[Senate Hearing 106-597]
[From the U.S. Government Publishing Office]
S. Hrg. 106-597
THE COMPETITIVE IMPLICATIONS OF THE BFGOODRICH/COLTEC MERGER
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
BUSINESS RIGHTS, AND COMPETITION
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
EXAMINING THE COMPETITIVE AND NATIONAL SECURITY IMPLICATIONS OF THE
PROPOSED MERGER BETWEEN BFGOODRICH/COLTEC INDUSTRIES
__________
JUNE 10, 1999
__________
Serial No. J-106-31
__________
Printed for the use of the Committee on the Judiciary
U.S. GOVERNMENT PRINTING OFFICE
65-461 CC WASHINGTON : 2000
COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire
Manus Cooney, Chief Counsel and Staff Director
Bruce A. Cohen, Minority Chief Counsel
______
Subcommittee on Antitrust, Business Rights, and Competition
MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania ROBERT G. TORRICELLI, New Jersey
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
Pete Levitas, Chief Counsel and Staff Director
Jon Leibowitz, Minority Chief Counsel and Staff Director
(ii)
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
DeWine, Hon. Mike, U.S. Senator from the State of Ohio........... 1
Kohl, Hon. Herbert, U.S. Senator from the State of Wisconsin..... 4
CHRONOLOGICAL LIST OF WITNESSES
Statement of Hon. David M. McIntosh, a Representative in Congress
from the State of Indiana...................................... 5
Statement of Hon. Dennis J. Kucinich, a Representative in
Congress from the State of Ohio................................ 8
Prepared statement of Kevin Arquit, head of the antitrust
practice of Rogers & Wells, LLP, and Steven Newborn, managing
partner of Rogers & Wells' Antitrust Group..................... 12
Panel consisting of Terrence G. Linnert, senior vice president
and general counsel, BFGoodrich Co., Cleveland, OH; Carl R.
Montalbine, senior vice president and general manager, Aircraft
Landing Systems, AlliedSignal, South Bend, IN; David R. Oliver,
deputy under secretary of defense, acquisition and technology,
Department of Defense, Washington, DC; Alan Reuther,
legislative director, International Union, United Automobile,
Aerospace and Agriculture Implement Workers of America,
Washington, DC; and Einer Elhauge, professor of law, Harvard
Law School, Cambridge, MA...................................... 15
ALPHABETICAL LIST AND MATERIAL SUBMITTED
DeWine, Hon. Mike:
Prepared statement of Kevin Arquit, and Steven Newborn....... 12
Letter submitted from Senator Jesse Helms, dated June 10,
1999....................................................... 14
Elhauge, Einer:
Testimony.................................................... 63
Prepared statement........................................... 65
Kucinich, Hon. Dennis J.:
Testimony.................................................... 8
Prepared statement........................................... 10
Linnert Terrence G.:
Testimony.................................................... 15
Prepared statement........................................... 17
McIntosh, Hon. David M.:
Testimony.................................................... 5
Prepared statement........................................... 6
Montalbine Carl R.:
Testimony.................................................... 21
Prepared statement........................................... 23
Court cases, letters and charts.......................... 31
Oliver, David R.:
Testimony.................................................... 58
Prepared statement........................................... 58
Reuther, Alan:
Testimony.................................................... 60
Prepared statement........................................... 61
THE COMPETITIVE IMPLICATIONS OF THE BFGOODRICH/COLTEC MERGER
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THURSDAY, JUNE 10, 1999
U.S. Senate,
Subcommittee on Antitrust, Business Rights
and Competition,
Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:06 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine
(chairman of the subcommittee) presiding.
Also present: Senator Kohl.
OPENING STATEMENT OF HON. MIKE DeWINE, A U.S. SENATOR FROM THE
STATE OF OHIO
Senator DeWine. The hearing will come to order.
I want to welcome you to the Antitrust, Business Rights and
Competition Subcommittee hearing on ``The Competitive
Implications of the Proposed Goodrich/Coltec Merger.''
As many of you know, this proposed merger between
BFGoodrich and Coltec Industries has attracted a great deal of
controversy and attention. I have been following the progress
of the deal since it was first announced in November of last
year. At that point, Goodrich announced it would be relocating
its headquarters from Ohio to North Carolina, resulting in the
loss of 170 good-paying jobs in Ohio. That job loss alone
obviously was a matter of concern, and my office immediately
contacted Goodrich to discuss the issue.
Not long after this announcement, I received a letter from
David Burner, the chief executive officer of Goodrich. Further,
my staff had several conversations and a meeting with Goodrich
officials. In the letter that I received and in the subsequent
meeting and conversations, we were told that only the 170
headquarters jobs would be lost as a result of this merger. We
were led to believe that the merger would not affect any of the
other Goodrich jobs in Ohio.
Permit me at this point to read a portion of the letter
that I received from Mr. Burner on November 23 of last year. It
states as follows:
``* * * [O]ur corporate headquarters in Richfield and our
aerospace headquarters * * * will relocate to Charlotte. A
total of 170 jobs will leave Northeast Ohio * * *'' The 170
jobs represent about 5 percent of BFGoodrich's Ohio employment,
which totals almost 3,400 jobs at more than a dozen sites
around the State, including major operations in Akron, Avon
Lake, Brecksville, Cincinnati, Cleveland and Troy. None of
these other Ohio-based jobs will be affected by the relocation
of the headquarters. Let me repeat: None of these other Ohio-
based jobs will be affected by the relocation of the
headquarters.''
Now, as we can see, the clear implication of that letter is
that only the headquarters jobs would be lost. My office had
very specific discussions with Goodrich representatives, and my
staff came away from these discussions with the same conclusion
that I reached: only the headquarters jobs were going to be
lost.
Now, I was already troubled by the potential loss of
headquarters jobs in Ohio, but my concern grew dramatically
last February, when my office received confidential documents
submitted to the Defense Department--the Defense Department
which was at that time examining the deal. These documents
indicated that Goodrich was considering to do far more than
just move the headquarters. In fact, Goodrich was considering
closing the Cleveland Pneumatic landing gear facilities--
putting 650 additional Ohio jobs at risk.
In fact, included as a packet of information submitted to
the Department of Defense on February 1, 1999, by Goodrich is a
chart showing three possible restructuring options Goodrich
could pursue to achieve a cash reserve needed to pay for the
costs of the merger. All three options had one striking
similarity: they all included closing the Cleveland plant.
This chart is not the only evidence that the Cleveland
facility is in danger. In fact, on February 3, 1999, Goodrich
submitted a letter to the Department of Defense providing a
more detailed explanation of their plans for the landing gear
operations. And let me read into the record some excerpts from
that particular letter. Again, this is a February 3, 1999,
letter from Goodrich to the Defense Department.
``The Company has been searching for business options and
alternatives (including closing and moving equipment and
operations from Cleveland * * *) for several years in an
attempt to put its landing gear business on a more sound
footing * * * After struggling mightily to improve productivity
at the Cleveland facility, it determined that an important
component of any long-range program would include closing this
facility. Several options for doing so have been considered but
rejected as not being economically feasible * * * This
situation highlights one of the main attractions of the merger
with Coltec * * * With the combined volumes of the two firms,
one or more options may be attractive. In particular, the
combined firm might well choose to close the Cleveland plant
and plating facility * * *''.
Now, this letter paints a far different picture about the
fate of more than 600 Ohioans than the one that was offered to
my office when the merger was announced. The letter makes it
clear that Goodrich has been considering the Cleveland plant
for years, and the merger with Coltec offers a good opportunity
to do so. At no time was my office given any indication that
the Cleveland facility could be closed until we obtained the
aforementioned materials. Again, as I said earlier, we were all
led to believe that only the headquarters jobs were at risk.
Now, I should mention, in all fairness to Goodrich, that no
final decision on the future of the facility has apparently
been made. We have been told that a more thorough examination
of the Coltec landing gear facilities and other relevant
financial data is needed before making the final determination.
But, frankly, that does not change the fact that Goodrich is
clearly considering the option of closing the Cleveland plant
and has been actively considering it for years. In fact, the
documents indicate that one of the reasons Goodrich is
interested in purchasing Coltec is because it could make
closure of the Cleveland facility more economically feasible.
This is how I came to the conclusion that Goodrich was not
being forthright with me, nor with my office, nor with the
people of Ohio, when it described how the merger could impact
the State of Ohio. In response to this fundamental question, we
were told initially by BFGoodrich that only headquarters jobs
would be lost. It is clear, however, based upon these
confidential submissions to the Defense Department, that there
was far more to the Ohio side of the story than the loss of
corporate headquarters jobs. Frankly, we received carefully
tailored legalistic answers--technically accurate, maybe, but
certainly misleading. Essentially, Goodrich was telling one
story to the people of Ohio and another story to the
regulators. I expect more candor from Goodrich, which has been
a good corporate citizen of Ohio for many years. And I hope it
will continue to work and build on its long history in Ohio.
The people of Ohio, and the Goodrich workers and their
families, deserve more candor.
So I am going to take this opportunity today to explore
these issues with Terry Linnert, who is here representing
Goodrich. We hope and we expect that we can find out once and
for all exactly what Goodrich plans to do. For the hundreds of
Ohioans who work at Goodrich's Cleveland plant, the recent
controversy naturally has created a great sense of uncertainty.
I am pleased to also have with us today Mr. Alan Reuther from
the United Auto Workers, representing those workers in Ohio,
and we are certainly going to take this opportunity to discuss
the issue of jobs with Mr. Reuther and the other panelists.
These workers need to know what the future holds for them, and
I hope and expect to get some straight answers.
It is clear, however, that antitrust analysis does not
generally include employment issues. Today's hearing, by
necessity, goes well beyond the issue of jobs in Cleveland. As
we began to investigate the potential impact of the merger, it
became clear the merger itself posed significant competition
issues.
This is not surprising. As this subcommittee has noted
before, our Nation is in the midst of an unprecedented wave of
consolidations, and the aerospace industry has certainly seen
its share of mergers and acquisitions. In fact, in July 1997,
this subcommittee held a hearing to examine the broad policy
and competition issues raised by consolidation in the defense
industry, and since that time the trend towards consolidation
has continued. By focusing on the Goodrich/Coltec deal in
particular, this subcommittee will have an opportunity to
examine the impact of a specific deal, in a specific market, in
the context, though, of the broader trend towards
consolidation.
Accordingly, we will focus our efforts on the competitive
implications of this proposed merger, but there are a few
points that should be made clear from the outset. First, two of
the parties represented here today, BFGoodrich and
AlliedSignal, are parties to private antitrust litigation. This
subcommittee, obviously, is not a court of law, and we do not
intend to resolve the antitrust dispute between Goodrich and
AlliedSignal. That matter is properly before the district court
in Indiana and the Seventh Circuit, and we will be very careful
not to interfere in any way with those proceedings.
Accordingly, let me caution our witnesses here today to keep in
mind the ongoing court case and any protective orders that may
now be in place. We are confident that this subcommittee can
examine the competitive issues raised by the proposed merger
without in any way releasing any confidential or proprietary
information, and I expect our witnesses to take all necessary
precautions in that regard.
Another point, also related to the ongoing litigation, is
that this hearing is going to examine issues from a perspective
more broad than just a strict antitrust review. The antitrust
issues, such as product market definition and whether or not
the proposed merger ``substantially lessens competition'' as
contemplated by section 7 of the Clayton Act, are not going to
be resolved by this hearing. Those issues have been examined by
the Federal Trade Commission and are currently being examined
again by the Federal courts as a result of the private
litigation. This subcommittee is going to take a broader look
at the competition and national security implications of this
proposed merger.
Most importantly, I am troubled by the possibility that the
only two major domestic landing gear manufacturers will merge,
leaving the U.S. military with only one major domestic
supplier. What impact will this have on the cost and quality of
landing gear? Why does the Defense Department believe that such
a merger is acceptable? And what types of factors go into their
analysis of a deal such as this one? These are some of the
questions that we expect to explore this afternoon.
We will go into these issues in more detail, and we are
glad to have here today, David Oliver, representing the
Department of Defense. I would like to note that we often hear
the testimony of our Government witnesses on separate panels,
but Mr. Oliver has agreed to provide his testimony in the
context of the complete panel, and we certainly appreciate his
consideration. We think it will facilitate our hearing and make
it more understandable.
Let me at this point turn to my colleague on the committee,
the ranking minority member, Senator Kohl.
STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE
OF WISCONSIN
Senator Kohl. Thank you, Mr. Chairman, and let me commend
you for holding this timely hearing. Our subcommittee has
studied defense industry consolidation before. We realize that
this is a complex issue, and the Goodrich/Coltec merger reveals
to us why.
On the one hand, because Goodrich and Coltec are the only
two domestic producers of aerospace landing gear, this deal
will result in only one remaining U.S. manufacturer. From an
antitrust perspective, that could create problems for
suppliers, and it could also have troubling implications for
the Department of Defense. More than that, even if these
companies gain efficiencies, it may be at the expense of jobs,
especially in northern Ohio.
So if there is any way that the merged companies can make a
commitment to our panel to minimize that pain, it would be nice
for them to tell us that today. And I am very concerned by what
appears to be attempts by Goodrich to mislead Senator DeWine.
On the other hand, like many mergers, this one produces its
fair share of benefits. For example, Coltec, which has a plant
in Beloit, WI, is heavily leveraged. Hopefully, Goodrich will
bring an even balance sheet to the table, creating a
financially healthy company, dedicating more money for
investment, and thereby generating more jobs instead of fewer.
Perhaps that is why the Federal Trade Commission and the
Department of Defense decided not to block this merger and why
it is unclear whether the Seventh Circuit will uphold the
temporary injunction stalling this deal when it hears arguments
tomorrow in Chicago.
That said, I again support you, Senator, for closely
examining this merger. And although I have to leave for another
commitment, I may submit a few written questions to our
witnesses.
Thank you, Mr. Chairman.
Senator DeWine. Senator Kohl, thank you very much.
Let me move directly to our two members of the first panel.
Dennis Kucinich was elected to Congress in 1996. He represents
the 10th District of Ohio, which includes parts of Cleveland,
Lakewood, and Parma. Representative Kucinich previously served
on the city council and as mayor of Cleveland. He is currently
the ranking minority member of the House Subcommittee on
National Economic Growth.
Congressman David McIntosh was elected to Congress in 1994.
He represents Indiana's 2nd District, which includes the cities
of Muncie, Anderson, Columbus, and Richmond. He currently
serves as chairman of the House Subcommittee on National
Economic Growth.
We will start with Representative McIntosh.
STATEMENT OF HON. DAVID M. McINTOSH, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF INDIANA
Representative McIntosh. Thank you, Mr. Chairman, and both
Mr. Kucinich and I will have to leave for a vote. So if it is
all right with you, I will submit my prepared testimony in full
and summarize it for you so we can make sure both of us have a
chance to speak.
Basically, I commend you a great deal for holding this
hearing and looking into this matter. Our subcommittee is also
taking up an oversight hearing--actually, two oversight
hearings on the BFGoodrich/Coltec merger, to determine whether
the FTC has been able to properly evaluate this merger. And my
concerns are three-fold:
First, the anticompetitive effects that you addressed in
your opening statement, particularly when we see the number of
suppliers for airline landing gear shrinking from two down to
one in the country. A tremendous impact on our commercial
airlines as well as military purchasers of that equipment.
Second, in my home state of Indiana, South Bend will be
impacted by this merger. AlliedSignal provides the brakes and
the wheels that are used on BFGoodrich and Coltec landing gear.
The potential with one manufacturer of the finished product is
that AlliedSignal will not be in the market anymore because
BFGoodrich can produce all of the needed wheels and brakes in-
house. And so that is 1,100 jobs that are at risk in South Bend
and something that brings a great deal of concern to me.
AlliedSignal has been a great corporate citizen in that
community, and brings a lot more than just those jobs, although
the jobs are very, very important as, I think, the number six
employer. But AlliedSignal also adds a lot to the South Bend
community beyond simply a manufacturing industry in that area.
The third is a concern that I have and share with you, Mr.
Chairman, that not all of the facts are out and that you have
personally had misrepresentations made to you, the same to the
public. I have seen in the Wall Street Journal very similar
misrepresentations about jobs not being lost in Ohio;
therefore, presumably, the jobs could continue to be there in
Indiana if the facility was open and able to be a viable
alternative to the merged entity.
We are going to look at that. We are going to look at all
of the documents and find out and determine whether
representations that may have been made in the process are
being lived up to in the Federal Trade Commission's review.
Finally, let me say--and, Mr. Kohl, address your point,
because one of my colleagues, our Vice Chairman Paul Ryan, also
mentioned it to me--that this merger is important to Coltec,
which is in his district in Wisconsin. I am not against this
merger per se. I believe in the free market. I think people
should be able to do that. I understand there are some
proposals for win-win solutions where there can be, instead of
closure of the Ohio plant, a sell-off that would allow a
willing buyer--and AlliedSignal is one such willing buyer--to
establish a second alternative so that Coltec and BFGoodrich
could continue with their strategic plan, have the synergy that
comes about from that merger, but that the public could benefit
from having two suppliers, competition to keep the price down,
as well as increased quality.
That is where I would like to see this ultimately come out.
The role of the Government is to make sure that the
anticompetitive effects and the national security implications
are thoroughly reviewed and studied, and I appreciate your
holding this hearing to make sure that those are being
adequately addressed.
Thank you for including us in this. Mr. Kucinich and I are
working together on this subject. You will see strong
bipartisan voices coming from the House.
[The prepared statement of Representative McIntosh
follows:]
Prepared Statement of the Hon. David M. McIntosh
Today, I am here, with Congressman Kucinich, to express my concerns
over the proposed merger between BFGoodrich Company and Coltec, Inc,
and whether the merger violates the anti-trust laws.
I serve as the chairman of the House Government Reform Committee's
Subcommittee on National Economic Growth, Natural Resources and
Regulatory Affairs. Representative Kucinich serves as the
Subcommittee's Ranking Member. Together, Mr. Kucinich and I are
conducting a bipartisan investigation of the Federal Trade Commission's
(``FTC'') and Department of Defense's review of BFGoodrich/Coltec
merger. Our first field hearing on the issue is scheduled for June 19th
in South Bend, Indiana.
Based on the information that we have reviewed so far, I have three
main areas of concern that I would like to raise today.
First, I am concerned about the potential anti-competitive effects
of the BFGoodrich/Coltec merger. I am a strong believer in the benefits
of a free market economy. However, in order to ensure fair competition
in the marketplace, our antitrust laws require the FTC to review
mergers with the potential to have a significant impact on market
share. In entering a preliminary injunction against the merger on April
30th , Judge Allen Sharp of the U.S. District Court for the Northern
District of Indiana concluded that the merger may be anti-competitive.
According to Judge Sharp ``the merger would likely result in a U.S.
monopoly * * * that would likely result in higher prices for [landing]
gears.''
That is a real problem. If the merger would result in a monopoly
that unfairly forces consumers to pay higher prices for landing gear,
the FTC should oppose the merger. Similarly, such review is needed to
ensure that the merger does not encourage less innovation in the
marketplace, decrease incentives for safety, or damage our National
Defense.
Second, I am concerned about the potential adverse impact of the
merger on the economies of South Bend and Cleveland. Chairman DeWine, I
am sure you are well aware of the likely economic impact of the merger
on Cleveland. I want to make the Committee aware that economic impact
of the merger on South Bend's economy is potentially devastating as
well.
AlliedSignal, Inc. has a plant in South Bend that is an industry
leader in manufacturing wheels and brakes for commercial and military
aircraft. If BFGoodrich and Coltec complete this merger and, if as a
result of the merger AlliedSignal is denied a fair opportunity to
compete, AlliedSignal's South Bend business could be in significant
danger.
AlliedSignal is the sixth largest employer in South Bend, with
1,100 employees. Most are high paying, technology driven jobs,
averaging more than $18 per hour. These sort of high paying
manufacturing jobs are vital to the South Bend community.
But, AlliedSignal's contributions to South Bend are not solely
economic. AlliedSignal has been a leading corporate citizen in South
Bend for years. That is why civic leaders like Patrick M. McMahon, the
Executive Director of South Bend's Project Future, are concerned about
the potential impact of the merger. AlliedSignal and its employees
serve their community by helping to organize civic and volunteer
projects, making charitable contributions, and participating on local
boards of directors for many non-profit organizations. I, for one, want
to help ensure that these great contributions continue.
Third, I am concerned about honest and open public debate on this
issue. Based on our initial review of documents, I am concerned that
BFGoodrich may have been less than candid regarding its intentions to
close its landing gear operations in Cleveland.
In public statements to the Wall Street Journal, the Cleveland
Plain Dealer, and others, BFGoodrich indicated that the merger would
not affect jobs in Cleveland. For example, according to BFGoodrich's
November 23, 1998 press release announcing the merger, ``No other Ohio-
based jobs will be affected by the decision to relocate the
headquarters. The company currently employs approximately 3,300 Ohioans
at more than a dozen locations around the state, including major
operations in Akron, Avon Lake, Brecksville, Cincinnati, Cleveland and
Troy.'' In the same press release, BFGoodrich CEO David L. Burner noted
that BFGoodrich has ``a long history here in Ohio, and many ties to the
region. We intend to maintain those ties in as many ways as possible,
including through the more than 3,000 Goodrich employees who will
remain in Ohio.''
However, in documents presented to the Department of Defense,
BFGoodrich indicates a much different plan. In a letter addressed to
the Department of Defense on February 3, 1999, BFGoodrich's attorney
indicated that ``[f]or much of the ownership of [Cleveland Pneumatic
Corporation], BFG has evaluated the possibility of reconfiguring its
manufacturing and assembly capacity for landing gear. After struggling
mightily to improve productivity at the Cleveland facility, it
determined that an important component of any long range program would
include closing the facility.''
In another document presented to the Department of Defense on
February 1, 1999, BFGoodrich presents three options for restructuring
its operations after the BFGoodrich/Coltec merger. All three options
included the following phrase ``Close Cleveland/Plating * * * Now.''
It is my hope that today your committee will be able to shed some
light on this issue.
Now, I am not here to say ``no'' to this merger. There is a win-win
solution. I am told that if BFGoodrich sells its landing gear facility
in Cleveland to AlliedSignal, everyone could win. BFGoodrich and Coltec
would complete their merger, because the sale would ensure competition
in the landing gear industry. AlliedSignal would obtain the opportunity
to develop landing gear systems that use its aircraft wheels and
brakes. And, workers in South Bend and Cleveland could keep their jobs
and continue to have the opportunity to compete in the marketplace.
