entrant !)li F.T.C 31.'589 Concurring Statement 98 F. required to enter the relevant market; the entrant also was adept at marketing in areas distant from Hs production facilities, such as the relevant market. Similarly, in Heublein we were able to judge with confidence that there were numerous smaller candidates available to the respondent for entry by toehold acquisition. 96 F. C. at 587-88. By contrast to these instances, the facts in other cases may not be as clear-cut, and a decision may often have to be made on the basis of inference from such evidence as company history or the experience of other firms in the market. But the fact that less-than-certain judgments must be made in the process of evaluating likely potential entry should not be fatal to the process or wholly determinative of the outcome.

In this case, the evidence of objective factors-including market compatibility, access to relevant technology, favorable and attractive market conditions and the availability of less anticompetitive entry vehicles-makes it quite reasonable to conclude that Tenneco would likely have entered the relevant market by alternative means. II. Interest, Incentive and Feasibility of Entry As the Commission s opinion notes, one of the key prerequisites to any finding of liability is to establish that a reasonable probability exists that the acquiring firm had means to enter, and would likely have entered, the relevant market other than through the challenged acquisition. United States v Marine Bancorporation 418 U. 602, 633 (1974); United States v Siemens Corp. 621 F.2d (3)499, 506- 07 (2d Cir. 1980). In Siemens, the court relied upon the following factors to find that the defendant would probably not enter the market de novo or by toehold acquisition, even though it had both the interest and incentive to do so: Siemens lacked the technological competence to develop its own product, as evinced by the fact that it had tried and failed to achieve that objective; it faced a substantial time lag before reaching the market, even if it did have the technology to develop its own product; the defendant had missed the growth phase of the market and the profit prospects for the future in that market were not encouraging; and there was no offer of evidence of an attractive and available toehold. Id. at 507--8. By contrast, the objective factors here support a reasonable probability that Tenneco would have entered by means other than this acquisition within a foreseeable period of time. Like Siemens Tenneco has the interest and incentive to enter the shock absorber market, as the ALJ found, as the Commission s opinion details and as I describe below. Unlike Siemens, Tenneco possesses the techno- .

464 Concurring Statement logical capability to enter the market. Although Tenneco/Walker did not have all the required technology in hand, it was close to that stage and presumably could have licensed or acquired the remainder. It had experience in making jacks and tubes and had acquired proprietary technology in shock absorbers, through Triple S. Respondent also had an efficient distribution system compatible with shock absorbers and its own muffer shops-a form of retail outlet through which shock absorbers are often sold. This compatibility is seen in the fact that most of the major competitors of Walker and Monroe market both exhaust system parts and shock absorbers. Also, unlike Siemens, even though the profits in shock absorbers have declined from previous levels, the rewards to be gained from the shock absorber business are still attractive and are expected to remain so. As mentioned above, the ALJ found that Tenneco had no plans to enter de novo and that no toeholds were available that would be viable alternative means of entry. Specifically, he found that while Tenneco was interested in acquiring Armstrong the interest was not mutual, that Tenneco and DeCarbon had failed to agree on a price that Blackstone was unattractive, and that the status of "other toeholds was "unclear." (LD. 119) Also, in denying a preliminary injunction, a district court found insufficient and inconclusive showings on both the de novo entry prospects and toeholds. FTC v Tenneco, Inc. 433 F. Supp. 105 CD. C. 1977). However, our own review of objective factors developed in this record leads us to a different conclusion. (4) As the majority s opinion makes clear, prior to the acquisition of Monroe Tenneco had been exploring several different means of entering the shock absorber business. More specifically, it had explored licensing, development of proprietary technology and various acquisitions. Obviously, if each of these alternatives had led to a dead-end, we would be left with no choice but to permit the merger, but the evidence reveals something quite different from that. After surveying Tenneco s multiple and varied probes of the shock absorber market, it is reasonable to conclude that the firm intended to enter by some means, whether by de novo entry, toehold acquisition, licensing or even acquisition of a leading firm. Moreover because of Tenneco s recent consideration of the time required for development of Armstrong and DeCarbon licenses and its probes of other acquisitions, probable entry seems more predictably immedi- /:

Concurring Statement 98 F. ate in this case than it has been in others. Compare BOC Internation- , Ltd. v FTC 557 F.2d 24, 29 (2d Cir. 1977). ' In ROC the court concluded that the Commission had found only that the respondent was likely to enter eventually with no indication as to what was meant by eventual entry. Here, by contrast, we have evidence of multiple negotiations with other firms regarding licenses and acquisition, plus the consummated acquisition of Triple 5 , all indicating a more immediate prospect of entry by Tenneco. Some further review of the evidence bearing on each of the elements of the actual potential competition doctrine will confirm this conclusion. Interest and Market Attractiveness A major argument of Tenneco is that it never seriously considered entering the shock absorher market by any means other than the Monroe acquisition. (l AB 14) Respondent emphasizes that no decision-making officials at Tenneco or Walker ever seriously considered any other method of entry, citing complaint counsel' own expert for the proposition that, at the very least, respondent did not exhibit an intention to entcr absent acquisition of a license or a toehold. (nab 15) In particular, Tenneco belittes its talks with other shock absorber firms prior to its negotiations with Monroe, including Armstrong, Tropic, Triple Sand DeCarbon. (RAB 15-17) While some of those negotiations may not have proceeded to ripeness, and some of those firms or their assets ultimately may not have been available these overtures belie the respondent's denial (5Jof any interest in this business beyond its efforts to acquire Monroe. This conclusion is supported by the evidence of respondent's sustained and focused interest in shock absorbers over time; for example, there is the following observation of Mr. Cook, the president of Walker. Although made in conjunction with consideration of the Monroe acquisition proposal, these comments unmistakably exhibit Tenneco/Walker s strong prior interest in the shock absorbcr market: During the past reviews of Walker s five year plans, we have had discussions with the Tenneco Planning Department regarding potential new product Jines that would most clusely fit with our present exhaust. business, and the answer has been collectively agreed t.o be shock absorbers, As is delailed in t.he preliminary background data attached, we believe the product line is the most compatible and is significant enough t.u justify pursuing. (CX loa) Respondent also argues that its interest in Monroe does not necessarily evince a general interest in other kinds of entry. (RAB In YURwhn .'.1"lon C(J Lid, FTC. lh" COll"( of"PI",;,bdid not aU""Jj.!l t.oo"1."I"1\i"" pn'Cisely 1'1"," Yarnall( ht. hav" c:n((,,-d the market; il ddennim,r: U",!.l.wonly showing "I' the till(' nr liker)' ""try Was " co" id"r,,bly ""H(' ddinit,e lh"n w,, the cas" ill,we" ml- (\2 CCII Trade Cas 1:6 f1 7:1:12H n. 1211'1 h Ci,- July 2 , 19,,11 _. , _.

164 Concurring Statement 17-18) That may certainly be true in some instances, but, as we said in Heublein 96 F. C. at 586, the fact that a firm says it will enter a market only by acquiring a particular firm should not be conclusive or highly probative, especially where there is other evidence of broader interest. ' I agree with the majority that Tenneco exhibited such broader interest prior to its acquisition of Monroe. Tenneco s general interest in shock absorbers has been stimulated and sustained by the special characteristics of its Walker Division that make shock absorbers the most log-icalline of products to add to its ESP lines. The majority s opinion describes in some detail the experience of Walker in the manufacture of steel tubing, a major input in shock absorber production (CX 4F), as well as its jackmanufacturing experience with hydraulic principles closely related to the desig-n and construction of shock absorbers. In addition, the majority details Walker s distribution and marketing capabilities which afford peculiar economies in shipment and saies from the combination of ESP and shock absorbers. l6JWalker itself has recognized the special compatibility of these two lines of products. (See CX loa). The similarity of these technolog-ies is much greater than was the case in either S/:emens, United States v Black and Decker Mfg. Co. 4:JO F. Supp. 729 (D. Md. 1976), or FTC lJ Atlantic Richfield Co. 549 F.2d 289 (4th Cir. 1977). The differences between Siemens' X- ray and computer tomography technology, on the one hand, and the technology required for entry into nuclear medical equipment created a wider chasm than exists here between ESP and shock absorbers. 621 F.2d at 507. And, in Atlantic Richfield although Arco had experience in one narrow segment of the uranium market, the court found that it possessed none of the requisite expertise to make it a potential entrant into uranium extraction; the two diverse technologies were not regarded as similar or transferable. 549 F.2d at 299-300. Likewise, Black & Decker experience in electric motors did not lend it the know-how required to enter gasoline engine production because, as the court noted, their desig-n and development entailed different considerations. 430 F. Supp. at 758. Such is not the case here, as Tenneco itself recog-nized on several occasions, and it is quite reasonable to infer that respondent' s experience with very compatible technology and mar- , The rnurt in Siemens said that ihe memoranda of a few lower-echelon employpf of the derf'ndl\nt comp"ny who possessed no man"gem'-nt r spon ibility could not. suffc,- as pvidence of corporate intent to ..nter a ",a,"ket 621 F.2d at 508 (2d Cir.19811 Furthermore, the vif'W" orthos,' employees had not been brnught to ttenti()nt.he of t.h.. decisioo- makifJ!j milnagem"nt" In this ca, howev! , there i suffcient. involvement by the upper management or Tennern and Willker to attribute, t.h", ..xpre sions of int.er..st in ho"k ab ()rber found in Tenn"co s dOrllmefJt." directlyt()lhedeci i()n makers.