This is a common sense solution; I hope all parties will reconsider it.
And, I would emphasize that this solution is not only important for
South Bend and Cleveland; but it is important for our Nation as well.
Healthy competition leads to lower prices, increased innovation, and
improved quality of safety, as industry leaders are forced to improve
in an effort to compete in the marketplace. It is these positive
benefits of competition that the antitrust laws are designed to
protect.
In addition, we may have a direct national interest in having at
least two domestic suppliers of landing gear. The proposed merger of
BFGoodrich and Coltec would leave the United States with only one
domestic landing gear manufacturer for large commercial and military
aircraft. After the merger, the only other major landing gear
manufacturer in the world would be Messier-Dowty, which is owned by the
French government. I know that the Department of Defense has looked at
the issue and determined that it has no objection to the merger. But,
I, for one, am still not convinced of the wisdom of allowing a merger
that would leave us with only one domestic manufacturer of landing
gear.
Chairman DeWine, I know you plan to have David Oliver, Deputy Under
Secretary of Defense Acquisition and Technology for the Department of
Defense, testify here today. I hope he will be able to address this
concern.
In closing, I certainly appreciate the difficult task before you
today. As in any antitrust dispute, the issues are complex and answers
never easy. But, I am here because I want to ensure that the Hoosiers
who work for AlliedSignal are given a fair opportunity to compete.
After all, when applied correctly, that is what antitrust laws are
designed to accomplish--fair competition.
And, rest assured. If the 1,100 Hoosier workers at AlliedSignal are
given a fair opportunity to compete, I have no doubt they will be
successful. That's just the way it is in Indiana.
Thank you for the opportunity to testify today on this important
issue.
Senator DeWine. Congressman, thank you very much.
Congressman Kucinich.
STATEMENT OF HON. DENNIS J. KUCINICH, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF OHIO
Representative Kucinich. Thank you very much, Senator
DeWine, and I want to thank you for holding this hearing and
for your leadership in this important area which relates to the
economic stability of a big industry in our State. So I thank
you on behalf of my own constituency and the working men and
women who have relied on your leadership. Also thanks to
Congressman McIntosh for the chance to work with him on this
issue.
Unfortunately, we are going to have to leave for a vote,
but I did want to make a few points, and I will submit my
entire testimony for the record.
Senator DeWine. It will be made part of the record.
Representative Kucinich. BFGoodrich executives, including
the BFGoodrich chief executive officer, made representations to
public officials that the Cleveland facility would not be
closed as a result of the merger. In fact, BFGoodrich only
admitted to relocating jobs in its corporate headquarters to
the merged company's new headquarters in the South, and the
press release issued by BFGoodrich explicitly states that no
other Ohio jobs will be affected by the decision to relocate
the headquarters after the merger.
However, BFGoodrich has also made diametrically opposite
representations to officials within the Department of Defense
and to the Federal Trade Commission. Specifically, BFGoodrich
argued that these Federal agencies should not oppose the merger
because of the efficiencies which would result from it. One of
the efficiencies supposedly promised to the Federal regulators
was the closing of the Cleveland plant. BFGoodrich revealed
that every option being considered by the company once the
merger was approved hinges on the closing of the Cleveland
facility.
Now, why would BFGoodrich tell public officials one story
and tell Federal regulators the opposite story? I hope you are
able to determine that in this hearing.
The subject of today's hearing is not only a local issue.
Closing the Cleveland facility will not only put hundreds of my
constituents out of work, but it will put U.S. taxpayers over a
barrel. The U.S. Government will be beholden to a monopoly
maker of landing gear for military planes. This merger will
create a legal monopoly. With the recent public disclosure of
BFGoodrich intentions to close the Cleveland facility and the
fact that the Federal regulators knew it but did not act on the
knowledge that the merged company would be a monopoly, I
believe that several significant questions should be asked of
the Federal regulators.
First, why did the Department of Defense not oppose this
merger when it clearly concerned the complete and final
consolidation within the domestic landing gear industry?
Does it really benefit the Department of Defense and the
taxpayer who foots the bill that the Government would not
oppose the creation of a legal monopoly?
What are the options available to the U.S. Government if
the BFGoodrich/Coltec merged company, for whatever reason,
cannot complete a contract?
These are questions that ought to be asked.
I am also hopeful that it will be asked of the Department
of Defense: If the U.S. Government becomes aware that a
contractor has shown a lack of integrity through
misrepresentations made in an important decisionmaking process,
would the U.S. Government have an obligation to consider
suspension or debarment of that contractor from further
Government business?
Second, as I am sure the committee knows, the only
remaining source for landing gear structures for U.S. military
aircraft and commercial aircraft is the Messier-Dowty firm, a
firm owned by the French Government. The BFGoodrich/Coltec
merger raises this question: Are we prepared to divulge
classified information about our military aircraft to a foreign
government if the merged company is not able to fulfill a
contract and the Department of Defense has to contract with a
French company?
Third, what consideration have the regulators given to some
of the other well-known consequences of monopoly, namely,
increased costs and loss of innovation. Direct competition
between two or more domestic competitors imposes cost
discipline on the competitors. That benefits the taxpayer. But
will the creation of a monopoly lead to higher prices for
landing gear equipment, making the cost to taxpayers higher?
And what will be the consequences for U.S. commercial companies
who also have to pay higher costs to the monopoly? Will the
price of commercial airplane tickets go up as commercial
carriers pass on to American consumers the higher prices of
equipment?
Further, without competition between two or more domestic
competitors, what will force the merged company to maintain
high quality and safety standards? Could the loss of
competition cause a loss in workmanship quality down the road?
Could the loss of competition that drives innovation result in
future landing gear that is less than cutting edge, less than
state of the art in terms of safety and combat effectiveness?
Finally, Senator DeWine and Senator Kohl, the closing of
the Cleveland facility caused by this merger will exact a
significant cost on the workers, the families that rely on them
in Cleveland, and the Cleveland community which is supported by
the wages paid to these workers. The creation of this monopoly
could have costly and even dangerous consequences for the U.S.
taxpayers and consumers.
Whatever anyone's position on the merits of the merger, it
cannot be disputed that a regulatory process which allows
merging companies to make diametrically opposed statements to
public officials and regulatory agencies is fundamentally
flawed. Public officials have a right to know accurate
information about a petitioning company's intentions. Public
officials have a right to know if these jobs are being
eliminated so that this work can be done--if it is eliminated
because they want the work done in non-unionized shops in other
States. Public officials have a right to know, and the
regulatory process should provide it.
I thank Senator DeWine and Senator Kohl for their careful
consideration of the topic of this important hearing, and I
thank Mr. McIntosh for his participation.
[The prepared statement of Representative Kucinich
follows:]
Prepared Statement of Hon. Dennis J. Kucinich
Mr. Chairman, and distinguished members of the Committee, I
appreciate the opportunity to appear before you to discuss the pending
merger of BFGoodrich and Coltec Industries Inc. I am also pleased to be
sharing this panel with my colleague from Indiana, Mr. McIntosh.
I represent the West Side of Cleveland, Ohio, and the surrounding
suburban communities. I became involved with this merger because of its
impact on the BFGoodrich facility in Cleveland. That facility, called
Cleveland Pneumatic Company, employs about 800 people, many of whom are
my constituents. The jobs held by my constituents are high paying jobs,
held by union workers, who have negotiated long term collective
bargaining agreements with BFGoodrich.
In the pursuit of federal and political approval of its planned
merger, BFGoodrich executives, including BFGoodrich's Chief Executive
Officer, made representations to public officials that the Cleveland
facility would not be closed as a result of the merger. In fact,
BFGoodrich only admitted to relocating jobs in its corporate
headquarters to the merged company's new headquarters in the South. A
press release issued by BFGoodrich explicitly states that ``[n]o other
Ohio-based jobs will be affected by the decision to relocate the
headquarters'' after the merger.
However, BFGoodrich has also made diametrically opposite
representations to officials within the Department of Defense and the
Federal Trade Commission. Specifically, BFGoodrich argued that these
federal agencies should not oppose the merger because of
``efficiencies'' that would result from it. One of the efficiencies
supposedly promised to the federal regulators was the closing of the
Cleveland plant. It was reported on television in Cleveland last night,
and in the Cleveland Plain-Dealer today, that in one such
representation to federal regulators, BFGoodrich revealed that every
option being considered by the company once the merger was approved
hinged on closing the Cleveland facility.
How could BFGoodrich tell public officials one story and tell
federal regulators the opposite story? Over the last three months I've
attempted to ascertain whether BFGoodrich was indeed saying one thing
to public officials and another to federal regulators. On April 15,
1999, I wrote a letter to BFGoodrich's Chief Executive Officer for
information about whether the company intended to close the Cleveland
plant. In that same letter, I asked for all documents related to the
merger provided by BFGoodrich to the Federal Trade Commission and the
Department of Defense. I did not even receive the courtesy of a
response. Only after another letter requesting the same documents was
sent to BFGoodrich by the House investigative subcommittee chaired by
Mr. McIntosh and on which I am the Ranking Democratic member, did
BFGoodrich provide any documents, and those are an incomplete set of
documents.
The subject of today's hearing is not only a local issue. Closing
the Cleveland facility will not only put hundreds of my constituents
out of work, but it will put U.S. taxpayers over a barrel. The US
government will be beholden to a monopoly maker of landing gear for
military planes. This merger will create a legal monopoly. With the
recent public disclosure of BFGoodrich's intentions to close the
Cleveland facility and the fact that federal regulators knew it but did
not act on the knowledge that the merged company would be a monopoly, I
believe that several significant questions should be asked of the
federal regulators.
First, why did the Secretary of Defense not oppose this merger,
when it clearly concerned the complete and final consolidation within
the domestic landing gear industry? Does it really benefit the
Department of Defense and the taxpayer who foots the bill that the
government would not oppose the creation of a legal monopoly? What are
the options available to the U.S. government if the BFGoodrich/Coltec
merged company, for whatever reason, cannot complete a contract?
Second, as I'm sure the committee knows, the only other remaining
source for landing gear structures for U.S. military aircraft and
commercial aircraft is Messier-Dowty, a firm owned by the French
government. The BFGoodrich/Coltec merger raises this question: Are we
prepared to divulge classified information about our military aircraft
to a foreign government if the merged company is not able to fulfill a
contract and the Department of Defense has to contract with the French
company?
Thirdly, what consideration have the regulators given to some of
the other, well-known consequences of monopoly, namely increased costs
and loss of innovation? Direct competition between two or more domestic
competitors imposes cost discipline on the competitors. That benefits
the taxpayer. But will the creation of a monopoly lead to higher prices
for landing gear equipment, making the cost to taxpayers higher? And
what will be the consequence for U.S. commercial companies, which will
also have to pay higher costs to the monopoly? Will the price of
commercial airplane tickets also go up, as commercial carriers pass on
to American consumers the higher prices of equipment? Further, without
competition between two or more domestic competitors, what will force
the merged company to maintain high quality and safety standards? Could
the loss of competition cause a loss in workmanship quality down the
road? Could the loss of competition that drives innovation result in
future landing gear that is less than cutting-edge, less than state-of-
the-art in terms of safety and combat effectiveness?
In conclusion, the closing of the Cleveland facility caused by this
merger will exact a significant cost on the workers, the families that
rely on them in Cleveland, and the community, which is supported by the
wages paid to these workers. The creation of this monopoly could have
costly and even dangerous consequences for the U.S. taxpayer and
consumers. Whatever your position on the merits of this merger, it
cannot be disputed that a regulatory process which allows merging
companies to make diametrically opposed statements to public officials
and regulatory agencies is fundamentally flawed. Public officials have
a right to know accurate information about a petitioning company's
intentions. Public officials have a right to know if these jobs are
being eliminated so that this work can be done in a non-unionized shop
in another state. Public officials have the right to know the truth,
and the regulatory process should provide it.
I look forward to this hearing, and the hearings that
Representative McIntosh and I will be holding on June 19 in South Bend
Indiana, and on July 7 in Cleveland, as a way of resolving these
issues.
Senator DeWine. We would like to thank you and, of course,
excuse both of you. We know that the clock is running and you
have to get over and vote. But I just want to thank you both
for some very excellent statements, and we look forward to
working with both of you on this issue in the future.
Representative Kucinich. Thank you.
Representative McIntosh. Thank you. And, Mr. Chairman, we
will make any of the information we receive in our oversight
investigation available to your committee so that you, too,
will have all that.
Senator DeWine. Good. We look forward to working with you.
Representative Kucinich. Bipartisan effort. Thank you.
Senator DeWine. Congressmen, thank you.
Senator DeWine. We will now move to our second panel. I
would now invite the members of the second panel to begin to
come forward, and I will begin to introduce you at this point.
Let me introduce the members of the panel. Our first
witness is Terrence G. Linnert, who is a senior vice president
and general counsel of the BFGoodrich Company. He joined
BFGoodrich in 1997. Prior to joining BFGoodrich, he was a
senior vice president and general counsel in the Senterior
Energy Corporation.
Carl R. Montalbine is a vice president and general manager
of AlliedSignal Aircraft Landing Systems. His prior experience
includes 3 years with Northrop B-2 Division and 16 years with
Fairchild Republic.
David R. Oliver is the Principal Deputy Under Secretary of
Defense for Acquisition and Technology and was confirmed to
this position by the U.S. Senate on May 21, 1998. Previously,
Mr. Oliver worked for Westinghouse Electric Systems Group.
Alan Reuther is the legislative director for the
International Union, United Automobile, Aerospace, and
Agricultural Implement Workers of America, the UAW. He has been
legislative director for the UAW since May 1, 1991.
Our final witness is Einer Elhauge, who comes to us from
Harvard Law School. He joined the faculty of Harvard Law in
1995 where he specializes in antitrust law.
We welcome all of our witnesses.
Let me also state that, before we start the testimony from
this panel, I think it is important that we note that Professor
Elhauge is a paid consultant for Crane Company, one of the
parties involved in the litigation.
Also, I would like to note that we have accepted the
written statement of Kevin Arquit and Steven Newborn. They are
also antitrust experts, and we will put their statements into
the record, and without objection, they will be made a part of
the record.
[The prepared statement of Mr. Arquit and Mr. Newborn
follows:]
Prepared Statement of Kevin Arquit and Steven Newborn\1\
---------------------------------------------------------------------------
\1\ Kevin J. Arquit heads the antitrust practice of Rogers & Wells
LLP. Prior to joining Rogers & Wells in 1992, Mr. Arquit was General
Counsel and then Director of the Bureau of Competition of the Federal
Trade Commission.
Steven A. Newborn is the managing partner of Rogers & Wells'
Antitrust Group. Until March 1994, he was Director for Litigation at
the Federal Trade Commission's Bureau of Competition, where he was in
charge of the Commission's merger enforcement program. He was named to
the Department of Defense's Antitrust Task Force that advised the
Secretary of Defense concerning merger policy in the Defense Industry.
---------------------------------------------------------------------------
We are pleased to have the opportunity to submit our views to the
Subcommittee in connection with its hearing on the competitive
implications of the BFGoodrich/Coltec merger.
While we were approached recently by counsel for BFGoodrich and
asked if we had an interest in commenting on any aspect of this merger,
we have not been retained or compensated by any interested party to the
merger and the views contained herein are our own. While we are not
conversant in the specific facts surrounding this transaction, we are
familiar with the merger review process generally and have been
provided information about the review that occurred here.
It is not uncommon, nor is it inappropriate, for competitors to try
to convince the government that a particular merger should be
challenged. What sets this transaction apart from any of thousands of
other mergers that are granted government clearance every year is the
extraordinary effort of two competitors--AlliedSignal Corp. and the
Crane Co.--to take a second and third bite of the apple after full
government review.
This case is interesting because it provides a clear illustration
of how these issues should be handled by the FTC and DOD. Although the
FTC is always interested in what competitors, suppliers and (most
importantly) customers have to say about a proposed merger, in the end,
the agencies view this public input with an eye towards each party's
financial or political self-interest in coming forward, and then make a
decision based on the competitive effect that the transaction will have
on the marketplace. After all, it is the purpose of the antitrust laws
to protect competition as a whole and not individual competitors.
Market shares are an important consideration in any merger analysis
by the antitrust agencies. They are by no means the only determinant of
consumer impact. Other key factors the FTC takes into consideration in
reviewing mergers include: the existence and viability of foreign
competitors; the need for large production scale to compete efficiently
on a global basis; the ability of large buyers (in this case the
Defense Department and commercial airline manufacturers) to use their
market muscle to counter any threats to competition; and the likelihood
that the combined entity will lead to lower cost or product
innovations.
The idea that DOD and the FTC missed the boat in approving this
merger, as alleged by its critics, is hard to imagine, given the
activist stance of both of late. Just this year, DOD has objected to
several consolidations (including two proposals to acquire Newport
News). Last year alone, the FTC challenged close to three dozen
transactions that it concluded would lessen competition. The
enforcement activity affected numerous key industries, including
pharmaceuticals, petroleum, computers, and defense and aerospace.
Nearly two years ago, this subcommittee conducted a hearing on
``Defense Consolidation: Antitrust and Competition Issues.'' At that
hearing, the subcommittee heard from Chairman Pitofsky of the FTC,
Assistant Attorney General Klein from the Department of Justice, and
Deputy Under Secretary of Defense Goodman. The subcommittee focused on
whether the current review process and application of the merger
guidelines provided sufficient assurance that defense consolidation
would go far enough, but not too far. Each of the witnesses concurred
that the review process and the merger guidelines were up to the task.
In response to questioning by Senator DeWine, each witness assured the
subcommittee that any additional major mergers would be carefully
scrutinized.
Secretary Goodman's description of the process and of DOD's
objectives helps frame the issue for today's hearing. In 1997,
Secretary Goodman testified as follows:
Our objective is to ensure that we are maintaining competition
consistent with our acquisition strategies now and for the
foreseeable future. Competition involves not only the number of
bidders in a competition but also the quality of competition *
* *.
In order to make this assessment, we gather information from a
variety of sources * * *. DOD also interact directly and
frequently with the antitrust agencies as the review proceeds.
The Department facilitates the antitrust agency review * * *.
DOD also communicates to the antitrust agencies its views
concerning the effects of the transaction.
We understand that is precisely what happened here. Following the
merger announcement, DOD and the FTC undertook parallel, full scale
reviews of the proposed merger. The review at DOD lasted 4 months,
until mid March, and the review at the FTC lasted 5 months, until mid
April. Both agencies received information and documents from the
parties to the transaction and from AlliedSignal and Crane. In
addition, the staff of the FTC's Bureau of Competition requested and
received from BFGoodrich all discovery material from the private
litigation initiated by AlliedSignal and Crane. This level of scrutiny
in itself is highly unusual. Here, consistent with the FTC's commitment
carefully to scrutinize major mergers in the defense industry, we
understand that representatives of AlliedSignal and Crane met with each
FTC commissioner to argue their case. In the end, not one commissioner
opted to challenge the merger, and DOD advised the FTC that it had no
objection to the merger.
With so many merger proposals in the pipeline, Government
enforcement decisions have the potential to impact significantly every
U.S. consumer as well as the future of many companies, big and small.
More than ever, it is imperative that the Government stick by the same
set of standards when ruling on mergers, whether it is BFGoodrich/
Coltec, AlliedSignal/Honeywell or countless transactions in the past.
Government should continue to place the interests of consumers and
competition over the financial interests of competing firms or the
political interests of special interest groups.
We have been actively involved in the merger review process for
many years, both as government regulators and as private practitioners.
We have worked with the Bureau of Competition staff who investigated
this transaction as colleagues, and sat on the opposite side of the
table from them as adversaries. Mr. Newborn served on the Defense
Science Board's Task Force on Antitrust Aspects of Defense Industry
Consolidation. Based on our experience and the scrutiny to which this
transaction has been subjected, it is difficult to imagine that the DOD
and FTC missed the boat on this merger.
Senator DeWine. Finally, we are also entering into the
record now a letter on this issue from U.S. Senator Jesse Helms
of North Carolina, and without objection, that will be made a
part of the record.
[The letter of Senator Helms follows:]
U.S. Senator, Jesse Helms,
North Carolina, June 10, 1999.
Hon. Mike DeWine, Chairman,
Subcommittee on Antitrust,
Business Rights and Competition,
Committee on the Judiciary,
226 Dirksen Senate Office Building,
Washington, DC.
Dear Mr. Chairman: I appreciate your interest in the proposed
merger of BFGoodrich and Coltec, and I am grateful for your allowing me
to share my views with your subcommittee. I certainly agree with you
that vigorous competition is the engine that enables U.S. industries to
lead the world in innovation and product development.
I am persuaded that the BFGoodrich/Coltec merger will be beneficial
for the landing gear industry, and I am satisfied that swift approval
of this transaction is consistent with the principles of open
competition which you and I share.
This conclusion is supported, I believe, by several facts: First,
the landing gear business is global in scope and requires the large
production scale afforded by this transaction to compete efficiently;
second, the merged entity will face competition from existing, viable
domestic and foreign competitors; third, powerful buyers like Boeing,
Lockheed Martin and the Department of Defense control the bidding for
landing gears, thereby preventing suppliers from raising prices; and
finally--and most importantly--no customer has opposed the merger.
The opposition to the BFGoodrich/Coltec merger has come from
AlliedSignal and Crane, whose motives appear obvious: Both offered to
acquire Coltec, but were ultimately spurned. In the face of this
rejection, both are now unleashing all available resources to prevent
completion of the merger.
AlliedSignal and Crane are now in court raising the same purported
antitrust reasons for opposing the merger they initially proffered to
the FTC. The FTC fully considered these arguments and rejected them for
one clear reason: The theories lack factual support. This merger will
not foreclose AlliedSignal and Crane from any aspect of the business
which they now compete or aspire to compete.
Mr. Chairman, the regulatory agencies have ably discharged their
duties to the American people, and AlliedSignal and Crane will have
their day in court. I do hope your subcommittee will not further delay
completion of the BFGoodrich/Coltec merger.
I'll very much appreciate your including this letter in the record
of the proceedings.
Sincerely,
Jesse Helms,
U.S. Senator.
Senator DeWine. Let me start from my left to right. Mr.
Linnert, good afternoon.
PANEL CONSISTING OF TERRENCE G. LINNERT, SENIOR VICE PRESIDENT
AND GENERAL COUNSEL, BFGOODRICH CO., CLEVELAND, OH; CARL R.
MONTALBINE, SENIOR VICE PRESIDENT AND GENERAL MANAGER, AIRCRAFT
LANDING SYSTEMS, ALLIEDSIGNAL, SOUTH BEND, IN; DAVID R. OLIVER,
DEPUTY UNDER SECRETARY OF DEFENSE, ACQUISITION AND TECHNOLOGY,
DEPARTMENT OF DEFENSE, WASHINGTON, DC; ALAN REUTHER,
LEGISLATIVE DIRECTOR, INTERNATIONAL UNION, UNITED AUTOMOBILE,
AEROSPACE AND AGRICULTURAL IMPLEMENT WORKERS OF AMERICA,
WASHINGTON, DC; AND EINER ELHAUGE, PROFESSOR OF LAW, HARVARD
LAW SCHOOL, CAMBRIDGE, MA
STATEMENT OF TERRENCE G. LINNERT
Mr. Linnert. Good afternoon. Thank you, Mr. Chairman.
Almost 2 years ago, in July 1997, this same subcommittee
did undertake an oversight hearing on the questions of
competition and consolidation in the defense industry and the
administration's policy on defense mergers. Since then, your
work has also included close looks at international antitrust
and merger and acquisition activity in the telecommunication,
energy, airline, information, entertainment, video, and sports
marketplaces. All of those hearings raised the same questions
as this panel presents to you today. There is a lot at stake in
these types of transactions.
Jobs are created or constricted, companies move or grow,
products succeed or flop overnight. Missing an expanding market
or not deploying a new technology or borrowing money at the
wrong time can create a dinosaur. The results for the U.S.
economy, our national security, and the economic health of our
workers and shareholders can be disastrous.
There will always be critics of these mergers beyond the
appropriate interests of the Government or the courts. So be
it. But those who usually carp the loudest are most afraid that
they will lose a preferred position in a marketplace to new,
more vigorous, more modern, and, yes, more formidable
competition. And most frequently these corporate critics go out
and get a deal of their own.
Since the end of the Cold War, U.S. defense spending has
declined dramatically. This reduced spending has driven
consolidation throughout the defense industry. Other factors,
such as globalization and requirements of scale and scope, have
combined to drive consolidation throughout the defense and
aerospace industry. Efficiencies of design and production and
the need to generate and consume large amounts of capital
quickly dictate corporate and management strategies that must
be judged simultaneously in both the short and long term. For
these reasons, just this week AlliedSignal a nearly $15 billion
merger with Honeywell.
One of the consequences of consolidation is typically the
loss of some jobs. As part of the BFGoodrich merger with
Coltec, approximately 170 headquarters positions will relocate
to North Carolina. Similarly, the AlliedSignal/Honeywell merger
will result in the closing of Honeywell's headquarters in
Minneapolis and the elimination of 4,500 jobs.
While these relocations have a human impact that we take
very seriously, they should not overshadow the positive
consequences of this merger. The plain fact is the merger of
BFGoodrich and Coltec will produce significant benefits for
employees, customers, shareholders, and our communities.
Following the merger, BFGoodrich will employ 27,000 people
worldwide. The size and diversity, financial and technical
strength, and global reach of our businesses will create job
stability and growth opportunities for our existing workforce.
As a stronger worldwide competitor, we will be better
positioned to compete for business abroad. A stronger, better
BFGoodrich is good from our employees and our customers.
Our customers are very sophisticated. They demand
innovative and quality products backed by the highest levels of
customer service and technical support, all at a fair and
competitive price. Our customers are our lifeblood. If they had
objected to this merger, it probably would not have gone
forward. They have not objected because they are satisfied that
they do have sufficient options to preserve healthy competition
for their business, and they recognize the merger enables us to
serve them better.
I would like to frame this by showing you a chart, Senator,
a chart that will show what the pre-merger suppliers are in
three various businesses.
This chart shows who the industry players are in the
landing gear manufacture business, the wheel and brake
business, and the brake controls business. Those are all parts
of what has been referred to as an integrated landing system.
If you look at the post-merger chart, you are going to see
that not much changes as a result of this merger. In fact,
there is no impact in either the brake control group of
suppliers, the wheel and brake group of suppliers; there is one
less landing gear manufacturer worldwide.
Mr. Chairman, as you know, the Federal Trade Commission and
the Department of Defense, like our customers, have each come
to the same conclusion following lengthy and comprehensive
examinations. Both agencies listened carefully to the arguments
presented by AlliedSignal and Crane. Both agencies concluded
that the merger should be allowed to proceed without objection.
I would like to address more specifically your concern
about the merger's impact on Ohio jobs. Following the merger,
BFGoodrich will employ more than 3,000 people in Ohio in
management, manufacturing, and research positions. Our
performance materials business, with more than $1 billion in
revenue, will remain headquartered in Brecksville, OH. Other
BFGoodrich operations in Ohio are located in Akron, Avon Lake,
Chagrin Falls, Cleveland, Columbus, Cincinnati, Dayton, Elyria,
Green, Troy, Twinsburg, and Uniontown.
We have actually been adding jobs in Ohio. Since January
1997, our aerospace employment is up 14 percent. We remain
committed to Ohio and to our workforce in Ohio. Following this
merger, BFGoodrich will contribute more than $20 million per
year in taxes to Ohio as part of its continuing presence in the
State. As our company grows, we would hope to build on this
significant employment base.
Much has been said about the future of our Cleveland
landing gear plant, Mr. Chairman. Let me be very clear about
this. BFGoodrich management has made no decision about the
future of this facility or any other landing gear facility.
Having said that, I will tell you that the U.S. landing gear
business is 15 percent below its peak volume, and customer
demand is expected to remain low for the foreseeable future.
In this business environment, a status quo cannot prevail.
One of the attractions of the Coltec merger comes from
combining the volume of the two firms and achieving more
efficient capacity utilization. The added volume and financial
strength will inure to the benefit of BFGoodrich and will allow
more investment in its facilities.
After the merger, we will look at our operations and
determine how best to become a more efficient and lower-cost
producer. This may include upgrading plants, reconfiguring our
production mix, and perhaps closing facilities. The failure to
make those hard decisions could cost us our competitive edge
and even more jobs than if we ultimately decide to close a
plant. But until the merger has closed, the planning cannot be
done and no decisions have been taken.
Our goals are the same, Mr. Chairman. We at BFGoodrich want
to grow so that we can satisfy our customers, challenge,
reward, and retain our employees, and provide financial returns
for our shareholders. We can only achieve those goals by
providing innovative, quality, least-cost products to our
customers consistently and timely. By becoming a stronger
competitor, we help the economy and our workforce.
Mr. Chairman, let me tell you what BFGoodrich is committed
to. We are committed to growing jobs and marketplace position.
We are committed to sustaining a vigorous U.S. national defense
position. We are committed to involving workers, shareholders,
customers, management, and Government decisionmakers in our
future business growth plans. Finally, we are committed to
building and designing the best priced and best performing
products for this or any other marketplace. We challenge
AlliedSignal, Crane, Honeywell, or anyone else to come and
compete with us fairly in the marketplace.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Linnert follows:]
Prepared Statement of Terrence G. Linnert
I am delighted to have the opportunity to appear before the
Subcommittee to address the competitive implications of the merger
between BFGoodrich and Coltec.
Multibillion dollar mergers have become an almost daily occurrence.
As this Subcommittee has no doubt heard before, technology and
globalization fuel this consolidation. In addition, in the defense and
aerospace industries, the end of the Cold War drives much of the
consolidation. Defense spending reductions and the consolidation at the
apex of the defense supply chain have placed ever greater demands on
the component supplier community to become more efficient while at the
same time increasing the risks of business. BFGoodrich is not here to
complain about the difficulty of competing. Rather, BFGoodrich believes
that the market forces of competition will determine the winners and
the losers in these changing and challenging times. Mergers are an
inevitable part of the restructuring of our industrial base. From the
standpoint of competition policy, this is not a bad thing--most mergers
are procompetitive or competitively neutral. Rigorous review by the
regulatory agencies--here, the Department of Defense and the Federal
Trade Commission--provide important reassurance that those mergers that
may hurt competition do not go unchallenged. Our transaction has
successfully undergone a review by both the Department of Defense and
the Federal Trade Commission, and I can assure the Subcommittee that it
was both rigorous and comprehensive. We welcome any inquiry the
Subcommittee may have regarding the thoroughness of the work of the
reviewing agencies.
It is also a fact that mergers and consolidations may dislocate
people and can result in the consolidation or relocation of some jobs.
While that is not always the case, clearly the demands of a global and
technologically advanced society require greater productivity and
efficiency. At BFGoodrich, we approach this part of the merger business
very carefully. Our work force is important to us and we recognize the
contributions our employees make to our success. We are committed to
providing opportunities to our employee community to grow within our
organization. We do not approach layoffs or plant closings with zeal or
happiness. When such actions are needed for the greater good, we take
them reluctantly and only after due deliberation. It is ironic, then,
that interest in the BFGoodrich/Coltec merger was fueled by
AlliedSignal's false allegations that, in conjunction with the merger,
BFGoodrich would close its Cleveland plant and eliminate 650 jobs.
AlliedSignal announced earlier this week its planned $15 billion merger
with Honeywell. As part of that merger, AlliedSignal plans to fire
4,500 people to help it ``realize the efficiencies'' of its merger. We
welcome any inquiry the Subcommittee may have regarding BFGoodrich's
views on the important public policy issues associated with mergers and
jobs.
I have organized my written testimony in three sections: (1) the
merger review process; (2) the competitive implications of the merger;
and (3) the effect of the merger on U.S. jobs.
the merger review process
BFGoodrich and Coltec agreed to merge in late November, 1998, and
submitted the required H-S-R notifications in early December. Shortly
thereafter, representatives of BFGoodrich met with representatives of
the Department of Defense to discuss the proposed merger. Between
December 1998 and March 1999, representatives of the parties to the
merger met and spoke with representatives of the Department of Defense
regularly. The parties provided extensive information about their
businesses to the Department of Defense in response to a detailed
questionnaire from the Department. The parties responded fully and
completely to every question posed by the Department of Defense.
We understand that representatives of Crane and AlliedSignal met
with officials of the Department of Defense in multiple efforts to
derail the merger. While we do not know the details of their arguments,
we believe they raised many of the same competition concerns that have
been presented in other forums. The Department of Defense carefully
considered the arguments presented by all concerned; from time to time,
we were asked by the Department of Defense to provide information
responsive to Crane and AlliedSignal complaints, and we did. On March
15, 1999, the Department of Defense notified the FTC and BFGoodrich
that ``the Department will not object to the proposed acquisition of
Coltec Industries by BFGoodrich.'' \1\
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\1\ Letter 3/15/99 from Jacques S. Gansler, Under Secretary of
Defense, to Terrence G. Linnert.
---------------------------------------------------------------------------
The FTC's Bureau of Competition conducted its own review parallel
to that of the Department of Defense. While the Bureau of Competition
conducted its investigation, AlliedSignal initiated private antitrust
litigation in Indiana. With BFGoodrich's consent, AlliedSignal provided
to the Bureau of Competition selected material it had obtained from
BFGoodrich in discovery in the private lawsuit. BFGoodrich, at the
request of the Bureau of Competition staff, provided the staff all of
the discovery materials, including thousands of documents and pages of
deposition testimony. The staff attorneys at the FTC diligently
reviewed the material, evaluated the potential for anticompetitive
effects, and concluded there were none.
AlliedSignal and Crane were not satisfied with this outcome and
insisted on meetings with the FTC commissioners. We are informed that
AlliedSignal and Crane met with each commissioner and used evidence
obtained in discovery in the private litigation in their effort to
persuade the FTC to intervene. Not one commissioner concluded that the
merger ought to be challenged. On April 26, 1999, the FTC advised
BFGoodrich and Coltec that it had closed its investigation without
taking any action.\2\
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\2\ April 26, 1999 letter from Richard G. Parker, Senior Deputy
Director, Bureau of Competition, FTC, to Terrence G. Linnert.
---------------------------------------------------------------------------
Over a five month period, two federal agencies, each charged with
considering the competitive implications of mergers, have reviewed the
BFGoodrich/Coltec merger and both have concluded that no further action
was warranted. This is strong evidence that the merger will not have
anticompetitive effects, particularly given the vigorous antitrust
enforcement we have seen in this same time frame (Lockheed-Martin/
Northrop; General Dynamics/Newport News; Litton Industries/Newport
News).
the competitive implications of the merger
The merger of BFGoodrich and Coltec is procompetitive. As a result
of consolidation among aircraft manufacturers and a declining number of
new aircraft program starts, business opportunities for landing gear
structure manufacturers have diminished. The total number of aircraft
produced declined from more than 900 per year in the early 1990's to a
low of 416 in 1996. While production has picked up since 1996, it is
not expected to exceed about 800 aircraft per year over the foreseeable
future.
The merged BFGoodrich/Coltec is likely to be better able to serve
its customers in this environment. Significant cost savings are likely
to result from the merger. These cost savings will enable BFGoodrich to
offer savings to its customers, invest in more efficient equipment, and
invest in additional landing gear projects.
BFGoodrich presently competes with Messier-Dowty, a French firm,
for landing gear. At Airbus, Messier-Dowty has won all the procurements
in which BFGoodrich has competed. The merger will place BFGoodrich in a
stronger position to compete for Airbus business.
AlliedSignal contends that the merger will put BFGoodrich in a near
monopoly position with regard to sales of landing gear. Nothing could
be further from the truth. Our business is global and we compete with
suppliers from around the world for business here and abroad. The
following are among the landing gear manufacturers capable of providing
main landing gear for large commercial aircraft: BFG/Coltec; Messier-
Dowty (a French firm); SHL (a subsidiary of Israeli Industries, which
provides the landing gear for the Boeing 717); Heroux (a Canadian firm
which provides landing gear for the C17); and Hydro-Mash (a Russian
company). Several other firms presently manufacture nose gear for
commercial aircraft and could increase capacity to supply main landing
gear for large commercial aircraft. These companies include Liebherr,
APPH, Sumitomo, and Castle Precision. Thus, after the merger,
BFGoodrich would face competition from at least 8 firms that presently
manufacture main and/or nose gear for commercial aircraft. These firms,
and two others (EDE and Cessna) provide landing gear for regional,
business and military aircraft.
For several reasons, BFGoodrich cannot, and will not be able to,
dictate terms to any aircraft manufacturer, or to unilaterally raise
prices or to design landing gear in a way that disadvantages
competitors' wheels and brakes and components. Whether the customer is
Boeing or the Department of Defense or any other airframe manufacturer,
the customer owns the data rights to the landing gear and to the
interface between the landing gear and other system components. Indeed,
on new programs, Boeing requires potential landing gear suppliers to
jointly prepare the design of new landing gear at no cost to Boeing.
Boeing then selects various suppliers to compete to produce the
components and subsystems. If Boeing believes a supplier is not
responsive or competitive, it can and will select another manufacturer.
Moreover, many of the smaller landing gear components can be
subcontracted. (BFGoodrich presently subcontracts 90 percent of its
landing gear components.)
BFGoodrich and AlliedSignal compete in the wheel and brake
business, but nothing about this merger will enable BFGoodrich to
discriminate against AlliedSignal's wheel and brake business. As noted
above, the airframe manufacturer owns the data rights, and the wheel
and brake manufacturer can obtain the necessary interface information
from the airframe manufacturer. Airframe manufacturers actively promote
multiple sources of wheels and brakes because it drives down the total,
lifetime cost of aircraft.
If this merger were likely to have anticompetitive effects, our
customers would have objected. They have not. Our relationships with
our customers are so important that, had they objected, we probably
would not have gone forward with the merger. Indeed, prior to
announcing the merger, my CEO, the President of BFG Aerospace and the
CEO of Coltec met with the President and CEO of Boeing and we were
advised that Boeing did not oppose the merger. We have also been told
by Lockheed Martin and Bombardier that neither opposed the merger. As
far as we know, no aircraft manufacturer has opposed this merger.
I appear before the Subcommittee confident that this merger is good
for competition and good for our customers. Those customers and the
federal agencies charged with enforcing competition policy have agreed.
I am confident that history will bear out those judgments.
the effect of the merger on u.s. jobs
Following the merger, BFGoodrich will employ 27,000 people
worldwide. The size and diversity, financial and technological strength
and global reach of our businesses will create job stability and growth
opportunities for our existing work force. The benefits and
efficiencies in this merger, perhaps unlike others, are not centralized
on employee reductions and layoffs. Rather, it is our hope that the
merger will be a source of job growth as we realize the benefits of
being more competitive both domestically and overseas.
As part of the merger, approximately 170 headquarters positions
will relocate from Ohio to North Carolina. This sort of headquarters
consolidation and relocation is typical of mergers. There will be 4,500
jobs lost as a result of the AlliedSignal/Honeywell merger, including
1,000 due to Honeywell's relocation from Minnesota to New Jersey.
I would like to address more specifically the Chair's concern about
the merger's impact on Ohio jobs. In February, 1999, in response to an
inquiry from the Department of Defense, BFGoodrich provided a
preliminary, internal study that presented possible options for
restructuring the landing gear business. Although each of the options
presented by the study contemplated closing the Cleveland plant,
BFGoodrich told the Department of Defense that ``its views concerning
reconfiguration are necessarily tentative'' because it did not have
cost information regarding any Coltec facilities.\3\
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\3\ February 3, 1999 letter to Kathy Brown, Senior Attorney, Office
of General Counsel, Department of Defense from Tom D. Smith. There is
absolutely no truth to allegations that BFGoodrich told the Department
of Defense or the FTC that it would close the Cleveland plant.
---------------------------------------------------------------------------
Let me be very clear about the future of our Cleveland landing gear
plant: BFGoodrich management has made no decision about the future of
this facility. Having said that, I must tell you that the U.S. landing
gear business is 15 percent below its peak volume, and customer demand
is expected to remain low for the next 10 years. In this business
environment, status quo cannot prevail.
After the merger, we will look at all of our operations and
determine how best to become a more efficient and lower-cost producer.
This may include upgrading plants, reconfiguring our production mix
and, perhaps, closing facilities. The failure to make these hard
decisions could cost us our competitive edge and even more jobs than if
we ultimately decide to close a plant. Until the merger has closed,
however, we do not have access to the information we need to make an
intelligent decision and, as a consequence, no decisions have been
taken.
I promise you this--we will include all of our stakeholders in the
process. We have already received a very appropriate and much
appreciated invitation from Governor Taft of Ohio to consult with his
office as we go forward in our planning and we have assured him that we
will do so. Likewise, we will talk to the unions, other state, local
and federal government officials as well as other interested groups to
help us make the most informed and sound decision possible.
Whatever decision is reached regarding any of our facilities,
BFGoodrich remains committed to Ohio. Following the merger, BFGoodrich
will employ more than 3,000 people in Ohio in management, manufacturing
and research positions. Our Performance Materials business, with more
than $1 billion in revenue, will remain headquartered in Brecksville.
Other BFGoodrich operations in Ohio are located in Akron, Avon Lake,
Chagrin Falls, Cleveland, Cincinnati, Columbus, Dayton, Elyria, Green,
Troy, Twinsburg and Uniontown.
We have been adding jobs in Ohio--since January 1997 we have added
200 jobs to our aerospace work force in Ohio and aerospace employment
is up 14 percent. We remain committed to Ohio and to our work force in
Ohio. Following the merger, BFGoodrich will contribute more than $20
million per year in taxes to Ohio as part of its continuing presence in
the State.
Our goals are the same as those of the Subcommittee. We at
BFGoodrich want to grow so that we can satisfy our customers,
challenge, reward and retain our employees, and provide financial
returns for our stockholders. We can only achieve these goals by
providing innovative, quality, least-cost products to our customers
consistently and timely. By becoming a stronger competitor, we help the
economy and the work force in Ohio and in the other states in which we
have operations.
Senator DeWine. Thank you very much.
Mr. Montalbine.
STATEMENT OF CARL R. MONTALBINE
Mr. Montalbine. Thank you very much, Senator. It is a
privilege to appear before you.
I am Carl Montalbine, vice president and general manager of
Aircraft Landing Systems, a business unit of AlliedSignal
located in South Bend, IN. AlliedSignal's Aircraft Landing
Systems division sells wheels and brakes, brake control
systems, and integrated landing systems for commercial and U.S.
military aircraft and employs approximately 1,400 people in its
South Bend facility. I would like to thank Chairman DeWine and
the subcommittee for inviting me to participate in the public
debate of this issue.
I have submitted written testimony, and I would like to
take 5 minutes to discuss that testimony. At the outset, I
would like to emphasize three points:
One, the BFGoodrich/Coltec merger will have serious
anticompetitive consequences.
Two, Allied is not alone in concluding that the BFGoodrich
merger is anticompetitive. Airlines, wheels and brakes
manufacturers, and even U.S. military personnel at Hill Air
Force Base concur.
Three, the anticompetitive effects can be avoided by
BFGoodrich selling its Cleveland Pneumatics landing gear
business to Allied. This sale would ensure vigorous competition
for landing systems, and AlliedSignal commits to you that it
will keep jobs in Cleveland, and we will keep jobs there long
term, not for just 2 years.
To understand the negative effects of the merger, I have a
diagram that illustrates how the merger will affect the
industry's structure that you can see to your right. Goodrich,
Coltec, and Messier control approximately 99 percent of the
large commercial landing gear market. There are only three
companies in the world--and they are shown on that chart--with
the capabilities to design, manufacture, and test landing gear
for commercial aircraft.
Now, let me explain something. Previously, you just saw a
chart that showed other landing gear companies--SHL, Liebherr
Aerotechnic, AP Precision. Those are classified as the build-
to-print, mom-and-pop-shop-type operations. They do not really
have the capability to design large commercial landing gears.
And if you look at the record and you look at the programs they
are on, it is obvious that that is the case as Cleveland
Pneumatics and Menasco constitute almost 100 percent of Boeing
landing gear content, and Messier-Dowty constitutes 100 percent
of Airbus content. If SHL, Liebherr, and AP Precision were
capable of designing gears of that size, where is their market
share?