630 EDERAL TRADE COMMISSION DECISIONS Concurring Statement 98 F. keting methods positioned it well for-and heightened its interest in--ntry into the shock absorber business. The attractiveness of the relevant market also constitutes an important objective factor to be weighed in potential competition analysis. Such analysis involves not only profitability but projected market growth and other market trends indicating the long-term health or decline of a business. Such considerations have played a role in other decisions, including the recent Siemens decision, in which tbe court found that the alleged actual potential entrant had missed the phase of rapid growth in the market and that profitabili. ty had become, and would likely remain, low. 621 F. 2d at 507. See also United States v Wilson Sporting Goods Co. 288 F. Supp. 543 553, 560 (D. Ill. 1968) (market growing rapidly and attractive for entry); United States v Ford Motor Co. 286 F. Supp. 407, 439 (E.D. Mich. 1968) (rate of return apparently attractive but misleading); United States v Standard Oil Co. (NJ), 253 F. Supp. 196, 212 (D. 1966) (high profit and growing demand). In this case, however, such factors portray a different picture of the prospects for the shock absorber market and entrants seeking to enter it. Respondent argues that the shock absorber market was stagnant from 1973-77 primarily because of the growth in demand for MacPherson struts and was unattractive to possible entrants because of the high minimum scale required for efficient production of shock absorbers. (RAB 10) While the barriers imposed by scale economies may be high, the evidence indicates that Tenneco is in a far better position than any other firm to achieve successful entry. Furthermore, while the profits in this market in recent years may be somewhat lower than they were previously, that is not enough to render the market unattractive for purposes of this analysis. As the ALJ notes, there is evidence that the decline in Monroe s profitability was temporary, resulting from internal problems, competition from Maremont and (7Jconditions in foreign markets. (I.D.F. 200) Moreover, respondent's own forecasts prior to the merger indicate that the market is attractive and that Monroe s setback is only temporary. (I.D.F. 205) Although the profit margins in the market have become somewhat leaner and some firms have exited, the market is hardly in irreversible decline nor does it approximate the condition of the market in Siemens. While some weight would be given to changed market trends, these changes are not so significant as to justify a finding that the shock absorber market is unattractive. In fact, the departures from the market tend to show only that those llll'1.rt.U lllt.. OJ, 464 Concurring Statement firms were not as well situated to thrive in the market as Tenneco/W alker. 4 Feasible Means of Entry The availability to Tenneco of feasible alternative means of entry is a critical issue here, and it played a principal role in the AI..' s and district court's findings in favor of respondent. The most likely alternatives available to respondent appear to be entry through a licensing arrangement or through acquisition of a toehold firm (e. Armstrong, DeCarbon, or Blackstone). We must acknowledge that economies of scale may make entry by either licensing or expansion of a toehold more difficult, as the respondent argues. (RAB 26) Yet to the extent that it exists, this difficulty was known to Tenneco and taken into account in its pre-merger evaluations of the shock absorber market. Some of the pre-merger documents involving the acquisition of Triple S indicate that Tenneco considered using that purchase as a springboard into the full-scale participation in shock absorber market. (CX 25Z-9) Throughout its period of exploration of shock absorbers, Tenneco also discussed production under a license as a possible option. Respondent specifically discussed licensing as well as acquisition with both Armstrong (CX 76) and DeCarbon (CX 297, 300, 303), and it seems quite clear that shock absorber production under a license was feasible. As the majority s opinion notes, the American shock absorber firm, Heckethorne, at the time of its purchase by Questor, produced under a license from DeCarhon. Additionally, an official of Armstrong, which licensed firms in many countries, testified that such licenses could be developed into full production in two years.