Today, two of those three landing gear companies up there,
Goodrich and Messier, also have their own wheel and brake
operations. That leaves the third company, Coltec, as the only
viable landing gear partner for AlliedSignal. AlliedSignal's
experience in the past has been that if Coltec is not willing
to cooperate with AlliedSignal on a particular program,
AlliedSignal has no other viable partner with which to team in
order to be a systems integrator for future aircraft programs.
A good example of that was the Dornier 728. When Menasco
decided it didn't want to participate, we tried to team with
Liebherr Aerotechnic, and they were not capable of doing the
design work that was required, and that deal fell through.
In short, after the merger, only Goodrich and Messier will
have access to landing gear needed to compete, and Messier is
owned by a French firm controlled by the French Government.
With that background, let me emphasize three points.
The first point I want to emphasize is that AlliedSignal
will be harmed by this merger. The combined BFGoodrich landing
gear business will result in a U.S. monopoly for landing gear
with overwhelming market power to harm Allied and others by
vertically foreclosing or gaming Allied and raising Allied
prices for landing gear.
In terms of vertical foreclosure, landing gear is similar
to Windows 95 operating system, and the wheels and brakes are
like the browser. The browser, a wheel and brake company, must
get the technical information from the operating system.
BFGoodrich and Coltec will control the landing gear information
necessary for Allied to understand the interface and to
compete. Based on Allied's experience, BFGoodrich will have
every incentive to game the information provided to Allied.
In terms of price increases, BFGoodrich will also control
the supply of landing gear that Allied needs to compete with
BFG as a landing systems integrator. Allied purchases landing
gear on projects such as the Joint Strike Fighter. BFGoodrich,
who is competing with Allied on the Joint Strike Fighter, will
have no incentive to sell landing gear to Allied at fair
prices, if at all.
The second point I want to emphasize is that these
anticompetitive effects are recognized by numerous parties who
know landing systems. Airlines, who are the customers for
wheels and brakes, oppose this merger. SAS, AirTran, United,
Northwest, American, Air New Zealand, and others have all
indicated anticompetitive concerns. Significantly, not a single
airline supports this merger as pro-competitive. Besides
Allied, the other two major independent wheel and brake
manufacturers in the world oppose this merger. ABSC, based in
Akron, also opposes this merger, and I urge the committee to
review the sworn affidavit of Mr. Ron Welsch, president of
ABSC, which is attached to this written testimony. In addition,
Dunlop Aviation, based in Coventry, England, also opposes this
merger.
The third and final point I would like to emphasize is that
all of these problems can be avoided. According to published
reports, BFGoodrich and Coltec will consolidate their landing
gear facilities and will close the Cleveland business. Indeed,
according to today's papers, BFGoodrich even told the
Department of Defense that it planned to close Cleveland. The
fact that BFGoodrich would prefer to close Cleveland rather
than sell Cleveland to AlliedSignal only confirms the high
value BFGoodrich places on being a monopolist in landing gear.
BFGoodrich would prefer to spend money to mothball a business
rather than receive money from Allied.
I want to emphasize AlliedSignal's long-term commitment to
the Cleveland landing gear business, again, not just for 1 or 2
years. Senator, Allied, is committed to purchase Cleveland,
keep Cleveland open, invest in Cleveland, and use Cleveland to
compete vigorously. We promise to be a strong competitor.
Thank you for your time.
[The prepared statement of Mr. Montalbine follows:]
Prepared Statement of Carl R. Montalbine
I would like to thank Chairman DeWine and the subcommittee for
giving me the opportunity to speak today.
I am Carl Montalbine, vice president and general manager of
Aircraft Landing Systems, a business unit of AlliedSignal located in
South Bend, Indiana. AlliedSignal's Aircraft Landing Systems division
sells wheels and brakes, brake control systems, and integrated landing
systems for commercial and U.S. military aircraft and employs
approximately 1,400 people at its South Bend facility. I am the senior
executive for the entire AlliedSignal Aircraft Landing Systems business
unit in South Bend and have ultimate responsibility for the profit and
loss statement of the business unit.
overview
BFGoodrich (``Goodrich'') and Coltec have announced a merger that
will result in a single U.S. landing gear manufacturer (and one of only
2 worldwide). A federal court in Indiana has preliminary enjoined the
merger based on a finding that ``the merger would likely result in a
U.S. monopoly for the sale of landing gear that would result in higher
prices for such gears,'' and the Ohio Attorney General is also
investigating the transaction. Moreover, according to published
reports, Goodrich may close its landing gear operations in Cleveland
after the merger.
There is a simple solution to the anti-competitive effects of the
Goodrich/Coltec merger. AlliedSignal has stated on more than one
occasion that it is willing to purchase the Cleveland landing gear
business--that is slated to be closed after the merger anyway--from
Goodrich. AlliedSignal has further stated that it would invest
significantly to modernize those operations so as to not only maintain,
but increase, competition in the United States landing gear market.
Moreover, AlliedSignal has publicly stated that it has every intention
of maintaining the high-paying union jobs at the Cleveland landing gear
business if it is sold to AlliedSignal.
personal background
My background is in engineering. I have a Bachelor of Science
degree in aeronautical engineering from the University of Cincinnati
and a Masters degree in mechanical systems and applied mechanics from
the Polytechnic Institute of New York. Before coming to AlliedSignal, I
was in charge of systems engineering on the Northrop B-2 bomber. I was
specifically hired by AlliedSignal to bring my expertise in systems
integration to the company to help work on future bids for landing gear
systems integration. At AlliedSignal, prior to holding my current
position, I was director of engineering at AlliedSignal and manager of
landing systems at AlliedSignal. Through these various positions, I
have experience providing integrated landing systems, designing and
manufacturing wheels and brakes, designing and manufacturing brake
control systems, and, before AlliedSignal sold its landing gear
business to Coltec in 1995, designing and manufacturing landing gear.
alliedsignal's opposition to the goodrich/coltec merger
As I already indicated, AlliedSignal opposes the merger and there
is ongoing litigation with respect to this merger. Because of a
protective order in the litigation, I personally have not reviewed the
numerous documents produced by Goodrich, Coltec, and third parties
during the course of the case. Nor have I had the opportunity to review
the deposition testimony of various Goodrich, Coltec, and third party
witnesses. My testimony therefore reflects what I know of the public
statements that have been made with respect to the merger and
AlliedSignal's experience and knowledge with respect to the landing
gear, wheels and brakes, and integrated landing systems businesses.
At the outset, it should be noted that AlliedSignal generally does
not oppose mergers. AlliedSignal itself has been--and will continue to
be--a company that seeks out merger opportunities to improve its
competitiveness in the markets in which it competes. AlliedSignal
almost never opposes mergers among its suppliers, customers, and
competitors. Nor does AlliedSignal oppose the combination of Goodrich's
and Coltec's aerospace businesses unrelated to landing gear systems,
even though AlliedSignal competes with Goodrich and Coltec in these
other aerospace lines of business. If AlliedSignal's opposition simply
represented the complaints of a ``whining competitor''--as Goodrich and
Coltec have suggested--then AlliedSignal would have challenged many
aspects of the merger--which it has not.
Instead, AlliedSignal's opposition to the merger has focused on the
particular anticompetitive effects of the combination of Goodrich's and
Coltec's landing gear businesses. There are only three companies in the
world today capable of designing, developing, and manufacturing landing
gear for large commercial aircraft, larger regional jets, and U.S.
military aircraft: Goodrich, Coltec, and a French company, Messier-
Dowty. Goodrich and Coltec are the only two domestic suppliers.
AlliedSignal believes that the merger of these two companies' landing
gear operations--which would create a worldwide duopoly and a domestic
monopoly--will have particularly adverse effects upon competition, not
only in terms of sales of landing gear, but also in terms of sales of
wheels and brakes (which must interface with the landing gear) and
integrated landing systems (which requires access to a supply of
landing gear).
other wheel and brake suppliers agree with alliedsignal
AlliedSignal is not alone in this view. There are five prominent
wheels and brakes suppliers in the world: AlliedSignal, Aircraft
Braking Systems (ABS), Dunlop, Goodrich, and Messier-Bugatti. Two of
these companies--Goodrich and Messier-Bugatti--are affiliated with the
two remaining landing gear companies. The other three companies oppose
this merger:
ABS submitted an affidavit in the litigation stating that
the ``post-merger Goodrich entity can be expected to exert
leverage by its landing gear market concentration to benefit
its Goodrich wheel and brake business'' and that the merger
will ``lessen competition in the integrated landing system,
landing gear, and wheel and brake markets.'' Tab A.
Similarly, Dunlop submitted an affidavit in the litigation
stating that the merger will lessen competition in these
markets. Tab B.
In short, every wheel and brake supplier not affiliated to one of
the two remaining landing gear suppliers recognizes the anticompetitive
effects of the merger.
defense department personnel who know landing gear agree that the
proposed merger is anticompetitive
After the merger, the Defense Department will have only one
domestic supplier of aircraft landing systems for its fighter, bomber,
attack, and cargo aircraft. Although the Defense Department has not
formally come out in favor of or opposition to the merger (wrongly, in
my opinion), key procurement personnel within the Defense Department at
Hill Air Force Base--the base responsible for landing gear sustainment
on AirForce aircraft--have expressed their opposition to the merger.
John Hamlen, for example, notes that several discussions have occurred
at Hill Air Force Base among personnel in which concerns have been
raised about the merger. Tab C. Frank Zuech similarly notes that these
concerns have revolved around the merger limiting the Air Force's
sources of landing gear and wheels and brakes and the possibility for
higher prices. Tab D. And John King wrote a memo in January 1999
outlining the Hill Air Force Base landing gear engineering group's
collective concerns with the merger, noting that the merger could
``adversely affect technical data availability, product support, and
technical capability for future designs,'' that Goodrich after the
merger would be like a ``non-regulated monopoly,'' that Goodrich could
``leverage their control of the gear into control of wheels, brakes,
and brake controls,'' and that Air Force personnel ``simply don't want
to put all of our eggs in one basket.'' Tab E.
airlines agree with alliedsignal
Significantly, airlines--including major U.S. carriers--also agree
with these Defense Department personnel and AlliedSignal. Ed Doty of
Scandinavian Airlines, who is involved in wheel and brake issues for
eight different major airlines through the Star Alliance, believes that
aftermarket wheel and brakes prices will rise and that Goodrich could
leverage its control over landing gear to obtain sole source positions
on future aircraft programs, adversely affecting airlines. Tab F.
AirTran similarly believes that the merger will result in higher
landing gear prices, that ``Boeing will pass any additional cost of
landing gear resulting from the merger on to customers,'' and that the
merger will have a ``negative impact on our ability to purchase wheels
and brakes at a competitive price.'' Tab G. I also am told that
personnel from United Airlines and Northwest Airlines have testified,
but, because of the protective order, I have not seen their testimony.
I am not aware of a single airline that has come out in favor of the
merger.
background on landing systems
An aircraft landing system consists of three key components: (1)
the landing gear structure (or ``landing gear''), which absorbs the
shock of an aircraft's landing; (2) the wheels and brakes (which are
typically sold as a package and apply the friction to slow the aircraft
upon landing); and (3) the brake control system, which allows the pilot
to operate and control the rest of the landing system.
AlliedSignal Aircraft Landing Systems's primary business focus
among these three components is selling wheels and brakes. AlliedSignal
Aircraft Landing Systems has designed, developed, and manufactured
wheels and brakes for numerous commercial and military aircraft. On the
military side, AlliedSignal makes the wheels and brakes for the F-22,
F-18 E/F, and F-15 fighter and attack aircraft, the C-17 cargo
transport aircraft, and the B-2 bomber. On the commercial side,
AlliedSignal sells wheels and brakes for numerous Boeing and Airbus
commercial aircraft, including the Boeing 717, Boeing 777, Boeing 767,
Boeing 737, Airbus 330/340, and Airbus 319/320. AlliedSignal also has
provided the wheels and brakes for the X-33, the prototype vehicle for
the next generation Space Shuttle. In addition to this wheels and
brakes business, AlliedSignal has a smaller brake control systems
business and is providing brake controls for the F-22 fighter.
Prior to 1995, AlliedSignal also had a niche landing gear business,
primarily focused on designing and manufacturing the smaller landing
gear used in U.S. military aircraft. AlliedSignal, for example,
designed and manufactured the F-18 E/F landing gear. In 1995,
AlliedSignal sold its landing gear business to Coltec and therefore
today does not compete with Coltec and Goodrich in the sale of landing
gear. The reason for this sale was the need to compete for integrated
landing systems, a subject to which I turn next.
systems integration
The design and development of the interfaces between the three key
landing gear components is often referred to as ``systems
integration.'' The task of integrating the landing system can be
performed by either the airframe manufacturer or by an outside systems
integrator. Systems integration typically involves performing the up-
front engineering work required to define the requirements for the
landing gear system itself, including the structure, wheels and brakes,
and brake control system.
Historically, the airframe manufacturer--i.e., Boeing, Lockheed-
Martin, Bombardier, Northrop Grumman--performed the landing gear
systems integration function themselves. Increasingly today, airframe
manufacturers look to outside systems integrators to perform the
systems integration on landing gear systems for new aircraft.
Integrated systems bids are now the standard procedure for aircraft
procured by the U.S. military as well as several major aircraft
manufacturers. The reason is that outsourcing systems integration can
lower costs and improve overall system design.
Several years ago, AlliedSignal recognized this trend toward
outsourcing systems integration and realized that in order to compete
for future aircraft landing system programs, the company would need to
be a systems integrator. To compete as a systems integrator,
AlliedSignal would need access to landing gear (so as to have landing
gear to integrate with the rest of the landing gear system). In
particular, AlliedSignal needed access to landing gear from a company
that could design and manufacture landing gear for larger aircraft such
as Boeing and Airbus aircraft. AlliedSignal had two choices. It could
undertake the massive investment in equipment and resources needed to
upgrade its small landing gear operations and enter the business of
supplying landing gear for larger aircraft. That did not make economic
sense. Or it could acquire or ally itself with such a landing gear
supplier. As I have noted, there were only three companies that had the
ability to design and manufacture landing gear for such aircraft: the
two merging parties, Goodrich and Coltec, and a French company,
Messier-Dowty. Goodrich and Messier each had their own wheels and
brakes business units that compete with AlliedSignal and therefore
would have little incentive to cooperate with AlliedSignal. Hence,
AlliedSignal turned to Coltec.
In 1995, AlliedSignal and Coltec entered into a Strategic Alliance
Agreement to compete for the sale of integrated landing systems. As
part of this Strategic Alliance, Coltec insisted that AlliedSignal sell
its small, landing gear business to it, so that Coltec would not be
partnered with a competitor in the landing gear business. AlliedSignal
agreed to this sale as part of an overall transaction that would
provide the company access to landing gear for the sale of integrated
landing systems. Under the Strategic Alliance Agreement with Coltec,
AlliedSignal has submitted joint bids with Coltec for integrated
landing systems on the Canadair Regional Jet, the Bombardier Dash 8-
400, the Joint Strike Fighter, and the X-33 project (the next
generation Space Shuttle). The joint bids for the Joint Strike Fighter
and X-33 were accepted and AlliedSignal and Coltec are currently
working together on these projects, with AlliedSignal providing the
wheels and brakes and overall systems integration, and Coltec providing
the landing gear.
It is my understanding that BFG and Coltec now argue there is no
market for integrated landing systems. Their own conduct belies this
argument. Coltec teamed with AlliedSignal under the Strategic Alliance
specifically to sell integrated landing systems. Coltec and
AlliedSignal today continue to work on integrated landing systems bids
for future programs. BFG meanwhile has been as active as any company in
bidding on programs involving systems integration. The reality is that
there are numerous integrated systems bids upcoming or in the planning
stages including the Joint Strike Fighter, Embraer 170, Embraer 190,
the next generation Space Shuttle, the Lockheed-Martin Aerocraft, the
Bombardier 90 seat regional jet, the Airbus A3XX, the Boeing New Small
Aircraft, and the Boeing Large Aircraft Product Development. Not only
is there a integrated systems market, but the vast majority of upcoming
aircraft programs will likely involve integrated systems.
industry structure after the merger
Tab H gives an overview of how the merger will affect industry
structure. Today, two of three landing gear companies, Goodrich and
Messier, have their own wheels and brakes operations. That leaves the
third company, Coltec, as the only viable partner for AlliedSignal.
AlliedSignal's experience is that if Coltec is not willing to cooperate
with AlliedSignal on a particular program, AlliedSignal has no other
viable partner with which to team in order to be a systems integrator
for future wide-body, narrow-body, large regional jet, and U.S.
military programs. After the merger, Coltec will no longer exist,
meaning that AlliedSignal would no longer be able to purchase landing
gear on reasonable terms and conditions in order to compete as a
systems integrator. While prior to the merger, four companies--
Goodrich, Messier, Coltec, and AlliedSignal--could compete to supply
integrated landing systems, after the merger only Goodrich and Messier
would have access to the landing gear needed to compete. The merger not
only would harm AlliedSignal as a buyer of landing gear and a
competitor in the integrated landing systems market, it will harm
competition for landing gear and integrated landing systems generally.
the goodrich/coltec merger will greatly diminish landing gear
competition
It is my understanding that Goodrich and Coltec have suggested that
the merger will not reduce landing gear competition because there are
supposedly numerous other potential landing gear suppliers. That simply
is not true. Developing landing gear for future aircraft requires
specialized equipment and skills that only Goodrich, Coltec, and
Messier-Dowty have.
To supply a newly designed landing gear for future aircraft models,
a company must be able to design, test and manufacture landing gear
structures.
designing landing gear
To design a landing gear, a company must have expertise in such
areas as the load and stress placed upon a landing gear when an
aircraft lands. Specialized analytical approaches are used in designing
landing gear to account for these issues that involve interpreting the
results from proprietary software. The ability to interpret and
understand the results of this analysis requires considerable know-how
that is a function of the experience of the personnel involved. The
difficulty of this analysis significantly increases for larger landing
gear and for landing gear used in the specialized circumstances of U.S.
military aircraft.
testing landing gear
Suppliers of new landing gear also must have the capability to
perform drop tests, structural tests, and fatigue tests. Testing
requires not only access to specialized equipment, but also personnel
experienced in interpreting test results.
manufacturing landing gear
Finally, suppliers of new landing gear must have the equipment to
manufacture landing gear. Manufacturing landing gear requires large,
specialized machine tools that are used to machine forgings. While some
machining can be outsourced, only Goodrich, Coltec, and Messier-Dowty
have the equipment to perform certain necessary machining to produce
landing gear for larger aircraft, particularly wide-body aircraft.
build-to-print shops do not have all these capabilities
While only Goodrich, Coltec, and Messier-Dowty have these design,
testing, and machining capabilities, it is my understanding that
Goodrich and Coltec point to the existence of other ``mom and pop''
operations as evidence of other competition. There are ``build to
print'' companies that have the capability (to varying degrees) to
manufacture landing gear for aircraft up to a certain size, but none
are credible competitors to undertake the entire task of designing,
testing, and qualifying new landing gear on future aircraft models of
these types. Not only do these companies not have these capabilities
today, it would be very difficult for current ``build-to-print'' shops
to develop these capabilities. As I have noted, AlliedSignal itself
considered developing these capabilities before entering into the
Strategic Alliance in 1995. AlliedSignal determined that it would cost
about $150 million to do so and that it would take years to develop the
engineering skills and reputation necessary to obtain an adequate
return on the investment. For that reason, AlliedSignal decided it was
not viable to upgrade from being a small landing gear provider to a
company that could provide landing gear on larger aircraft. Because
AlliedSignal already had engineers with designing and testing skills
and know-how for U.S. military aircraft, AlliedSignal in 1995 was
better positioned to become a major landing gear supplier (such as
Messier-Dowty, Coltec, and Goodrich) than are build-to-print shops that
operate today.
difficulty of entry
It is my understanding that Goodrich and Coltec also have suggested
that entry into the landing gear business is not difficult. That is
wrong. As I just discussed, AlliedSignal contemplated upgrading its
operations a few years ago and found that it was not possible on any
reasonable economic basis. There are several reasons. There is a long
lead time to acquire the necessary equipment and the equipment is very
expensive. A company also would have to develop a team of engineers
with sufficient know-how and experience to design, test, and
manufacture the landing gear. It should be emphasized that it is not
just a matter of hiring a few engineers, but rather a team of engineers
with skills in design, structural analysis, and testing along with
specific knowledge of chip cutting, plating, heat treating, and
assembly. A potential entrant also would have to obtain proprietary
design materials. Finally, a company would have to develop a reputation
as a credible supplier of landing gear for new aircraft.
harm to competition in the wheels and brakes market
After the merger, the two remaining landing gear suppliers--
Goodrich and Messier--will each have their own wheels and brakes
business units. Each company will have an incentive to design landing
gear and distort the bidding process in a way that favors its own
wheels and brakes operations. The result will be harm to competition
and harm to AlliedSignal and other wheels and brakes suppliers.
how wheels and brakes are sold
The sale of wheels and brakes to airline operators--i.e., airline
passenger companies and companies such as Federal Express and UPS--
involves large up-front investments that are recouped over the life of
the aircraft. These up-front investments come basically in two forms.
First, in order to become ``certified'' as a wheel and brake supplier
for a particular aircraft (a prerequisite for being able to sell wheels
and brakes), a wheel and brake supplier typically will offer to invest
significant amounts in designing and developing wheels and brakes for a
new aircraft model along with perhaps making direct payments to the
airframe manufacturer. This up-front investment will usually involve
millions of dollars. Second, once certified, a wheel and brake supplier
often will have to provide up-front inducements to airline operators
(typically, free wheels and brakes on the initial aircraft sale plus
some additional free spares) in order to persuade them to use the
company's wheels and brakes. Again, these inducements will usually
involve providing millions of dollars in free equipment.
To recover these investments, a wheel and brake supplier expects to
sell replacement wheels and brakes over the life of the aircraft.
(After a certain number of landings, an aircraft's wheels and brakes
must be overhauled and a wheel and brake supplier provides the
replacement equipment.) A wheel and brake supplier usually will enter
into a long-term agreement with an airline operator to provide wheels
and brakes replacements for some period of time (such as ten years) in
exchange for the up-front investment in free equipment. AlliedSignal
recoups its up-front investments with sales of replacement wheels and
brakes over the life of the aircraft.
potential disadvantages that can be imposed on competitors
Obviously, the more a company must invest initially in designing
wheels and brakes for a new aircraft model and becoming certified, the
less likely it is a company will be cost competitive or find it
attractive to invest in a particular aircraft program. Therefore, a
company that can raise a competitor wheel and brake supplier's initial
costs can achieve a competitive advantage.
It also is important to be one of the wheel and brake suppliers
initially certified for an aircraft model. Once major airline operators
have chosen a particular wheel and brake supplier for their initial
purchases of a particular aircraft model, it is unusual for the airline
operator to switch to another supplier because of the high costs of
retrofitting an existing fleet. As a result, if a wheel and brake
supplier is not initially certified, it will find a dwindling pool of
potential customers available to which wheels and brakes can be sold to
offset the initial up-front investment in the program. Hence, if a
wheel and brake supplier can delay the certification of a competitor
wheel and brake supplier, it will obtain a competitive advantage.
Finally, with a sufficiently attractive offer, an airframe
manufacturer may be willing to ``sole source'' wheels and brakes for a
particular aircraft, meaning only one wheel and brake supplier will be
allowed to sell wheels and brakes for a particular aircraft model.
Hence, it is conceivable that a company that has leverage with respect
to landing gear can offer not to charge monopoly prices for landing
gear in exchange for a sole source position as a wheels and brakes
supplier. Because the airframe manufacturer itself pays directly for
landing gear while airline operators pay for wheels and brakes in the
aftermarket, an airframe manufacturer may find such an offer
attractive.
landing gear design process
The Goodrich/Coltec merger will give Goodrich the opportunity to
exploit its dominance over the landing gear marketplace to favor its
own wheels and brakes operation. In particular, Goodrich can exploit
its control over the landing gear design process. The landing gear
usually is the first component designed. Once the landing gear is
designed, the brake control system and then the wheels and brakes are
designed to fit the specifications and interfaces created by the
landing gear design. In order to work properly, an aircraft's wheels
and brakes must have a proper interface with the landing gear.
Obtaining timely information about the proposed landing gear design
and its interface with wheels and brakes is crucial to being a cost-
effective producer of wheels and brakes. Early knowledge of technical
factors such as the load sizes of a landing gear, the torque take out,
and other general information about the materials, weight, and type of
wheel and brakes desired can avoid the unnecessary costs that might
result from developing wheels and brakes based on incomplete
information or from having to rush to complete the design work because
the information was not received in a timely fashion.
``gaming'' the design process
There is little doubt that the landing gear design process can be
used to impose higher costs upon wheels and brakes suppliers not
affiliated with the landing gear suppliers. As an example of such
potential ``gaming,'' a landing gear systems integrator might announce
restrictions for a wheel and brake design that seemingly pose costly
technical challenges without informing other parties that other aspects
of the design will compensate for the restrictions. A wheels and brakes
designer without complete information in that situation might invest in
unnecessary and costly research to meet the challenge. The landing gear
also can be designed in ways that favor the landing gear company's own
wheel and brakes division. For example, the vibrations of a wheel and
brake must, accommodate or fit the frequency of the vibration of
landing gear structure when an aircraft lands. A landing gear designer
can tune the frequency of the landing gear so as to disadvantage a
competitor's wheels and brakes. Similarly, a landing gear designer can
change the way in which an axle is mounted or the spacing of a bearing
so as to disadvantage a competitor's off-the-shelf products. Or the
landing gear designer may tune the landing gear specifically to
compensate for the oscillations of its own wheels and brakes, while
forcing other wheels and brakes competitors to modify the oscillations
of their own wheels and brakes to meet the landing gear design.
gaming has already happened
It is my understanding that Goodrich and Coltec have argued that
such gaming is not possible. But AlliedSignal itself already has
experienced such gaming. The French firm Messier--which consists of
Messier-Dowty (which supplies landing gear) and Messier-Bugatti (which
supplies wheels and brakes)--supplies virtually all landing gear
components and systems for Airbus. Messier-Dowty obviously has an
incentive to promote and favor inclusion of Messier-Bugatti's wheels
and brakes on Airbus programs. AlliedSignal has faced significant
hurdles getting certified as a wheels and brake supplier on Airbus
airplanes for such reasons. For example, AlliedSignal has been trying
for months to obtain more information from Messier-Dowty on the
upcoming A340-600 landing gear design, but Messier-Dowty has refused to
provide it. (The attached Tab I is an AlliedSignal letter complaining
about this problem.) On earlier versions of the A340, Messier designed
the landing gear in ways that disfavored AlliedSignal's wheel and
brakes and gave AlliedSignal the wrong specifications for the interface
between its brake control system and the wheels and brakes, causing
substantial problems that resulted in AlliedSignal incurring additional
costs. And on the A319-320, several airlines requested that
AlliedSignal's wheels and brakes be certified and AlliedSignal signed
contracts with the airlines to deliver wheels and brakes on future
aircraft (after being told by Airbus that AlliedSignal would be
certified). After signing these contracts, Airbus then moved very
slowly in certifying AlliedSignal's wheels and brakes in order to
protect Messier-Dowty's position. AlliedSignal has suffered hundreds of
thousands of dollars of financial penalties under these contracts
because it was not certified in a timely fashion.
After the merger, Goodrich will be the primary (if not only)
supplier of landing gear to U.S. airframe manufacturers. With the
reduction in landing gear competition, AlliedSignal expects to see the
same type of gaming with future aircraft development programs that it
has experienced at Airbus with Messier. Moreover, AlliedSignal also
expects that Goodrich will try to leverage its dominance over landing
gear into sole source positions on future aircraft programs.
harm to airline operators
Such behavior will not only harm AlliedSignal but also airline
operators. By driving up competitors' costs and either obtaining sole
source positions or delaying certification of competitors, Goodrich
will be able to reduce customer choice, raise wheels and brakes prices,
and reduce the amount competitors are willing to offer airline
operators to attract business. These results are harmful to airline
operators. In addition, AlliedSignal invests millions of dollars each
year in research and development of wheels and brakes. As a result,
AlliedSignal competes not only in terms of price, but also quality,
innovation, and service. If the merger results in AlliedSignal being
excluded from future competitions or having its costs artificially
raised, the result will not only be higher prices for wheels and
brakes, but also reduced quality, innovation, and service. The merger
also may make it difficult to justify maintaining current levels of
research and development spending or to expand or even retain the
personnel now used to provide systems bids and perform research and
development.
lockheed martin joint strike fighter bid
When the Defense Department originally reviewed the Goodrich/Coltec
merger, it was unclear whether Lockheed Martin's Joint Strike Fighter
bid would be an integrated systems bid. Now, it is clear that it will
be. Absent the merger, the two most important bidders would have been
Goodrich and Coltec/AlliedSignal. The merger would remove the benefits
of this competition, to the detriment of AlliedSignal and taxpayers as
well.
sale of goodrich's landing gear business to alliedsignal would solve
the problem
As I noted at the outset, I believe there is an easy resolution to
the competitive problems posed by the merger. AlliedSignal has offered
to buy Goodrich's landing gear business (the former Cleveland Pneumatic
Company). If AlliedSignal acquires Goodrich's landing gear business, it
will invest in the company and aggressively compete for new business in
the landing gear market. Such an acquisition would preserve competition
in the marketplace and preserve any job losses that might occur due to
any consolidation of Coltec's and Goodrich's operations. I therefore
believe the sale of Goodrich's landing gear operations to AlliedSignal
is a reasonable pro-competitive resolution of this dispute that would
still allow the rest of the Goodrich/Coltec merger to go forward.
conclusion
I believe the evidence will be compelling that the Goodrich/Coltec
merger is anticompetitive. A federal judge has already decided that
such a conclusion can be reached. Other wheels and brake suppliers,
Defense Department personnel, and airlines agree that the merger is
anticompetitive. By contrast, while some companies have apparently
decided not to get involved and therefore have chosen not to oppose the
merger, I am not aware of any supplier, customer, or competitor of
Goodrich and Coltec that has actually stated its support for the
merger.
Thank you again for giving me the time today to present testimony
on this important subject.
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Senator DeWine. Thank you very much.
Mr. Oliver.
STATEMENT OF DAVID R. OLIVER
Mr. Oliver. Senator, I appreciate this opportunity. I have
submitted my comments for the record. Let me summarize the key
points.
In the Defense Department, we have two key issues, I think,
in looking at each of these mergers to advise FTC and Justice,
one of which is the security issue, and the second is with
respect to whether or not we think there will be sufficient
competition to keep the prices down and the technology
advancing.
With respect to security, in this area when we looked at
it, we said the French company, whose facilities are really in
Canada and the United Kingdom, we found was already the
producer of choice for the F-18 C and D for the Navy, for the
Harrier for the Marine Corps, and for the Air Force's F-22. In
addition, they have many of the contracts for our newer
airplanes. And so it was our conclusion, after we had talked to
the services and also to the manufacturers who were using them,
that they did not feel that there was a security issue, and we
did not either.
The second issue has to do with competition and the
question is: What is the competition? And that is a difficult
question because it depends on the industry and it depends on
the situation. It depends upon what kind of technology you are
involved in, and I don't pretend that is an easy question. And
we wrestled with that for some time and took a great deal of
data.
What we came to the conclusion was that in this case the
market would be almost evenly divided between the two
competitors that would be left and that they were vigorous
competitors and that since only 15 percent of this is the
military and 85 percent of it is commercial, then you have the
large commercial companies riding herd on them, plus the
airlines, all of which--and the after-market issue, all of whom
are actually less subject than we are to the niceties of
ensuring that the companies behave in a competitive manner. So
it was our conclusion that it was not a security problem and
that you had a competitive environment.
That is my discussion, sir.
[The prepared statement of Mr. Oliver follows:]
Prepared Statement of Dave R. Oliver
introduction
Mr. Chairman and distinguished members of the Committee, thank you
for this opportunity to present the views of the Department of Defense
(DOD) on our process for reviewing mergers in the defense industry and
the application of that process to BFGoodrich's proposed acquisition of
Coltec Industries. DOD has generally supported the process of
consolidation in the defense industry to reduce excess capacity and
overhead, the cost of which are ultimately charged to DOD contracts,
raising the cost of the systems we buy. Throughout this process,
however, we have reviewed various transactions in the defense industry
carefully and thoroughly to ensure that we maintain competition for our
current and future programs. In my remarks today, I will describe,
first, the process by which the Department of Defense reviews
transactions, and second, the application of that process to
BFGoodrich's acquisition of Coltec, which led to our conclusion that
the proposed merger would not create unacceptable adverse competitive
implications on DOD acquisition programs.
dod's response to proposed mergers and acquisitions
In 1993, the Department asked the Defense Science Board, an
independent advisory body to DOD of distinguished defense experts,
business leaders, and academics, to form a Task Force on Antitrust
Aspects of Defense Industry Consolidation to advise DOD on the role it
should play in the antitrust review process. In its April 1994 report,
the Task Force concluded, among other things, that due to the nature of
DOD's role in defense industry procurements, DOD has an important stake
in the antitrust review and special expertise that is critical to the
analysis of industry transactions.
The Task Force recommended that DOD review proposed transactions
and advise the enforcement agencies of facts, concerns, and views
relevant to the antitrust analysis, and that the enforcement agencies
likewise notify DOD of any knowledge they possess that would be
valuable to DOD's review.
dod's role in reviewing proposed mergers and acquisitions
The Department facilitates the merger investigation by the
antitrust agencies. and develops its own judgment about the proposed
merger or acquisition. The Department's merger and acquisition review
process is now delineated in DOD Directive 5000.62, issued October 21,
1996. The DOD General Counsel and my staff, under the DUSD (Industrial
Affairs), lead DOD's review, which proceeds simultaneously with the
antitrust agency's review.
When we learn of a transaction, we begin by identifying each and
every program (from those in the research and development phase to
those in full production) and every market area (for example,
satellites, radar) where the two companies are competing, are likely to
compete in the future, or are involved in a potential supplier
relationship. Specifically, we examine four areas:
Horizontal overlaps in programs or market areas.
Vertical integration in programs or market areas where one
party to a merger or acquisition is, or is likely to be, a key
supplier to the other party or its competitors.
Organizational conflicts of interest where one party is
providing systems integration or technical assistance to a
program office, and the other party is either a future
competitor for programs managed by that program office or is
currently performing work for that office.
Savings that may result to the Department from the merger or
acquisition.
Our objective is to ensure that we are maintaining competition
consistent with our acquisition strategies now and for the foreseeable
future. Competition encompasses not only the number of bidders in a
competition, but also the quality of the competition. In some cases, a
business combination may improve the capabilities of a weaker firm,
thus strengthening the competitive environment. In other cases, a
reduction in the number of competitors may have no significant effect
on competition because an adequate number of suppliers remain to ensure
continued pressure for technological innovation and price competition.
In still others, as we have found, some action may be required to
maintain robust competition.
In order to make this assessment, we gather information from a
variety of sources--the Military Departments, the Defense Agencies, the
parties to the transaction, and competitors who may choose to convey
their views to us or the antitrust agency. DOD also interacts directly
and frequently with the antitrust agencies as the review proceeds. The
Department facilitates the antitrust agency review by arranging
interviews with DOD program personnel or other technical experts and by
providing an overall perspective on Department programs. DOD also
communicates to the antitrust agencies its views concerning the
competitive effects of the transaction.
bfgoodrich's proposed acquisition of coltec industries
The Department of Defense reviewed BFGoodrich's acquisition of
Coltec Industries in a manner consistent with past reviews by DOD. Our
finding that the transaction would not adversely affect competition on
DOD procurements was based on our assessment of information gathered
from DOD Military Departments and Agencies, the parties to the
transaction, suppliers and competitors, as well as the prime airframers
who select components to be incorporated on their platforms. Following
our investigation, we informed the Federal Trade Commission of our
conclusions.
BFGoodrich announced its intention to acquire Coltec on November
23, 1999. As part of our review, we talked with the parties, their
suppliers, and their competitors, as well as the prime U.S. airframers.
As a result of our review we focused on an area of potential DOD
concern, military landing gear. According to parties, military landing
gear is less than 1 percent and less than 4 percent of BFGoodrich and
Coltec's business, respectively.
Landing gear systems are comprised of various components such as
the landing gear, wheels and brakes, and brake controls. Each of these
components can represent a separate market. Three companies,
BFGoodrich, Coltec's subsidiary Menasco, and Messier-Dowty, a French
company, have the specific engineering and manufacturing capabilities
to design and fabricate both large landing gear and gear made from
specialty materials that DOD uses on high-performance tactical
aircraft. Currently, the Department of Defense and U.S. commercial
airframers purchase landing gear from all three companies. We were
concerned that the merger would reduce the number of competitors for
certain types of landing gear from three suppliers to two, with one
being a foreign source. It is noted that Messier-Dowty, which has
facilities in Canada and UK in addition to France, currently provides
landing gear on several U.S. military aircraft. Following a thorough
review of the market, including size, technology, etc., and continued
discussions with the parties, suppliers and competitors, U.S.
airframers, and DOD program managers, we concluded that the merger
would not have an unacceptable effect on future landing gear
competitions.
A concern raised by competitors during the course of the merger
review, which I understand has now become an issue in litigation, is
the ability of the landing gear manufacturer to limit competition for
other components of the landing system by the design of the interface
points on the landing gear, specifically those for wheels and brakes.
DOD believes that competition will continue for those components,
nevertheless, we will monitor procurements for those components. Should
it appear that anticompetitive practices are being exercised by the
landing gear producers, DOD can take appropriate action to encourage
competition.
conclusion
In closing, I would like to thank you and the Committee for
providing me this opportunity to discuss the Department's views on
defense industry mergers and acquisitions, particularly BFGoodrich's
acquisition of Coltec. I believe the Department has acted responsibly
and effectively in reviewing this transaction and that our review was
indeed careful and thorough. I would be pleased to answer your
questions.
Senator DeWine. Mr. Oliver, thank you very much.
Mr. Reuther, thank you for joining us.
STATEMENT OF ALAN REUTHER
Mr. Reuther. Thank you. My name is Alan Reuther. I am the
legislative director for the UAW. We appreciate this
opportunity to present our views on the proposed merger between
BFGoodrich and Coltec Industries.
The UAW represents about 300 workers at the BFGoodrich
Landing Gear Division in Cleveland and another 40 workers at
the Goodrich Plating Operations facility, which is a supplier
for the Landing Gear Division.
In addition, the UAW represents about 490 members at the
AlliedSignal Aircraft Landing Systems operation in South Bend,
IN, which produces wheels and brakes for the landing gear.
The workers at the BFGoodrich and AlliedSignal plants are
highly skilled employees. As a result, these are good-paying
jobs with pay ranging from about $13 to $21 per hour, and also
with excellent benefits.
The UAW is very concerned that the proposed merger will
lead to the loss of a substantial number of jobs for the UAW
members, both at the BFGoodrich facilities in Cleveland and the
AlliedSignal facility in South Bend. As has previously been
indicated, Coltec has plants in a number of States, as does
BFGoodrich. As you have indicated, Mr. Chairman, BFGoodrich
officials have previously advised you that there have been
discussions about post-merger consolidation of these
operations, and in their written report to Federal agencies,
they have repeatedly listed the closing of the Cleveland plants
as an option in all of their post-merger consolidation plans.
I think the most telling thing is that BFGoodrich officials
consistently are refusing to make a commitment to keep the
Cleveland plants open, and even today in the testimony,
although they say that no decision has been made, they are
explicitly not committing to keep the plants open in the
future.
At the same time, we also think that following the merger,
BFGoodrich will cease to use AlliedSignal as a supplier for
brakes and wheels since they produce their own brakes and
wheels. This in turn will result in the loss of many jobs at
the South Bend facility of AlliedSignal.
The UAW submits that this is contrary to our national
interest to allow the proposed merger. First, and most
importantly, from our point of view, the loss of the jobs at
the BFGoodrich plants and the AlliedSignal facility will be a
terrible blow to our members. Also, the loss of these good-
paying jobs will have a devastating impact on the communities
in which these workers live.
Second, the loss of the highly skilled jobs we believe will
undermine our defense industrial base, thereby weakening our
ability to respond to future threats to our national security.
In particular, we are concerned that it will be impossible to
reassemble the skilled workforce that is currently employed in
these facilities if they are closed.
Third, by eliminating the dual U.S.-based sources for
aircraft landing gear, we believe the proposed merger will
reduce competition and that this creation of a monopoly will
inevitably lead to higher prices that will have to be paid both
by the Pentagon and ultimately by U.S. taxpayers.
As has previously been indicated, there is absolutely no
reason why the proposed merger is needed. AlliedSignal has
already offered in writing and also here today in their
testimony to purchase the Cleveland plants from BFGoodrich. We
do believe this is a win-win situation. AlliedSignal is
promising to put investment into the plants and to maintain the
workforce and the union contract. If AlliedSignal is permitted
to pursue this alternative, we can maintain the good-paying,
family-supporting jobs that are so important to both of the
communities in Cleveland and South Bend. Equally important, we
can maintain the skilled workforce that is an important part of
our defense industrial base. And we can also maintain a
competitive environment that will be good for the Pentagon and
the taxpayers of this country.
For all of these reasons, the UAW urges the subcommittee
and the entire Congress to stop the proposed merger of
BFGoodrich and Coltec.
In conclusion, we would like to thank you, Mr. Chairman,
for the leadership that you have shown on this important issue.
Thank you.
[The prepared statement of Mr. Reuther follows:]
Prepared Statement of Alan Reuther
My name is Alan Reuther. I am the Legislative Director for the
International Union, United Automobile, Aerospace & Agricultural
Implement Workers of America (UAW). The UAW represents 1.4 million
active and retired workers in the automotive, aerospace, agricultural
implement, defense and other industries.
We appreciate the opportunity to present our views on the
competitive implications of the proposed merger between BFGoodrich Co.
and Coltec Industries. The UAW is particularly interested in this issue
because we represent workers at the BFGoodrich plants in Cleveland,
Ohio and workers at the AlliedSignal plant in South Bend, Indiana, who
would both be adversely impacted by the proposed merger. We commend the
Chairman of this Subcommittee, Senator DeWine, for holding this hearing
on the proposed merger.
The UAW represents workers at two BFGoodrich plants in Cleveland,
Ohio. We represent about 300 workers at the BFGoodrich Landing Gear
Division, and about 40 workers at the BFGoodrich Plating Operations
facility. We have represented the workers at these two plants since
1991. The Plating Operation facility is a supplier for the Landing Gear
Division.
The UAW also represents about 490 members at the AlliedSignal
Aircraft Landing Systems operation in South Bend, Indiana, which
produces wheels and brakes for aircraft landing gear. We have
represented the workers at this facility since 1935.
The workers at the BFGoodrich and AlliedSignal plants are highly
skilled employees. Over the years they have acquired the specialized
knowledge and skills that enable them to produce high quality aircraft
landing gear. As a result, these are good paying jobs, with the pay
ranging from $13.60 to $21.00, along with excellent pension, health
care and other benefits. These are family supporting jobs, which also
help to sustain the surrounding communities in Cleveland and South
Bend.
The UAW is very concerned that the proposed merger of BFGoodrich
and Coltec will lead to the loss of a substantial number of jobs for
the UAW members at the BFGoodrich plants in Cleveland and the
AlliedSignal facility in South Bend. Coltec currently has plants in
Texas, Washington and Ontario. In addition to the plant in Cleveland,
Ohio, BFGoodrich also has a facility in Tennessee. We understand that
BFGoodrich officials have previously advised Senate staff that there
have already been discussions about post-merger consolidation of these
operations. Furthermore, BFGoodrich officials have refused to give any
commitments about the future of the Cleveland plants. At the same time,
they have already announced that they intend to close their corporate
headquarters in Ohio and move about 170 jobs to Coltec facilities in
North Carolina. Accordingly, the UAW believes it is likely that
BFGoodrich will close the Cleveland plants following the merger, and
then shift the jobs and production to operations in other states where
the wages and benefits are significantly lower.
At the same time, we believe that following the merger BFGoodrich
will cease to use AlliedSignal as a supplier of brakes and wheels for
aircraft landing gear, since BFGoodrich produces its own aircraft
brakes and wheels. This in turn will result in the loss of many of the
jobs at the South Bend facility of AlliedSignal.
The UAW submits that it is contrary to our national interest to
allow the proposed merger of BFGoodrich and Coltec to proceed. First,
the loss of a substantial number of jobs at the BFGoodrich plants in
Cleveland and the AlliedSignal facility in South Bend will obviously be
a terrible blow for the UAW members who are laid off. In addition, the
loss of these good paying jobs will also have a devastating impact on
the communities in which they live. The UAW believes Congress should do
everything possible to stop these types of job-destroying, community-
undermining corporate mergers.