As for the availability and attractiveness of the toeholds, we place greater weight than the ALJ did on the extensive contacts and negotiations by Tenneco with various firms, ranging from Tropic and Triple S to Armstrong and DeCarbon. The ALJ's dismissal of the Armstrong and DeCarbon talks as futile and meaningless because of differences over price is not entirely persuasive. The reasonable inference to be drawn from these talks is that they were serious, that they proceeded and were maintained (8)over a period of time and that they were substantial exercises within the total context of Tenneco s multi-faceted exploration of the shock absorber business. Indeed, even after its initial round of discussions with Armstrong, which did not produce an agreement, Walker s president wanted to . A variant of respondent s argument about the attractivem'Hs of the market is that the market was performing o competitively that the potent.ial competition doct.rine is inapplicablf' That issue will be disc:ussed mure flllly below Concurring Statement 98 FTC. keep the lines of communication with Armstrong open for future development. The fact that certain negotiations were stalled over price differences is not necessarily dispositive. Obviously, respondents should not be required to pursue a futile exercise or accept an unreasonable offer. But the facts here do not reveal an impasse in negotiations between Tenneco/Walker and either Armstrong or DeCarbon. Rather, the evidence, based on Walker s own assessment indicates that the doors remained open for purchase of a viable toehold at the time Tenneco turned its attention to Monroe. III. Fewness of Potential Entrants As we noted in Heublein although complaint counsel bear the ultimate burden of proof on the issue, it seems reasonable to ask the party defending the merger to come forward initially with evidence that "a group of plausibly qualified potential dcconcentrators exists. " 96 F. C. at 589. Respondent suggests t.hat a large group of such entrants is sitting in the wings, citing the major auto companies and manufacturers of original equipment shock absorbers and other motor vehicle parts. Superficially, those firms might appear to have the capability to enter the independent aftermarket for shock absorbers. But complaint counsel have persuasively demonstrated as both the ALJ and the Commission s opinion describe, that the characteristics of the shock absorber aftermarket J?, inventory management, distribution, brand-name recognition, access to technology and scale economies-make entry difficult and severely limit the number of likely potential entrants into the market. Respondent acknowledges that entry barriers are high and argues on that basis that. even Tenneco would not be able to enter the market successfully except by purchase of Monroe. However, as detailed previously, Tenneco clearly appears to be in the best position to enter by means other than the Monroe acquisition, and the exit of other auto parts producers from the market suggests that expertise in other automotive lines is not readily transferable to the independent aftermarket for shock absorbers.

IV. Likelihood of Deconcentration The Supreme Court in Marine Bancorporalion clearly suggested that the presumption of non-competitive market performance derived from high levels of concentration could be rebutted, citing United States v General Dynamics Corp. 415 U.S. 486 (1974), a horizontal merger case wherein the court found that market shares based on the traditional measure of sales did not fully refleet \ .

l'll'll'A, , H 464 Concurring Statement competitive conditions in the market. 418 U.S. at 631. Respondent claims to have overcome the presumption here by showing how intense competition has thinned profit margins. (9)More specifically, respondent offers the following evidence in support of its contention: (1) testimony of industry executives; (2) testimony of non-industry members as to unattractiveness of entering the market from a profit perspective; (3) documentary evidence showing declining rates of return; (4) evidence showing that shock absorber prices rose less rapidly than prices generally; and (5) "buyer power" exerted by large mass retailers such as Sears. (RAE 48-9) As to the first two arguments, it appears difficult to place great weight on post-merger statements of "intense price competition" by industry representatives. If corroborated by other objective evidence these statements might be given some credence, but it is hard to imagine any industry member admitting that his firm did not compete aggressively or that the industry was non-competitive. The statements by non-industry members about the attractiveness of the market are somewhat more credible, but the reasons advanced could as easily be attributable to the fact that those firms did not have the technical or marketing capability to enter the market. In other words, the very reasons why those firms are not likely entrants-and Tenneco is-provides an explanation for their view that the market did not offer attractive investment opportunities. With respect to the third reason, the evidence of declining rates of return--specially Monroe s-does not necessarily suggest that those returns will inevitably remain low. For one thing, Tenneco own pre-merger documents indicate that the market is attractive and that Monroe s problems are temporary: Generally, the industry 6'TOwth pattern has been similar to exhaust: A long period of steady growth up to 1973, a drop in 1974, and a recovery in 1975-1976. (CX 51) We strongly believe Monroe wil rebound and again be a significant profit producer partjcularly jf they are combined with Walker. (CX 5D) We project the shock market to continue to grow and basically be a function of cars on the road, miles traveled, and overall economic conditions. (CX 5G) An additional factor affecting Monroe s profitably was the more aggressive competition of the other industry leader, Maremont, in the early-to-mid-1970s. Although Maremont' s actions reilect more competitive behavior, it is not at aU clear that they signal the beginning of a long-term trend toward a fully competitive market. For one thing, Maremont may weU have been responding, at least in part, to the threat of entry by Tenneco. For another, high entry 367- 4'1" a - 82 - Ul QL J Concurring Statement 98 F. barriers limit the prospects (lOJthat a rapid influx of new competitors will await those industry leaders who attempt to extract supracompctitive profits from the market. That is not to say that a highly concentrated industry having relatively high entry barriers cannot operate reasonably competitively- However, the evidence that such an occu::rence is likely to exist and remain permanent should be fairly persuasive. In light of evidence that historical profits were above average, that the shock absorber market is not in an irreversible state of decline, that the structure of the market has not changed significantly over time and that Monroe s problems were temporary, it is difficult to conclude that the presumption created by the high concentration levels has been effectively rebutted. The evidence on price trends is especially difficult to assess and therefore, is less reliable as a measure of the degree of competition existing in the market. It simply docs not reveal with any clarity the underlying causes of the pricing behavior or the likelihood that competitive pressures, to the extent they exist, are likely to have a dampening effect on prices in the future. It is possible, as respondent suggests, that the growth of Sears and other mass retailers has had some impact on prices. But even if we accept the notion that buyer power could be considered an effective antidote to seller market power, it is not at all clear that the mass retailer segment of the shock absorber aftermarket will serve as an effective check on the competitive behavior of industry leaders. As respondent acknowledges, even with the presence of Sears, the buyer market is still significantly less concentrated than is the seller side. Moreover given the difficulty of entry into the manufacture of shock absorbers for the independent aftermarket, there are substantial constraints on the ability of buyers to integrate vertically upstream if prices at the seller level rise too far above the competitive ideal. In short, the evidence offered by respondent is inadequate to counter the presumption arising from the high concentration figures. Industry returns may be somewhat lower than they were but the downward pressures on profits and prices are not so strong or irreversible that we can assume that the market-notwithstanding the concentration levels-is reasonably competitive. (111 Perceived Potential Competition Finally, a brief word is in order about our finding that Tenneco was a perceived potential competitor. In making that finding, the Commission relied upon objective evidence, bolstered by consistent , .. , u,-,, 464 Concurring Statement subjective evidence and a consistent inference of present effect upon one of the existing firms, Maremont.

The objective evidence has been described in detail and needs no further mention. Objective evidence undoubtedly constitutes the best evidence of the perceptions of existing firms and (0 Jrdinarily the objective likelihood of the outside firm s future entry would also determine the perceptions of existing firms. Id. 111122c at 119. As for the subjective evidence, which consists of the testimony of competitors as to their perceptions of Tenneco s entry potential it is wise to heed the advice that "subjective evidence from existing firms must be heavily discounted." V. P. Areeda & D. Turner Antitrust Law 1I1122d at 120 (1980). Subjective evidence can be helpful, however, as confirmatory evidence, so long as its limitations are clearly understood. Here, those subjective perceptions are in line with the objective factors to which we have devoted so much care. In addition, the observed behavior of Maremont during the time of Tenneco s most active efforts to enter the shock absorber market is consistent with the other evidence of an edge effect. While Maremont may have also been responding to other market conditions, its conduct is quite consistent with a perception of Tenneco as a likely potential entrant.