Second, the loss of these highly skilled jobs will undermine our
defense industrial base, thereby weakening our ability to respond to
future threats to our national security. In order to maintain a strong
national defense, we need to establish and maintain a strong, vibrant
industrial defense capability. This includes maintaining the highly
skilled, trained workforce that can produce various military systems.
If the proposed BFGoodrich/Coltec merger results in the closing of the
Cleveland plants and the loss of a substantial number of jobs at the
South Bend facility, there will be irreversible harm to our defense
industrial base. It will be impossible to reassemble the skilled,
trained workforce that is currently employed at these facilities. As a
result, we will have lost an essential piece of our defensive
industrial base that would be needed to produce high quality aircraft
landing gear in the event our nation should need to quickly increase
production of this vital aircraft component in order to respond to a
threat to our national security.
Third, by eliminating the dual U.S. based sources for aircraft
landing gear, the proposed merger will reduce competition in this area.
We believe the creation of this monopoly will inevitably lead to higher
prices that will have to be paid by the Pentagon and U.S. taxpayers.
There is absolutely no reason why the proposed merger is needed.
AlliedSignal has already offered in writing to purchase the Cleveland
plants from BFGoodrich. In addition, AlliedSignal has promised to put
substantial investment into the plants, and to maintain smooth
operations by continuing the current workforce and union contract. If
AlliedSignal is permitted to pursue this alternative, we can maintain
the good paying, family supporting jobs in both Cleveland and South
Bend. Equally important, we can maintain the highly skilled workforce
which is essential to maintaining this part of our defense industrial
base. And, by continuing dual sources for the aircraft landing gear, we
can maintain a competitive environment that will benefit the Pentagon
and the taxpayers of this country.
For all of these reasons, the UAW urges this Subcommittee and the
entire Congress to stop the proposed merger of BFGoodrich Co. and
Coltec Industries. This proposed merger is contrary to the interests of
the workers, their communities, and the entire nation.
In conclusion, the UAW appreciates the opportunity to present our
views on the proposed merger of BFGoodrich Co. and Coltec Industries.
We look forward to working with the Members of this Subcommittee on
this vital issue of direct concern to UAW members.
Senator DeWine. Mr. Reuther, thank you very much.
Professor Elhauge, you may proceed. Thank you.
STATEMENT OF EINER ELHAUGE
Mr. Elhauge. Thank you for inviting me to appear.
To summarize my written testimony, this merger essentially
involves a merger to monopoly, the most anticompetitive form of
merger possible. There are lots of distractions and details,
but that is the central fact that concerns me about this
merger. No court has ever sustained a merger involving such
high market concentration.
Now, one distraction is that this merger creates a monopoly
of buyers as well as sellers, or what in economics we call a
monopsony. Here, the monopsony is for buying components for
integrated landing systems on airplanes. But it is well
established as a matter of economics and law that monopsony
power is just as evil as monopoly power. Both produce a
subcompetitive level of market output that ultimately harms not
only suppliers but consumers.
For example, courts have struck down buying cartels or
mergers that create monopsony power that is used against
farmers, thus not only harming those farmers but producing
lower farm output, and thus ultimately harming consumers in the
grocery stores.
In this particular case, the lower form of output is likely
to take the form of lower market quality as firms faced with
monopsony pricing are forced to cut back on research and
development and, thus, not improve the quality of landing gear
and component parts as much as they otherwise would have. So
there is, I think a long-term concern for what this means for
the quality of airline parts as well as for prices.
A second distraction is that in addition to the two merging
firms, there is a third firm in the world that can make the
relevant products, the aforementioned Messier-Dowty, which is
controlled by SNECMA. But this firm owned by the French
Government does not have the same competitive significance as
an independent firm in the U.S. market for several reasons.
First, it is in a joint venture with one of the merging
parties, so it is not entirely independent.
Second, it is legally barred from at least some military
markets and has so far not been an effective competitor for
landing gear on U.S. military planes other than currently
participating in the demonstration phase of the NATO Joint
Strike Fighter.
Third, it has never sold landing gears in the U.S. market
for large commercial planes, thus suggesting a relevant sub-
market there.
In any event, even if you include this French firm in the
market, that would still mean that this merger would result in
a global market with only two firms. And whether you have a
merger from two to one or from three to two, it is still highly
anticompetitive.
Now, a third distraction are various fringe firms that you
saw in the charts put forward by BFGoodrich. Now, in my
opinion, those firms should properly be excluded from the
markets because they lack the physical assets to make large
landing gear and lack the design capacity to make new large or
medium landing gear, and also lack the technical capacity to be
integrators of landing systems. But even if you include all
those fringe firms, the thing to notice is that the market
percentages they have are extremely small. The market
concentration in the medium-gear market and the large-gear
market would still be nearly 3 times, triple the FTC threshold
for presumptive condemnation, and the increase in market
concentration would still be 5 to 20 times that threshold.
Now, even if you include all the firms in that chart, what
this merger produces is a market where the two biggest firms
have over 98 percent of that market. No court, again, I
reiterate, has ever sustained a merger producing that high a
market concentration.
A fourth distraction are arguments that there is no real
market for integrated landing systems, and that market was, in
fact, omitted from the chart that you saw. The merging firms
have argued that this market is too speculative because it is
only part of a market trend. But this trend is a historical
fact in the medium-gear market, has already started in the
large-gear market, and all indications are that everybody
expects it to be a market that will expand in the future. And
it is with future competitive effects that antitrust is
properly most concerned.
In any event, even if there was no such integrated landing
system market, the merger still creates a domestic monopoly in
the medium and large landing gear markets, and that is clearly
anticompetitive. So this clearly warrants presumptive
condemnation, I think, even under the undisputed facts in this
case. The two grounds for rebutting that presumption are absent
here. Entry barriers are not low; they are extremely high. In
fact, this market has not known entry for 2 decades, has only
known exit from the market. And as far as efficiencies, there
are no redeeming efficiencies in this case. In fact, the only
real efficiency offered, what it amounts to is cost savings
from closing a plant. Now, closing a plant is in effect a
restriction of market output. That is the very anticompetitive
concern that antitrust law was meant to address. It is not an
efficiency to close a plant.
Finally, it has been said that buyers have not been
complaining, mainly Boeing, it amounts to, one powerful buyer
has not complained. But this for very good reason is not an
antitrust defense. It doesn't mean that there is no
anticompetitive effect.
First, when you have a merger that creates a monopsony
power like this one, you would expect suppliers to complain
first because they are the most directly affected.
Second, although Boeing hasn't complained, many other
buyers have, as Mr. Montalbine has indicated.
And, third, the existence of a powerful buyer like Boeing
does not eliminate the possibility of anticompetitive effect,
as economic theory shows. Worse, a powerful buyer actually has
incentives to preserve and enhance seller market power in
exchange for a side payment giving you the share of the
seller's monopoly profits. Such special discounts can also
anticompetitively raise entry barriers because new entrants
wouldn't have the same special discounts available to them.
I have also become increasingly concerned that firms can
coordinate on the policy of not objecting to enforcement
officials. We all know that firms can coordinate on price
without explicit agreement if there are few enough firms in a
market. They can also coordinate on a policy of not objecting
to each other's mergers. Here, Coltec and BFG didn't object
about Boeing's prior mergers, so it is not surprising that it
responds by returning the favor.
Given these complicating factors, I have become
increasingly concerned about the general trend towards
consolidation that the Senator mentioned and that an
enforcement policy of requiring buyer complaints can really
facilitate that trend. Now, I have to say it is true that often
a buyer decision like that can be an accurate surrogate for
whether or not the merger is efficient or not. It is just that
the economic analysis one needs to undergo to decide which
buyers decisions are accurate surrogates and which ones are a
result of other factors unrelated to competitiveness is so
complex that it is actually more accurate, and certainly a lot
easier, to instead rely on the structural market concentration
analysis that has always been the bedrock of merger analysis.
And that standard analysis clearly condemns this merger.
Thank you.
[The prepared statement of Mr. Elhauge follows:]
Prepared Statement of Einer Elhauge
This merger essentially involves a merger to monopoly, the most
anticompetitive sort of merger possible. There are various distractions
and details, but that is the central fact that makes this merger highly
worrisome. No court has ever sustained a merger to monopoly.
1. Monopsony As Well as Monopoly. One distraction is that the
merger creates a monopoly of buyers as well as sellers--i.e., a
monopsony. Here, the monopsony is for buying components for integrated
landing systems. But it is well-established in economics and antitrust
law that monopsony power and monopoly power are equally evil. Both
produce a subcompetitive output that harms not only suppliers but also
consumers. For example, courts have struck down buying cartels or
mergers that use monopsony power to depress the prices paid to farmers,
which not only harms those farmers but also lowers farm. output and
thus ultimately harms consumers in the grocery store. No court has ever
sustained a merger to monopsony.
2. Duopoly Instead of Monopoly? A second distraction is that in
addition to the two merging firms there is a third firm in the world
that can make the relevant products: large landing gear, medium landing
gear, and integrated landing systems. But this firm owned by the French
government (SNECMA/Messier-Dowty) does not have the competitive
significance of a independent firm in the same market. First, it has a
joint venture with the merging firms that makes it unlikely to compete
vigorously. Second, it is legally barred from some military markets,
and has generally not been an effective competitor for U.S. military
planes other than currently participating in a joint bid for the NATO
Joint Strike Fighter. Third, it has never sold landing gears in the
U.S. market for large commercial planes, thus suggesting differentiated
buyer preferences and a relevant submarket. In any event, even if one
did include This French firm, That would still mean the merger creates
a global market with only two firms, known in economics as a duopoly. A
duopoly can be just as anticompetitive as monopoly, and clearly
requires presumptive statutory condemnation. No case has ever sustained
a merger to monopoly or duopoly.
3. Include Fringe Firms? A third distraction are various fringe
firms. These firms should be excluded from the markets here because
they lark the physical assets to make large landing gear, lack the
design expertise to make new large or medium gears, and lack the
technical capacity to be integrators of landing systems. But even if
one includes all these fringe firms in the market, the resulting market
concentration would still be three times the FTC threshold for
presumptive condemnation, and the increase in HHI's five to twenty
times that threshold. No case has ever sustained a merger creating such
a high market concentration and increase.
4. No Integrated Landing Systems Market? A fourth distraction are
arguments about whether a market for integrated landing systems really
exists. It does. The merging firms argue that this market is too
speculative because it is only part of a market trend. But this trend
is a historical fact in the medium gear market, has already begun in
the large gear market, and there is copious evidence that all sides
think it is a market that will expand in the future.
The merging firms also argue that integrated landing systems cannot
be a product because their components vary from plane to plane and thus
cannot be precisely defined. But some cars have air conditioning, power
steering, antilock brakes, and automatic transmission. Others don't.
Indeed, even for a given car model, consumers can normally dictate
which of these features they want as options. The fact that every
component of a car cannot be specified does not mean cars are not a
product, any more than it means integrated landing systems are not a
product. Market definition is not about the metaphysics of what a
product ``is'' but a functional inquiry about which firms a customer
can turn to in order to get its needs met. Thus, even if (like car
manufacturers) systems integrators tailor their product to particular
customer's requirements, it remains a product, and a monopoly in it
(like a monopoly in cars) would be worrisome.
Finally, defendants argue that no such market can exist because
airplane makers can always re-enter it and integrate their own landing
gear systems. But the possibility of buyer self-provision doesn't mean
no market exists. We could always make cookies from scratch, but there
remains a market for pre-made cookies. The whole point of markets is to
permit a division of labor that allows each product to be made by the
more efficient actor. A distinct market for integrated landing systems
is emerging precisely because it is more efficient for an airframe
manufacturer To out-source the integration function than to do the work
itself, and it is that difference in efficiency that excludes the
airframe manufacturers from the market.
In any event, even if there were no such market, the merger would
create a domestic monopoly in medium and large landing gears and thus
clearly be anticompetitive.
The merger thus clearly warrants presumptive condemnation under the
undisputed facts. The merging firms have offered two defenses, but
neither is availing.
1. Entry Barriers Not Low. The merging firms have at times asserted
that entry barriers are low. But this claim is completely contradicted
by the evidence, which demonstrates extremely high barriers to entry.
Indeed, as a historical fact, these markets have known only exit, not
entry, for the last couple of decades, as the markets shrunk from 13
firms to 3.
2. There Are No Redeeming Efficiencies. Defendants claim that
efficiencies exist. But they have never substantiated any merger-
specific efficiencies. To the, contrary, their cost-savings flow from a
plan to restrict output by closing a plant. Such a restriction of
output is not an efficiency justification but precisely the
anticompetitive effect the statute seeks to avoid.
Finally, the merging firms claim there can be no anticompetitive
effect because there is a powerful buyer, Boeing, who has not
complained. But this is not an antitrust defense, and is insufficient
for a number of reasons. First, where (as here) a merger creates
serious monopsony issues, suppliers rather than buyers are most
directly injured and thus most likely to complain, as Crane has done.
Second, although Boeing has not complained, many other buyers have.
This includes AlliedSignal, which buys landing gears for integrated
landing systems. It also includes personnel at several airlines. These
airlines bear the bulk of any monopoly overcharge because most
component profits are derived not from sales to airplane makers like
Boeing, but from sales of replacement parts to airlines in the
aftermarket. Third, the existence of a powerful buyer does not
eliminate the possibility of anticompetitive effect. Where the buyer
market power is legal, it is better to have it corrected by market
forces (like the entry encouraged by supracompetitive prices) than to
entrench market power on the other side. Even where it is
uncorrectable, it turns out to be ambiguous whether exercising
countervailing market power would improve or worsen market output.
Areeda & Kaplow, Antitrust Analysis 200 n.51 (5th ed. 1997). Worse, a
powerful buyer has incentives to preserve and enhance seller market
power (rather than countervail it) in exchange for a side-payment
giving it a share of the sellers' monopoly profits. IV Areeda,
Hovenkamp & Solow, Antitrust Law 204-06 & n.4 (rev. ed. 1998). Such
special discounts also anxicompetitively benefit the buyer by
increasing barriers to entry into the buyer's market because new
entrants would be disadvantaged by being denied the discount.
Buyer nonobjections might also rest on three other grounds that
have nothing to do with the merger being procompetitive. (1) Agency
Costs. A buyer's managers may benefit from a short-term price reduction
(which affects their promotion and rewards) even if the buyer's long-
term costs increase because of the created monopoly (which harms not
current managers but their successors). (2) Oligopolistic Coordination
on Non-objection Policy. Just as a few firms in an oligopolistic
industry can coordinate on price, so too a few firms in an industry can
also coordinate on a policy of not objecting to each other's mergers.
Coltec and BFG did not complain about Boeing's prior mergers, so it is
not surprising that it responds by returning the favor. (3) Collectivee
Action Problem. Complaining firms must incur individual costs in
petitioning and risking possible retaliation by merging firms. In
contrast, the benefits of successfully complaining are collective and
nonexclusive because every buyer benefits if an inefficient merger is
blocked whether it complained or not. This free riding problem may
prevent any buyer from objecting to inefficient merger that harms them
all.
Given these complicating factors, I have become increasingly
concerned that a general enforcement policy of requiring buyer
complaints can lead to industrial overconcentration. While many buyer
decisions may be accurate surrogates for whether a merger is efficient
or not, the economic analysis to determine when one can rely on buyer
decisions is so complex that it is preferable--and indeed easier--to
rely on standard market analysis. That standard market analysis clearly
would condemn this merger.
Senator Dewine. Thank you very much. We appreciate the
testimony of all the witnesses.
Mr. Linnert, you have stated in your testimony that
Goodrich has no plans to close the Cleveland facility, and I
believe you basically said, if I wrote this correctly, ``No
decision has been made. After the merger, we will look at this
issue.''
The problem I have is that we have heard this before, in
letters to my office and your press release. But I don't think
it is entirely accurate. According to the confidential
submissions that Goodrich made to the Defense Department, the
submissions that I read in my opening statement, Goodrich is
actively consider closing the Cleveland facility and has been,
in fact, for years.
I do, though, want to give you a chance on the record to
explain why on the one hand you have told us and the people of
Ohio one thing, that you have no plans to close the Cleveland
facility, and then on the other hand you have told the
Department of Defense that you have plans, at least tentative
plans, to close Cleveland.
Mr. Linnert. Senator, I would be happy to address that.
The Cleveland facility has been studied ever since it was
acquired. It has been studied in ways to improve its operations
and efficiency. Investments have been made in that facility,
and it is still a viable facility today.
The company has made no decision to close any facility in
any of our landing gear manufacturing portfolio. The simple
reason for that, Senator, is we can't make a decision as to
what to do with those landing gear facilities until after we
merge. We do not have access to the cost or operating data for
the Coltec facilities. That is why I have said before, and I
will say it today, that no decision has been made to close
Cleveland, Tennessee, Washington, Texas, or Canada--the
locations of other facilities.
But what we will do, we will do an in-depth study after the
merger is closed. We have said to your staff that that study
will take 6 to 8 months to complete when all operating data and
all facts are available to us. That is our fiduciary duty to do
that study, and we intend to do it. But no decision can be made
until that study is complete.
In terms of the letter that you are referring to to the
Department of Defense, we did provide to the Department of
Defense a study that was done by the gentleman who runs our
landing gear business. He was asked to take a look at what
financial reserves might be set up if such an action were
taken. He looked at actions going forward based only on
Goodrich data. That study that he performed was never given to
Marshall Larson, the president of Aerospace, never given to Mr.
Burner, the chairman of our company, never given to our board.
In terms of corporate governance, that plan can never be
acted upon until it has been reviewed with the appropriate
folks. The appropriate folks have said in their sworn testimony
in the court case that they have never seen that study, and
they will not--they will not act on that kind of a study. An
appropriate study will be done post-merger.
Senator DeWine. Well, I appreciate that, and I also noted
in the press coverage the last few days your position in regard
to this planning document that I talked about in my opening
statement--and you have just referenced this--that the planning
document--this is the one that refers to the three different
options for closing the Cleveland plant. And you have said and
it has been reported in the press and you have been quoted as
saying that this is basically a preliminary study by one person
and that the study does not reflect Goodrich's plans to close
the Cleveland plant. That is my understanding of what you are
saying. Correct?
Mr. Linnert. That is correct.
Senator DeWine. Now, let me just say, though, it seems to
me that the documents make it clear that, in fact, that
planning document is not an isolated document created by one
plant manager, and I think it is a little misleading to say it
is just one person's document. It is part of the long-term
thinking of Goodrich, part of the goal of eventually closing
the Cleveland facility.
Let me read to you again--because I want to give you a
chance to answer and explain it, let me read to you again the
language from the Goodrich letter to the Department of Defense.
Now, this is from your company to the Department of Defense. It
is not one low-level individual. This is from your
representation to the Department of Defense as recently as
February.
``The Company has been searching for business options and
alternatives (including closing and moving equipment and
operations from Cleveland * * *) for several years in an
attempt to put its landing gear business on a more sound
footing * * * After struggling mightily to improve productivity
at the Cleveland facility, it determined that an important
component of any long-range program would include closing this
facility. Several options for doing so have been considered but
rejected as not being economically feasible * * * This
situation highlights one of the main attractions of the merger
with Coltec * * * With the combined volumes of the two firms,
one or more options may be attractive. In particular, the
combined firm might well choose to close the Cleveland plant
and plating facility * * *''
Let me read that last sentence again. ``In particular, the
combined firm might well choose to close the Cleveland plant
and plating facility * * *''
It seems to me that Goodrich has been thinking about
closing Cleveland for years. This isn't anything new. Now, you
know, we can deal with language, we can deal with words.
Goodrich may not have a plan. Goodrich today may not know that
it is going to close the plant. But I think, frankly, that is
more of a lawyer's answer than anything else.
What we were looking for today is, frankly, a very
straightforward answer. If the Coltec data shows you what you
think it will show you, you do plan to close the facility.
Isn't that correct?
Mr. Linnert. Senator, I have said before we do not have
access to the Coltec operating data or----
Senator DeWine. Let me rephrase it. Let me reread my
question. If the Coltec data shows what you think it will show,
you plan to close the facility. Isn't that true?
Mr. Linnert. Senator, I do not know what the Coltec data
will show, and neither do our people because they haven't seen
the data. I think what is fair is that once the merger is
complete and we have access to that data, it will be--all the
facilities will be examined on a level playing field.
Whether any consolidation results from that, whether any
closing results from that, whether there is any shifting of
programs, is to be determined. There has been no predetermined
outcome to that study.
Senator DeWine. How do you explain the language of your
letter?
Mr. Linnert. The letter----
Senator DeWine. I just read it to you. I would be more than
happy to read it to you again, but----
Mr. Linnert. I have the letter.
Senator DeWine. I am sure you do. How do you explain that?
Mr. Linnert. What that letter said is----
Senator DeWine. It does not say what it says? I mean, it
does not say what it seems to----
Mr. Linnert. No, I think it says exactly what it says. It
reflects the history of studies that have been undertaken at
the Cleveland facility. There has been a constant effort to
upgrade the efficiency and the competitiveness----
Senator DeWine. Well, let me ask you this--I am sorry. Go
ahead and finish.
Mr. Linnert. No, I didn't mean that. I meant the bell.
Senator DeWine. This happens all the time. Don't worry
about it.
Mr. Linnert. Do you want me to finish?
Senator DeWine. I would like for you to finish. I
apologize.
Mr. Linnert. That is OK. There have been ongoing studies
since that plant was acquired to look at ways to improve the
efficiency and competitiveness of that facility. Closing that
facility is an option that is looked at when you look at those
scenarios, in building another facility, consolidating
elsewhere. That was done prior to the merger, Senator, and
every time the Cleveland facility survived.
Senator DeWine. If you were an employee in Cleveland
Pneumatic and looked at that letter, wouldn't it bother you
that Cleveland, of all the BFGoodrich facilities, is singled
out so prominently in this document? It just jumps out.
Cleveland seems to be where the focus is of this letter. It is
prominent.
Mr. Linnert. Yes, because----
Senator DeWine. You don't have anybody else that prominent.