Furthermore, it is useful to note that Marernont's behavior, in light of the other evidence, is perhaps as close as we may get in most cases to direct evidence of an edge effect. We cannot trace, with absolute certainty, Maremont's every action directly back to its apprehension about Tenneco, but the "something more" that would be required to do that-such as a pre-litigation document from the files of a high executive of an existing firm identifying the presence of the potential entrant as the cause for its efforts to discourage entry-wil rarely be available. The problem of proof, of course, does not justify making speculative guesses about the market's likely reaction to potential new entry. The evidence here, however, taken as a whole warrants the reasonable inference that existing firms were aware of Tenneco s efforts to enter and reacted accordingly. (12) VI. Conclusion To summarize briefly, I support the Commission s decision. The facts before us point inexorably toward the conclusion that the various elements of the potential competition doctrine have been satisfied. While the evidence in cases of this kind is always subject to Final Order 98 F.

some uncertainty, I believe our findings are fully supportable and in harmony with relevant judicial precedent. FINAL ORDER This matter having been heard by the Commission upon the appeal of complaint counsel from the initial decision, and upon briefs and oral argument in support thereof and in opposition thereto, and the Commission for the reasons stated in the accompanying Opinion having determined to reverse in part the initial decision: It is ordered That the initial decision of the administrative law judge be adopted as the Findings of Fact and Conclusions of Law of the Commission, except to the extent it is inconsistent with the accompanying Opinion. Other Findings of Fact and Conclusions of Law of the Commission are contained in the accompanying Opinion. It is further ordered That the following order to divest be, and it hereby is, entered:

It is ordered That respondent, Tenneco, Inc. (hereinafter "Tenne- ), a corporation, and its officers, directors, agents, representatives employees. subsidiaries, affiliates, successors and assigns, shall divest all stock, assets, title, properties, interest, rights and privileges, of whatever nature, tangible (2)and intangible, including without limitation all buildings, machinery, equipment, raw material reserves, inventory, customer lists, trade names, trademarks, and other property of whatever description acquired by Tenneco as a result of its acquisition of Monroe Auto Equipment Company (hereinafter "Monroe ) together with all additions and improvements to Monroe subsequent to the acquisition. Such divestiture shall be absolute, shall be accomplished no later than one (1) year from the service of this Order, and shall be subject to the prior approval of the Federal Trade Commission. It further ordered That such divestiture shall be accomplished absolutely to an acquirer approved in advance by the Federal Trade Commission so as to transfer Monroe as a going business and a viable, competitive, independent concern. TENNECU, l1\1L.

464 Final Order It is further ordered That pending any divestiture required by this Order, respondent shall not knowingly cause or permit the deterioration of the assets and properties specified in Paragraph I in manner that impairs the marketability of any such assets and properties. Respondent may but shall not be required to make capital expenditures for the improvement of any such assets and properties.

It is further ordered That pursuant to the requirements of Paragraph I, none of the stock, assets, properties, rights, privileges and interests of whatever nature, tangible or intangible, acquired or added by Tenneco, shall be divested, directly or indirectly, to anyone who is at the time of the divestiture an officer, director, employee or agent of, or under the control, direction or influence of Tenneco or anyone who owns or controls. directly or indirectly more than one (1) percent of the outstanding shares of the capital stock of Tenneco or to anyone who is not approved in advance by the Federal Trade Commission.

It is further ordered That for a period of ten (0) years from the date this Order becomes final, Tenneco shall cease and desist from acquiring, or acquiring and holding. directly or indirectly, through subsidiaries or otherwise, without the (3)prior approval of the Federal Trade Commission. the whole or any part of the stock, share capital, assets, any interest in or any interest of, any concern corporate or noncorporate, engaged in the business of manufacturing, distributing, or selling. shock absorbers, nor shall Tenneco for a period of ten (10) years from the date this Order becomes final enter into any agreement, understanding or arrangement with any such concern by which Tenneco obtains the market share, in whole or in part. of such concern in the above described product lines. without the prior approval ofthe Federal Trade Commission. It is further ordered That within sixty (60) days from the effective date of this Order and every sixty (60) days thereafter until it has fully complied with Paragraph I of this Order, Tenneco shall submit Final Order 98 F.

a verified report in writing to the Federal Trade Commission setting forth in detail the manner and form in which it intends to comply, is complying or has complied therewith. All such reports shall include in addition to such other information and documentation as may hereafter be requested, (a) a specification of the steps taken by Tenneco to make public its desire to divest Monroe, (b) a list of all persons or organizations to whom notice of divestiture has been given, (c) a summary of all discussions and negotiations together with the identity and address of all interested persons or organizations, and (d) copies of all reports, internal memoranda, offers counteroffers, communications and correspondence concerning said diverstiture.

VII It is further ordered That Tenneco shall notify the Commission at least thirty (30) days prior to any proposed changes which may affect compliance obligations arising out of the Order, such as dissolution assignment or sale resulting in the emergence of successor corporations, and that this Order shall be binding on any such successor. , , THE KROGER CO. b;j 639 Complaint