Mr. Linnert. Yes, because of the three facilities that we
operate in Tennessee, Ohio, and Washington, the one that was
earmarked to try to improve its efficiency and competitiveness
was Cleveland. So, yes, if I was an employee of Cleveland, I
would be concerned about that study. But what we have said,
there is a new landscape, a new playing field. We are going to
look at five facilities. What that outcome will be is yet to be
determined. There is no prejudgment of that.
Senator DeWine. Mr. Oliver, let me turn to you. You had the
opportunity to--and I didn't interrupt him, but I almost wanted
to because I wanted to get your reaction contemporaneous. But
Professor Elhauge made some interesting comments, and I wonder
if you would like to respond to those. Let me read them to you.
I am reading from the prepared testimony of the professor: ``*
* * this firm owned by the French government * * * does not
have the competitive significance of an independent firm in the
same market. First, it has a joint venture with the merging
firms that makes it unlikely to compete vigorously. Second, it
is legally barred from some military markets, and has generally
not been an effective competitor for U.S. military planes other
than currently participating in a joint bid for the NATO Joint
Strike Fighter. Third, it has never sold landing gears in the
[United States] * * * for large commercial planes * * *'' That
was a portion of what you said.
Mr. Oliver. Yes, I heard that, and I think it may have been
inadvertently misleading.
Senator DeWine. I am sorry.
Mr. Oliver. I think it may have been inadvertently
misleading.
Senator DeWine. OK. That is why we have a panel. I want to
get your reaction.
Mr. Oliver. Because, as I said, they actually provide
landing gears for current airplanes, military airplanes, and
for many future airplanes, and, in fact, the Joint Strike
Fighter is going to be the airplane that the Navy, Marine
Corps, and the U.S. Air Force use almost exclusively, and some
NATO countries may buy it, too. But when you say the NATO Joint
Strike Fighter, it implies that one might think that this is
something that you are only going to build overseas. That is
going to be the airplane that is going to be our primary
warfighter, and it is going to be for all the services that fly
fixed-wing airplanes.
The French company is the partner on one of the teams. I
mean, if that team wins, they will get whatever they have
negotiated with the team, but certainly either all of them or a
great majority of them. They are also in the business--I look
at--they are on all of our other teams, including our most
classified plans, such as the F-22. So I think it is misleading
to say that there is business by which they are, one,
restricted from because that is not true in the airplane
landing business.
Senator DeWine. Wait a minute. I want to make sure I
understand. There is no area because of security that they
can't bid on?
Mr. Oliver. They can't bid on black programs.
Senator DeWine. Right.
Mr. Oliver. But you tend not to have black programs on
landing gears.
Senator DeWine. Well, we won't go beyond that today.
Mr. Oliver. And as I said, they have 50 percent of the
market for military planes, and they would have 50 percent
after this. And the American companies would have 50 percent,
and one might even consider them to be in a much better
position to compete after the merger.
Senator DeWine. So we would be down, though, effectively to
one French company, one American company.
Mr. Oliver. Yes, sir, that is correct.
Senator DeWine. And the Defense Department is just happy
with that.
Mr. Oliver. We looked at it----
Senator DeWine. That is just OK.
Mr. Oliver. Yes, sir, that is correct.
Senator DeWine. OK.
Mr. Oliver. We looked at it from the point of security and
competitiveness, and we feel the security problem is solved--we
feel that security is answered, and we believe that it will be
a competitive situation. And that might not be true if we were
talking about some other component, but in this case it is
true.
Senator DeWine. Do you want to respond to that, Professor?
Mr. Elhauge. Well, I guess I would like to begin by saying
that there are many personnel within the Department of Defense
who have expressed concerns about this merger, particularly
personnel in the landing procurement business.
Now, I would also note that in declining to pursue this
merger, the Department of Defense has, as Mr. Oliver indicated,
focused on the military market, not on the impact on the
commercial markets, which are a big part of this merger. And,
in particular, in their letter they express concern about this
joint venture, and if the joint venture extended to the
military projects, they might want to revisit----
Senator DeWine. Whose letter is this? I am sorry.
Mr. Elhauge. This is the letter----
Senator DeWine. The specific letter?
Mr. Elhauge. I don't have it in front of me, but it is a
letter from the Department of Defense notifying the parties
that they weren't going to pursue the merger, noted this joint
venture with Messier-Bugatti, which is owned also by the parent
corporation, SNECMA, and that if anything changed with regard
to the scope of that joint venture, they might want to revisit.
But I think it should be of concern to the military that
there are only going to be two purchasers, even if there is one
U.S. purchaser and even if they think that the French firm is a
viable competitor. General market analysis indicates that
duopolies tend to perform poorly, not well.
Now, you know, I think the military, to be fair, has not
seen all of the documents I have seen, and I can't talk about
all of them because of the protective order here today. But I
think I just have a different judgment of the likely
competitive impact of this merger than indicated by the
statements of the Department of Defense here today.
Senator DeWine. Well, it is an interesting statement you
made, and you believe that the Pentagon has not seen all the
documents that you have seen, something that I understand you
don't want to go beyond at this open hearing. But that is
something that I think we clearly should follow upon, if, in
fact, it is true that the Pentagon has not seen those same
documents that you have seen. I don't know whether Mr. Oliver
wants to respond to that.
Mr. Oliver. Sir, it is difficult for me to respond about
whether or not I have seen----
Senator DeWine. No, I understand that.
Mr. Oliver. But I do have a correction to make. My staff
has pointed out that I misspoke because the French company is
not on the F-22, they are on the F-18, the T-45, which is a
trainer, and the AV-8B, which is the Marine airplane.
Now, it is also my understanding--and I do not have the
document--that the joint venture that you are talking about is
on brakes and wheels, not on landing gear. That is my
recollection.
Senator DeWine. You are responding that that is correct,
Professor Elhauge? Let the record reflect----
Mr. Elhauge. I believe that is right. My point about the
joint venture goes to whether--the vigorousness, their
willingness to compete, not that they will be merged in the
landing gear business but that when you share profits with
another business, you are less likely to compete as vigorously
with them as you would otherwise.
Senator DeWine. Mr. Oliver, recently the Department of
Defense objected to the proposed merger of Northrop Grumman and
Lockheed Martin. The basis for that objection, as I understood
it at the time, was that in certain markets the merger would
reduce the competitors from three to two. Even assuming for
purposes of discussion that the French company is just as
desirable as an American supplier, why isn't the Defense
Department concerned about this merger, which reduces, in your
own words, competition from three down to two? It was
apparently a big problem when we were dealing with Northrop
Grumman and Lockheed Martin?
Mr. Oliver. Senator, Mr. Chairman, it becomes--each of
these is a difficult problem. I think we spent about 4 months
on the Coltec/Goodrich thing. I had a group of people working
this for about 4 months, and I would guess that they briefed me
half a dozen times. Each of these falls on lots of different
issues. Let me say that they are different, and the problem--
and other than talking about the security and the fact that we
thought there was sufficient competition, I am somewhat
constrained by the ongoing lawsuit to talk about specifics of
the considerations that we went into.
Senator DeWine. You are under an order?
Mr. Oliver. No, sir. I am--the companies have to--we
require the companies, when we are looking at these things, to
talk to us and give us data. In addition, we require that data
from other people. We go out and talk to different services,
competitors, and everyone else, and we require them to give us
data.
That data right now is not discoverable in the current
lawsuit, and we don't want it to become discoverable because we
would like to continue to have an open and full relationship
with companies when we discuss this, because we go into them
not knowing where we are going to come down, and we believe the
decisions we are making are those which are based towards the
best interest of the country. So, therefore, we are pretty
insistent with these companies that they talk to us clearly and
forthrightly. And so I am not interested in opening up all that
data.
Senator DeWine. Well, you know, I understand that, and I am
not going to beat up on you or the Department today. But I tell
you, DOD is not a party to this lawsuit, and if the Department
of Defense fails to give candid testimony to this committee or
any other--now, just let me finish--this committee or any other
committee because there happens to be a private lawsuit, it is
going to be very difficult for this Senate to do business. I
mean, we are talking about broad public policy issues that,
quite frankly, are a lot more important than any one particular
lawsuit.
We do not want to get involved in this lawsuit. We made
that very clear. I made that very clear at the beginning. But
now we are talking about you, the U.S. Government, talking
about why you made a public policy decision, and whether it was
right or not, it is something that clearly we have the right to
air in this committee. And when you answer my question and you
basically say, Senator, I would love to talk to you about this
but I can't, it makes it very difficult to look behind your
decision, which I think we have every right to do.
Mr. Oliver. Yes, sir. As you know, you do. I am only
worried--I told you what I was worried about.
The decision in this particular case, when you look at the
type of competition, the type of business it is, and whether or
not it is a piece part business, whether it is an organization
in which you sell one thing and the same people provide all of
the repair parts, whether or not the military in this case is
15 percent of the market and commercial is 85 percent of the
market, how much of the business it is, for example, this is 1
percent of one company and 4 percent of another, what is the
cost of the airplane, relative to the cost of the airplane, and
let's say it is in the low percents in the cost of the
airplane, what type of technology it is--in all those, we have
found this to be a different case from the previous one, and we
believe that in this case two companies who have been accepted
and were on military planes and were performing adequately and
were accepted by the large plane manufacturers, we believe the
competition was adequate.
Senator DeWine. Mr. Montalbine has testified that if this
merger is allowed, AlliedSignal might be forced to exit the
wheels and brakes market. In fact, we saw a chart that was put
up. What is your reaction to that? If that is true, would that
be a problem from a competitive point of view?
Mr. Oliver. I don't know, Senator, whether we looked at
that or not. I would have to get back to you, Senator.
Senator DeWine. Well, I accept that answer and I appreciate
you don't recall. But that seemed to be a fairly significant
thing as his presentation was being made. Would you--you just
don't know, apparently.
Mr. Oliver. I do not know, Senator.
Senator DeWine. Mr. Montalbine, do you want to comment on
that?
Mr. Montalbine. Yes, if I could address a point that has to
do with the focus on what a landing system constitutes, and it
is a landing gear and a wheel and brake specifically that we
are talking about here.
When we discussed previously the existing joint venture--
and it happens to be between Messier and BFGoodrich--it is on
wheels and brakes. But that has a very significant effect.
A landing gear is designed 18 months before a wheel and
brake is really configured. In a post-merger world, BFGoodrich
and Messier will be predisposed to configure the landing gear
to suit their wheels and brakes. That is how we will be
precluded----
Senator DeWine. Excuse me. Maybe we will put that chart up.
Anytime anybody as they are testifying wants one of their
charts up, just let me know because I think it may be helpful
as we have this discussion.
Mr. Montalbine. If you look at the lower half of the chart
in the post-merger world, let's say that exists, and there is
an existing wheel and brake joint venture between Messier and
BFGoodrich, and it is on the A-319, the A-320, the A-321, the
A-330, and A-340 programs, it would be in their best interests
to configure the landing gear for their equipment. And there is
gaming that can occur, ways to configure the interface points,
the size of the axle, the size of the equipment, to preclude
our wheels and brakes and favor their wheels and brakes.
In the next year and a half, there will be about six major
programs that will be let in as integrated landing systems--the
A-3SX, the AS-400, the Embraer 170, the Bombardier 90-passenger
jet--and those systems will require a single supplier to be
able to integrate and provide a landing gear, wheel and brake,
and brake control.
In the post-merger world, where would AlliedSignal team? We
couldn't team with Messier. They have their own wheel and brake
company. We couldn't team with BFGoodrich. They have their own
wheel and brake company. And as I stated before, we did attempt
to look at Liebherr--and there are other smaller mom-and-pop-
type, build-to-print landing gear companies. They lack the
adequate design, knowledge, and expertise to develop structures
for airplanes like the A-3SX, an 800-passenger size aircraft.
Very, very large structure. And even if they do have some
moderate design capability, they lack the manufacturing
facilities for that.
So we will not be able to compete on any of those new
programs that are coming down. Over time our market share will
drop. We will be forced to just focus on the products that we
have now in production, and eventually we will be forced to
exit the business.
Senator DeWine. Mr. Oliver, do you want to comment on that?
Mr. Oliver. Let me comment on part of it because it----
Senator DeWine. Sure.
Mr. Oliver. Which is that if I were doing this chart, I
would have drawn it differently, and I would have drawn it with
each of these at half the size they are to represent market
share and to show that currently this company has half the
market share, say 46 percent in the world. And we are talking
these two being half that.
Senator DeWine. Excuse me. I want to get my statistics
correct and make sure I have got it down. The total market
share worldwide is what?
Mr. Oliver. With respect to military.
Senator DeWine. OK. Oh, we are talking about U.S. military?
Mr. Oliver. No, no. Military, period. I am interested in
U.S. military.
Senator DeWine. Wait a minute. Which?
Mr. Oliver. I am interested in----
Senator DeWine. I am just trying to----
Mr. Oliver. I am interested in market share of U.S.
military.
Senator DeWine. U.S. military market share. OK. Give me the
figures.
Mr. Oliver. And this would be half, and these would be a
quarter. And so now what you would end up with----
Senator DeWine. Total sales, what you are saying is total
sales, they have half the market now--half the U.S. military.
Mr. Oliver. And this will have half.
Senator DeWine. OK.
Mr. Oliver. So that is the way I would have drawn it if I
were making the same chart.
Senator DeWine. The size would be different in the boxes.
OK.
Mr. Oliver. Yes, sir.
Senator DeWine. Anything else you want to add to that?
Mr. Oliver. No, sir.
Senator DeWine. Mr. Montalbine, you noted that individuals
at Hill Air Force Base expressed concerns with the merger. Do
you want to expand on that? And then I want to give Mr. Oliver
a chance to follow up with that.
Mr. Montalbine. Hill Air Force Base is responsible for
predominantly all of the overhaul and maintenance for landing
gears and wheels and brakes on military aircraft. Several
people--John King in particular, a key individual in that base
has expressed in a written affidavit that they opposed this
merger based on the anticompetitive effects that they foresaw.
The ability--or the fact that they would be held hostage with
regard to spares pricing, and they would have no alternative
source of that material.
Senator DeWine. Mr. Oliver, do you want to comment on that?
Mr. Oliver. Yes, sir. I don't know him, but it is difficult
for an individual at that level to have access to all the
information that you might have in an office dedicated to
looking at these things.
Senator DeWine. OK. Let me ask you a question, Professor.
On its face, this merger appears to be troubling. Either we
have a three-firm market shrinking to two, or a two-firm market
shrinking to one, depending on how you look at it. You
certainly appear to believe that this raises significant
competitive concerns, but why hasn't there been, in your
opinion more objection to the deal? And why hasn't the FTC
pursued a case? How do you explain that.
Mr. Elhauge. Well, I am not entirely sure. I think the
overall answer is that the FTC exercises prosecutorial
discretion here, so it does not challenge every merger and does
not have to challenge every merger that violates the statute.
It has scarce enforcement resources. It has to allocate them in
the way that it sees fit, and I don't know what competing
demands there might be on their time.
Here there are a couple of factors that it might well have
looked at under standard policy. One is that we have private
litigants in this case who are bringing an antitrust
enforcement action, anyway. So if you are sitting in the FTC,
it might make a lot of sense to say we will go after some other
merger and allow the private parties to fight this one out in
court and save our personnel for something else.
Second, I think the FTC does rely on buyer complaints and
in this case on the absence of Boeing's complaints, which for
the reasons I indicated previously I think to the extent it is
relying on that, it is over-relying. Really, they are not--a
lack of complaint by Boeing is not nearly as significant as the
market structural analysis is, and if there are reasons to
doubt it and the fear that such a policy would lead to general
over-concentration.
But I would note that because of all these concerns about
whether FTC non-enforcement really means anything, the FTC
itself in the letter about this merger and as a general matter
of policy says that its decision not to go after a merger does
not mean the merger is not anti-competitive, and it always
reserves the right to intervene later in any merger if further
information develops. And Congress has itself passed a statute
to indicate that judges should not shy away from enjoining
mergers of private litigants even though the FTC has decided
not to pursue the matter.
Senator DeWine. Mr. Reuther, I imagine that in your time at
the UAW you have seen too many plant closings. Can you describe
briefly the impact that a closing like this would have on a
community and how long it would take to recover the economic
benefit of those jobs? I mean, you know the type jobs we are
talking about. You know what the basic pay is.
Mr. Reuther. Well, for the workers involved, typically,
especially if you have an older work force, they can experience
unemployment for lengthy periods of time. And even when they
are able to find new employment, typically, it is at much lower
pay, without the same type of benefits.
In addition, when you have job loss of these magnitudes,
the entire community suffers; businesses in the area that
depend on people having good-paying jobs to buy products, the
local school system can suffer. It can have a ripple effect
throughout the entire community that can last for quite some
time.
Senator DeWine. Let me ask you another question. We all
know there has been a significant decrease in the defense
budget, and we know that some mergers are certainly necessary.
Let me ask you, has the UAW opposed all of the mergers in
the defense industry or have there been some that you did not
oppose?
Mr. Reuther. We do not oppose mergers per se. We always
look at them on a case-by-case basis to see whether, as a
result of the merger, will the workers be in a stronger
position in terms of maintaining their jobs or are the mergers
likely to lead to the layoff of a lot of the workers?
In the nondefense area, the most recent major example,
Daimler-Chrysler, we did not object to that merger. I would
note that shortly after that was announced, the CEO's
immediately made announcements that there would not be any
plant closings or layoff of Chrysler workers in this country.
In contrast to the statements we heard today, they didn't say,
``Well, no decision has been made. We are going to gather data,
and we will get back to you in 8 months.'' They immediately
were able to make an announcement in a case, you know, that was
a much grander scale than the merger here.
Also, on each merger case, we look at the operations of the
companies involved to try and make our own judgment about
whether the company is going to be planning to consolidate
operations. Taking the Daimler-Chrysler case, it was pretty
clear that their lines did not directly compete, so that it was
not likely to lead to consolidations. In this case, as we have
heard from the testimony before, they have been planning a
closure of the Cleveland facility for some time, and there has
not been any dispute about the impact on the AlliedSignal
facility in South Bend.
So it is based on the specific facts of this case that we
think a merger is not in the interest of the workers.
Senator DeWine. Mr. Linnert, what about a potential sale to
AlliedSignal? There has been a lot in the press about this.
Apparently, they have made an offer.
Mr. Linnert. They have not made an offer.
Senator DeWine. All right. What about if they do make an
offer? What if you make the decision that you are going to
close this facility? You are certainly not just going to close
it up and eliminate competition. You are going to put that on
the market, I assume.
Mr. Linnert. Let me put in context what has been offered,
since you asked.
What AlliedSignal has offered was to buy the Cleveland
Pneumatic Company or Menasco. They offered to buy Menasco 2
months after our merger was announced. They called the Coltec
CEO and offered to buy his entire landing gear business in
exchange for stopping their efforts at DOD and FTC to block the
merger. He told him he was not willing to sell his landing gear
business, which is more than just facilities. It is the entire
profitable business to them.
What Allied has offered since then is to buy the entire
Cleveland Pneumatic Company, which is the Goodrich landing gear
business. That business is not for sale, just as Coltec's
landing gear business is not for sale.
So for someone to offer to buy our entire landing gear
business, it just makes no sense to us, and we will not do it.
Senator DeWine. Mr. Montalbine, do you want to respond to
that in any way?
Mr. Montalbine. Well, we have, as Mr. Linnert had said,
we----
Mr. Linnert. Senator, while he is thinking of his answer,
may I have a few minutes later on to address some of these
other points, if that is----
Senator DeWine. Oh, we will give you all the time you want.
Mr. Linnert. All right. Thank you.
Senator DeWine. You just kind of raise your hand or give me
a signal, and we will just kind of do it. We are pretty
informal here, and we will take all of the time it takes today.
Good ahead, sir.
Mr. Montalbine. AlliedSignal has offered to buy the
Cleveland plant in order to remedy--or the Menasco plant--in
order to remedy this anti-competitive situation that----
Senator DeWine. The plant.
Mr. Montalbine. Well, the business. I am sorry. The
business. The Cleveland Pneumatic's business or the Menasco
business in order to remedy this situation, subject, of course,
to due diligence. We have not made a monetary offer. We need to
go through that process. But, again, as was indicated, we have
been rebuffed and told that the business was not for sale. We
are still willing to do that. We are still willing to go
through that process, and it is just a matter of BFGoodrich
allowing that to continue.
Mr. Linnert. May I speak to that?
Senator DeWine. Sure.
Mr. Linnert. Let us be real clear about what has been
offered. They have offered to buy an entire business. That is
commercial programs, regional programs, business programs,
military programs. That is what makes up both those businesses.
Those businesses are not for sale, as we have said.
In settlement discussions with AlliedSignal, which were
made public yesterday, what AlliedSignal was willing to
discuss, was having returned to them the military programs that
they sold to Coltec in 1995. That would be several programs and
some equipment, no facilities, no business in regional business
or commercial.
Mr. Montalbine. We also offered to buy something less than
the entire CPC business. And there was discussions about the
factory that is based in Cleveland less than the Tennessee
facility, and that offer also stands.
Mr. Linnert. Again, our business is not for sale. What we
offered to sell back to them was just the military programs
that they owned when they exited the business--those programs
and the equipment that they sold to Coltec in order to service
those programs. That was on the table, not an entire business,
and we just will not sell it. It destroys the reason of why we
are doing this merger. We just will not sell an entire
profitable business.
Senator, could I take a few minutes----
Senator DeWine. Mr. Linnert, you can take your time now and
go right ahead. You wanted to respond, apparently, to a few
other comments, and you go right ahead.
Mr. Linnert. Just to help with the understanding. We have a
chart on the military----
Senator DeWine. OK. We will put the chart up.
Mr. Linnert [continuing]. Landing gear business. And what
we tried to show was here, currently, are folks who are in the
landing gear supply business for the military, and we tried to
list the programs on the left and then the names of the
companies across the top. The flags merely show what country
they are from. I just wanted to put that up to show that there
is a more vibrant----
Senator DeWine. Mr. Linnert, I hope people's eyes are
better than the Chairman's eyes. That is all I have got to say.
Do a good job describing it because I cannot see it very well.
Mr. Linnert. The flags just indicate a number of different
suppliers.
Senator DeWine. I can see the flags. It is the rest of it I
cannot see.
Mr. Linnert. I think, just to finish that one thought, and
I will get off that one, the one thought. In the military
business, the data rights to the landing gear are owned by the
military. They can choose who they want to provide that landing
gear. Once you get past the people who supply an entire landing
gear design, if you look at the people who supply components to
that, the pieces and parts of it, there are 25 or more
suppliers. This is something where the military owns the data
rights. There are a number of people who can supply military
landing gear. It is not a two-to-one merger.
In the commercial markets--there was a lot of discussion
about this three-to-two--in the large commercial markets, the
way these markets work, take Boeing as an example, Boeing, in
cooperation with the landing gear manufacturer, designs the
landing gear. Boeing owns that design. Boeing can choose to
have, whether it is BFG, Coltec or Messier-Dowty, Coltec can
choose who they want on any of their programs. They have that
same choice after the merger. Admittedly there are two large
commercial suppliers.
If they ever get to the point where they think they are not
getting a competitive, high-quality product from those large
commercial suppliers, it will be their going forward plan to
incentivize that next tier of suppliers to come up into the
large commercial market. The reason there are not more up there
is what we have said before. There has been this declining
production in the commercial and military markets.
So, again----
Senator DeWine. Do you think that is practical?
Mr. Linnert. To incentivize others? Absolutely. If Boeing
is dissatisfied with its suppliers, it will make more--it will
create and enhance or give the opportunity to more people to
get into that business. And the reason I say that is----
Senator DeWine. What if the U.S. Government becomes
dissatisfied?
Mr. Linnert. The same with the U.S. Government on the
military side. Right now, as you can see from that chart, the
military currently buys landing gear from a number of different
suppliers.
Let me just finish the thought with Boeing, though, please.
A comment was made earlier about Boeing's support for this
merger being obtained with a side payment. What I think that
oblique reference to is Boeing has a program whereby they deal
with their suppliers, and as Boeing competes for a worldwide
share of commercial planes with Airbus, Boeing does have a
program of trying to have their suppliers become lower cost and
more efficient. That is what has driven the consolidation in
this business.
Boeing has a program of asking its suppliers for discounts,
in terms of the products they supply to them. It has got
nothing to do with a side payment from any one company. It has
to do with a program by Boeing to become more efficient and
cost competitive.
In terms of Airbus, one of the goals of this merger is for
us to grow. This merger is not about shrinkage. The BFGoodrich
Company wants to grow. As I mentioned, we would have 27,000
employees worldwide. We intend to continue to grow in both our
aerospace and chemicals business, as well as industrial
products, which we will get through the merger.
This merger is anything but anti-competitive. If it was,
the FTC and the DoD would not have come to the conclusions that
they have come to. In their process, they do a very good
professional process in the course with their merger
guidelines. What was different here is Allied and Crane kept
raising arguments during the process, as was their right to do.
DoD and FTC considered all of those arguments that were
presented by Allied and Crane, and even with that lengthened
scrutiny, came to the same conclusion. This merger is not anti-
competitive.
Senator DeWine. Anything else you want to comment on?
Mr. Linnert. Let me look at my notes real quick, Senator.
Senator DeWine. Sure. Take your time.
Mr. Linnert. There was a comment about the integrated
systems market and Allied being foreclosed--its wheel and
brakes facility going forward.
Two thoughts there. The one thought was that somehow this
merger will cause loss of jobs in South Bend. We disagree with
that. The reason we disagree with it is AlliedSignal is
currently on 9 of 13 Boeing programs with wheel and brakes and
6 of 11 military programs. Once you are on those programs, once
you are certified on those programs, you are on those programs
for the life of the plane, however long that program is in
existence.
The work that is currently being done in South Bend will
continue for a long, long time. Now, the competition is for new
programs. The jobs I mentioned that we have added in Ohio over
the past 2 years, the 200 jobs in aerospace, principally have
come at the Troy, OH, wheel and brake facility. One-hundred-
and-twenty-some of the additional jobs have come at that
facility. Why? Because we have been competing more vigorously
with AlliedSignal in terms of winning new competitions for
wheels and brakes.
Again, that is a competitive issue. We are happy to compete
with that. But the annuity part of it, the programs they have
now are not impacted by this merger. Wherever they are
certified, they will keep making the wheel and brakes.
Competing going forward, we are glad to do that.
Now, the argument that they are making is there is an
integrated system market out there where Goodrich will favor
its wheel and brakes over Allied wheel and brakes in putting
together a package. Two thoughts to that.
First, there is a strategic alliance agreement that Allied
has with Coltec in which they will team to put in bids for
integrated landing systems. We succeed to that agreement. We
will honor that agreement. We have told Allied we will honor
that agreement with all appropriate safeguards with respect to
any proprietary knowledge. We have offered to let them take it
back, but we will honor that agreement through its term.
Second, the fact is there is really no integrated landing
system market today. During the first 5 or 6 years of that
agreement--and it is a 10-year agreement. It is about halfway
through--there were a couple of programs that were bid. There
is no large commercial integrated landing system market today.
Senator DeWine. Mr. Oliver, you testified why you did not,
grossly summarizing here, why the Defense Department did not
have a problem with this merger, and you gave a number of
reasons. What is the advantage, though, of this merger? What
does the Defense Department pick up by this merger? How are you
better off? It is a different question.
Mr. Oliver. Yes, I know it is.
Senator DeWine. I'm not saying that should be your
standard, but I am just curious. What do you pick up, if
anything, from this thing?
Mr. Oliver. Let me preface that by saying that we use the
standards I said. So I am not sure--we did not look at that, of
what we pick up, we picked up. I mean, that was not part of it.
I will give you my personal perspective, which is really--
--
Senator DeWine. Excuse me. So, first of all, the Defense
Department, what you are saying is--I want to make sure I
understand--you did not, in your study, because that was not
part of what you do, come up with anything that was positive
about this.
Mr. Oliver. The industry----
Senator DeWine. Now, what you are going to do is give me
your own opinion, which I appreciate it, and I welcome.
Mr. Oliver. Yes. Because from our perspective, if the
industry proposes to do something, it is our goal to look at it
and see if this does the Defense Department harm, and that is
particularly interesting.
In this particular aspect, it looks to me as if you end up
with a company which is a much stronger competitor.
Senator DeWine. And why is that?
Mr. Oliver. Because you end up with two companies in the
market which have nearly the same market share, and are well
capitalized and have most of the business; in other words, you
have two good competitors.
Senator DeWine. OK.
Mr. Oliver. And I like to have two strong, but I am not
saying that was not the situation before. I do not know what
the situation--I am saying----
Senator DeWine. Right.
Mr. Oliver. When I look at what the situation is coming to,
I said I still have two strong competitors. That is good.
Senator DeWine. OK. But you are not really saying, are you,
that, as a basic principle, it is better to have two
competitors than three?
Mr. Oliver. No, sir. Absolutely not.
Senator DeWine. I mean, they are all pretty strong. They
all three have a fairly good market share at this point. So you
go from three that are players to two that are players, right?
Mr. Oliver. A difficult--that is part of the reason we did
not look at that specific problem.
Senator DeWine. All right. I appreciate that.
Professor, do you want to comment on that? I see you making
some notes there and nodding your head.
Mr. Elhauge. Yes. I would like to comment on that and a
number of other items.
Senator DeWine. You go right ahead.
Mr. Elhauge. One, there is a general argument being made
that because of declining market demands producing industrywide
overcapacity, a consolidation is merited and thus justified.
That is just contrary to antitrust theory and economics.
Overcapacity is not a justification for a merger. Competition
will drive out overcapacity itself. If the firms have too much
capacity, it is better to let the competition decide which
capacity gets cut rather than have an agreement decide. Because
when you have a merger and agreement, you never know whether
the capacity is being cut because of an agreement to restrict
output by the merger rather than because competition produced
that answer.
Then as to the claim that going from three firms to two
firms is better because it creates stronger competition, first,
I would note that in the large commercial market, and I
understand the admiral has mainly focused on the military
market, but in the commercial market for large planes, there
will only be one who sells in the U.S. market. But even if you
look worldwide, they will have 70 percent market share, the two
firms combined after this merger, not 50 percent market share.
And as a matter of theory, it is just not true that you
necessarily have stronger competition, even for a market where
both did have 50 percent, than you would have with two firms
with 25 percent and one firm with 50 percent. You are better
off having more competitors, as long as none of them is below
the minimum efficient scale for operating. And there is nothing
to indicate that 50 percent of the entire market is a minimum
efficient scale for a company.
Senator DeWine. There is nothing to indicate that, status
quo, today, that any of the three cannot compete. I mean, in
layman's terms, is that what you are talking or what you mean?
Mr. Elhauge. Yes. Now, there are a number of other things I
would like to comment on, if I could.
One, is the claim that self-provision by the airframe
makers of landing gears is a possibility. They can enter the
market. Now, there is a lot I cannot tell you, because of the
protective order, about the documents. But this and other
things may urge the committee to get the document itself so it
can make up its own mind. But I think that that is completely
wrong. The entry barriers are extremely high.
And if I may offer a homey analogy, this is a lot like
saying to consumers, ``Well, there is a monopoly for cookies
that are pre-made, but you can all make cookies from scratch
yourself. So, really, there is no monopoly at all.'' The fact
that buyers can self-provide something does not mean that a
merger is not anti-competitive. Ever since Adam Smith, we have
known that what makes markets efficient is a division of labor,
so the most efficient producer is making the item.
I have similar reactions, I guess, to the claim that there
is no integrated landing systems market. Again, I do not think
that that is right. I urge the committee to get documents to
decide that question for itself.
Senator DeWine. Say that again.
Mr. Elhauge. I do not think it is right, and I urge the
committee to get documents to decide that question----
Senator DeWine. And the question is what, though?
Mr. Elhauge. Whether there is an integrated landing systems
market. I think there is a demonstrable one. There has been one
on many medium planes, and I think it is clear that the trend
is that there will be on large commercial planes.
On the question of a side payment, again, the committee
should get documents for itself. The only thing I can comment
on, from publicly available knowledge, is that there was a CCIP
price reduction given to Boeing after the merger was announced.
All I was saying here in the testimony is that because of the
possibility of payments, one should not rely excessively on
buyer noncomplaints.
So the analysis for that, and many other reasons, the
analysis to figure out when buyer noncomplaints indicate a
merger is efficient and when it does not, is itself an
extremely complex undertaking. It is easier to figure out just
what the market concentration is.
And when you do review this question more closely, on some
market share information given by the merging parties, I know
they have a tendency to conflate different kinds of gear; nose
gear with the main landing structure, small gears with the
large and medium gears that were talked about here, and
proposals versus actual sales. So all of that should be sorted
out.
Senator DeWine. Mr. Montalbine, as described in the
testimony, AlliedSignal and Coltec currently have a strategic
alliance agreement, which sets out the terms under which
AlliedSignal and Coltec will work together to provide landing
systems.
It is my understanding that Goodrich has sworn under oath
that it will meet all of the obligations between Coltec and
AlliedSignal. And if that is the case, why are you concerned
about the future relationship between Goodrich and
AlliedSignal?
Mr. Montalbine. We looked at the proposal, Senator, that
Goodrich had made. And, essentially, they are asking us to
trust them with highly sensitive competitive data on wheels and
brakes.
In order to do an integrated landing system bid like we
do--if you could put our chart back up--right now with Menasco,
Menasco provides all of their cost data for designing, and
developing and testing the landing gear, and we give them all
of our very sensitive pricing data with regard to the wheels
and brakes. We also give them data, how much we are willing to
invest, what our break-even points are, all of the pertinent
cost data that would be extremely useful to BFGoodrich on the
wheel and brake side.
Quite frankly, we just do not trust them. We do not think
it is a viable alternative. We see no way that we would feel
comfortable, in dealing with a competitor like BFGoodrich,
giving them sensitive data and hoping that, you know, they kept
that data confidential.
In addition, we have no way of knowing that the prices--
look in the post-merger area. We would have no way of knowing
that the prices that we got from BFGoodrich/Coltec now were
competitive. We have no way of auditing them or determining
that we are getting a fair price on landing gear.
I have a couple other points I would like to make here, if
I could, Senator.
Senator DeWine. Sure. Go right ahead.
Mr. Montalbine. I think it is easy to be inadvertently
misled, and everyone is focusing on who can manufacture landing
gear.
Mr. Oliver indicated, and rightfully so, that the F-18 C/D
right now is being manufactured by Messier-Dowty. That is not
really what the issue is here. The issue is the eroding design
capability in this country. The F-18 C/D landing gear was
originally designed by CPC. The C-17 was designed by CPC. The
F-18 E/F was designed by AlliedSignal in 1992. Those landing
gears right now are made by other companies.
Who can make a landing gear and what their capability is is
important. But the more important fact is, in the future, when
large commercial transport or military aircraft or transport
aircraft are envisioned to be built, who is capable of
designing that equipment? And the answer is it comes down to
three companies: CPC, Menasco and Messier-Dowty. And that is
what needs to be focused on. That design capability is eroding
significantly, and that is one of the major barriers to entry
in this business.
If you had a spare $300-or-so million to facilitate a plant
and buy all of the tooling and equipment, which is about what
it would cost to upgrade a plant and go into the business, your
real obstacle would be finding the design engineers and the
talent. You do not learn how to design landing gears in
engineering school. You hire people with the basic rudimentary
structural and dynamic capabilities, and those people learn
over time, and it takes many, many years and many, many
programs for that reputation to be assured with companies like
Boeing or Menasco.
To the point that the future is not integrated landing
systems, again, I strongly urge the committee to look into the
facts. There are currently 12 programs, either in the
conceptual stage, pre-production or production phase, that were
all let as integrated landing system contracts. It is clearly
the wave of the future. And the prime reason for that is that
if you look at the OEM's ability to oversee and ride herd, as
Mr. Oliver said, on subcontractors, that ability is eroding
significantly.
Boeing has 220 people in their landing gear group at the
beginning of this year, and they are laying off anywhere from
six to seven a week for the entire year. Boeing has announced a
reduction in force of 45,000 people. That capability to ride
herd, and oversee and participate in landing gear design is
significantly eroding, and this situation will only make it
worse.
Finally, I would just like to be clear on one point.
AlliedSignal is committed to buy all or part of the Cleveland
Pneumatic business. And maybe I was not clear before. I think
the fact that BFG will not sell it, and even if they plan on
closing it, will not sell it, is evidence to the fact that the
value that it has to them and their intention to really grab
hold of this monopoly, and that is something that is of real
concern to us for the long-term viability of the wheel and
brake business.
Thank you.
Senator DeWine. Mr. Oliver, you state in your testimony
that the Defense Department would be monitoring developments in
the wheels and brakes market and that you would, in fact, take
action if you spot any discriminatory behavior. What are the
types of steps that the Pentagon can take if it finds such
behavior and that you might take?
Mr. Oliver. There are several, sir. For example, recently
in the ship business for the Navy, where we felt that the
people had put together a dream team of all of the people who
were the real competitors, both technically and politically, we
just simply told them they could not do it. And we went in and
renegotiated. I renegotiated two new teams with them.
Subsequent to that, Dr. Gansler, the Under Secretary of
Defense for Acquisition and Technology, put out a memorandum on
January 5 on anti-competitive teaming, in which we talked about
this particular point and talked about teams becoming too small
and talked to our people about consent to subcontract, et
cetera.
And I wrote a memorandum on May 5, it turns out, on
subcontractor competition, in which I talked to everybody about
the necessity to watch this as we go down in number of
suppliers.
We also have the authority, in the event it does not work,
to bring that to the Justice Department's attention for
violation of antitrust law. We also can develop a second
source, and we can also, since it is our drawings, provide them
to other companies and have them made.
With respect to that, there were some references to the
joint agreement between BFGoodrich and Messier on wheels and
brakes for Airbus aircraft. And I have a memorandum on that,
essentially, which Dr. Gansler signed, to BFGoodrich saying,
``While this does not adversely affect competition involving
this Department, the Department would be considered, however,
if this agreement were extended to include other aircraft and
that extension could affect competition for military
programs.''
``The Department would also be concerned if BFGoodrich and
Messier-Dowty collaborate in areas that have been the subject
of this merger review.''
Consequently, we requested them not to do that and said we
would be watching them and asked them to reply in writing. So
that is reference to that issue.
Mr. Reuther. Senator.
Senator DeWine. Mr. Reuther.
Mr. Reuther. The fact that the Defense Department may
monitor the situation in the future is really not going to help
the workers very much at the Cleveland plant or in South Bend
if they lose their jobs in the near term. It becomes impossible
to unscramble the egg and get these people their jobs back or
to repair the damage to the communities. It is much better
before that damage happens in the first place.
Senator DeWine. Mr. Linnert.
Mr. Linnert. Senator, a couple points. The question came up
about design capability eroding, engineering. You asked the
Department of Defense what they gain from this merger.
I would like to point out something that Senator Kohl said.
Coltec is a highly leveraged company. Coltec has not, on its
own, been able to invest and reinvest significantly in new
programs, new technology, new facilities. One of the good
things about this merger is, on a combined basis, we will have
a stronger balance sheet. We will be a higher quality supplier.
One of the things Boeing, DOD, all of our customers look
for is a stronger partner going forward. That is one of the
benefits of this merger, and it is a benefit strategically of
why we are doing it.
I said before customers are our life blood. If we cannot
partner with them to provide high-quality, cost-effective
products, we are not going to be in business. That is what this
merger is about, and that is what we tend to achieve.
I find it also interesting the comment about Boeing and
Boeing's support for our merger as being somehow tainted or is
not as credible as it should be in terms of looking at
competition. Yet when AlliedSignal and Honeywell announced
their merger, that is one of the first things that they
announced; that Boeing supported their merger. And, again, when
you look at some of the aerospace markets that result in that
merger, that deserves a close look, and that is probably why
they asked Boeing ahead of time.
So I find Boeing's support, as a buyer, as a disciplinarian
in the markets, will be very key to this transaction, just as
they must feel it is very key to theirs.
Mr. Reuther. Senator.
Senator DeWine. Mr. Reuther.
Mr. Reuther. If I could respond. We are hearing, on the one
hand, that this merger is going to create a stronger company
that will be able to have more investment and create more jobs,
and yet earlier we heard that they would not know for 8 months
or so, after they saw data from Coltec, what their options
would be and whether they are going to close the Cleveland
facility or not.
And I would just ask how can those two statements both be
true? It seems to me that they are saying, well, there may be a
stronger company for investment elsewhere, but not in
Cleveland.
Senator DeWine. Mr. Linnert, do you want to respond to
that?
Mr. Linnert. Yes. Absolutely.
BFGoodrich is a company across a large--that operates
businesses across a wide variety of markets. We will be a
stronger company going forward. Clearly, the merger is about
building a stronger platform.
But it is our responsibility, when we close the merger, to
take a look at those areas where efficiencies may be able to be
obtained. We mentioned earlier the classic example, when you
merge two companies, there is no need for two general counsels
going forward, there is no need for two CEO's going forward.
The staff headquarter's functions are always initially looked
at, but we do need to look at the operations. It is not just
landing gear, it is also sensors that we will take a look at.
But, again, you look at the combined facilities operations when
you have data available.
To ask us to make a decision prior to that time is
premature. It is just pure premature decisionmaking. We have
said, as strongly as we can, we are going to study this, but no
decision has been made.
Now, one of the things that is going on in Cleveland is we
have talked to the work force in Cleveland about different
forms, changing the manufacturing processes, the work
practices. There is dialogue going on about that. That dialogue
would not be taking place if we had written Cleveland off. That
is to improve Cleveland, to make it better, not to close it.
Senator DeWine. I want to thank--Mr. Reuther.
Mr. Reuther. If I could respond, again.
Senator DeWine. Sure.
Mr. Reuther. And I would again ask, if Daimler and Chrysler
could immediately make an announcement about no layoffs in the
United States in that merger, which is much larger, I find it
difficult to understand why a similar commitment cannot be made
in the context of this merger.
And in terms of the comments about efficiencies and not
needing two CEO's or two general counsels, we tend to notice
that the CEO's and general counsels tend to get golden
parachutes. And if they are willing to provide the same type of
commitments to the rank and file workers in the Cleveland plant
and in South Bend, we would be happy to accept that type of
offer.
Senator DeWine. On that note, we will----
Mr. Linnert. Senator.
Senator DeWine. Go ahead, Mr. Linnert.
Mr. Linnert. The commitment to jobs, I am glad Chrysler
could make that kind of commitment. AlliedSignal and Honeywell
could not make that kind of commitment and neither can
BFGoodrich. What we can commit to is a responsible study using
all data available. We will do that. And as Mr. Reuther
probably knows, whenever there have been reductions in force
for any reason at Goodrich over the past few years, appropriate
severance mechanism tools were used.
Senator DeWine. Well, I think this has been a very helpful
hearing. Any additional comments anyone feels they have to
make? If not, we will--Professor, are you OK over there?
Mr. Elhauge. Well----
Senator DeWine. You look like you are ready to go. I just
did not want to shut you off.
Mr. Elhauge. I guess I will say a few things, then.
One is that that this merger is being justified as
efficient, and it is hard to see how it could be so justified,
if they have not studied the question, as they say today.
Second, it is just common sense, the undisputed fact is, at
the end of the day, we have two firms in this market
financially related to each other with a joint venture. And I
would just submit that common sense indicates that is not a
competitive market.
Senator DeWine. Let me say I want to thank you all again
very much. Let me say I think this has been a very helpful
hearing. I appreciate your patience. I appreciate your time. I
think this has provided the subcommittee with really some
valuable insight into the competitive implications of this deal
and the impact it may have on the national security of our
country.
This subcommittee will continue to monitor and provide
oversight as the defense industry continues to consolidate
because it is critically important that these mergers are
thoroughly and carefully examined.
Specifically, I might add, that we look forward to
discussing this merger, in particular, in more detail in
private with the Defense Department. And maybe we can follow
up, Mr. Oliver, with some of the things that we could not get
into in a public hearing today.
I must say, though, in conclusion, that I am disappointed
in the amount of information we received today about the
prospects of the Goodrich Cleveland plant. I had hoped, and
frankly had expected, to hear a clear, candid explanation of
the Goodrich plans for the Cleveland facility.
While I think that Mr. Linnert was able to provide a little
more of an explanation, I am still not satisfied. The people of
northeast Ohio, the Goodrich workers, their families, deserve
an answer, and they deserve an answer as clearly as possible
and as soon as possible. And I am going to continue to keep
working to see that they get that answer.
Let me, again, thank all of you very much. Our hearing is
now adjourned.
Thank you.
[Whereupon, at 4:14 p.m., the subcommittee was adjourned.]