On May 29, 2015, the FTC filed a complaint against Steris Corporation and Synergy Health plc alleging their proposed merger would substantially lessen competition in a market that included the sterilization of medical products.  On September 24, 2015, the Court ruled in favor of the parties, denying the FTC’s motion for a preliminary injunction and allowing the parties to consummate their transaction.  The case is interesting not so much because the FTC finally has lost a merger case but because it brought the case at all.

Background

There are three methods of sterilizing medical products used in the United States:  gamma radiation, e-beam and ethylene oxide gas.  Steris is one of two providers of gamma sterilization services in the United States.  Sterigencis is the other.  Sterigenics also has two United States e-beam facilities.  Together, the two companies control about 85 percent of the United States sterilization services.  Synergy is the largest provider of e-beam series in the United States.  Synergy has a large number of gamma facilities worldwide and operates the only x-ray sterilization facility in the world.

In its complaint, the FTC alleges that Synergy had been planning to enter the United States with an emerging x-ray sterilization technology that “it hoped would disrupt the current duopoly in the U.S. contract sterilization market…”  The FTC alleges that this acquisition of a “potential competitor” violated Section 7 because the relevant market is highly concentrated, the competitor “probably” would have entered the market, its entry would have been procompetitive, and entry barriers are high.

Synergy’s Analysis

In a very thorough opinion, the court disagreed with the FTC’s evidence.  The court found that there was ample evidence to conclude that Synergy would not enter the United States.  Synergy could not achieve the targeted IRR, ROCE, cash payback or revenue commitments from customers.  Synergy expected an IRR of 15% and could only project 3% on the project.  It could not secure any commitment from customers to buy the product even if the projects were built.  Customers would have to pay hundreds of thousands of dollars and complete years of testing under FDA rules to move products from approved gamma sterilization to x-ray sterilization.  Synergy needed to obtain a sterilization device that omitted both e-beams and x-rays for the project to function properly.  It found one, but that that turned out to be inadequate, and the only other one that might have worked was significantly more expensive and may not have provided sufficient capacity on the e-beam side.  Synergy owned an x-ray facility in Switzerland that operates at only 25% capacity most of which was for non-medical purposes.  And the cost of the plants would consume most of Synergy’s development budget for multiple years.  It was an untested technology, with high build-out costs, that would require a large capital expenditure, and no proven or even expected revenue support.

The FTC argues that Synergy was poised to enter the market and the merger caused it to abandon its effort.  In September 2014, Synergy had effectively green lighted the expansion; the deal was announced in October 2014; and subsequent to that agreement, the parties engaged in an elaborate subterfuge to make entry into the States seem much more impossible than it really was.  In response to the evidence that the decision was thoughtful, the FTC contends that “documents created and testimony given after the merger was announced should be viewed with a high degree of skepticism.”

Analysis

Given its theory of harm, in order to win, the FTC had to persuade the judge all of the time, effort and analysis that went into deciding whether to enter the United States x-ray sterilization market was concocted for the sole purpose of facilitating the merger of the parties.  And therefore if the merger is abandoned, Synergy will in fact enter the market.

Preliminarily, it is possible that Synergy had the internal discipline to set about manufacturing documents and data that internally demonstrated the project was a loser.  It is equally possible that Synergy recognized the problem with abandoning U.S. x-ray immediately upon announcing the deal.  (In fact, if that had happened, they likely could have been charged with illegal market allocation in violation of Section 1 of the Sherman Act, a criminal violation.  If you agree to abandon U.S. x-ray, we will pay you some large premium for your business.)  The prospect of that prosecution could very well have inspired their vast diligence in “manufacturing” this evidence.

Having said that, that is a lot of manufacturing, and a lot of people would have had to been in on the scheme.  And had any evidence appeared of that motive, a smoking gun if you will, the deal would have been dead, and the parties looking at a criminal probe from the other U.S. antitrust agency.  Quite telling to me are the customer testimonies.  If x-ray was such a promising technology both medically and economically, why wasn’t it thriving in Europe?  And why weren’t the customers willing to step up to the plate and sponsor it?  Why were they willing to testify on the parties’ behalf that they would not have used the technology even if it had been developed?  It is against their self interest to do so if access to the technology would have benefitted them.  Indeed, the court noted the savings of switching, realizeable after years of testing, the cost of which was not included in the analysis, would result in cost savings of 1 percent.  And the idea that these companies, these large sophisticated companies with as much experience with Section 7 as actual parties, would have known the complete range of responses they could have made in the process and would have stood up for themselves.

This case was just weak.  An elaborate ruse was possible, but improbable.  Among other things,Twombly has empowered judges to reject implausible conspiracies, and this cases is basically nothing more than that, an implausible conspiracy.

The FTC should have simply referred the case to the Justice Department for criminal investigation.  If the parties had in fact agreed to drop U.S. x-ray in exchange, say, for an inflated acquisition price, and the documents and testimony were in fact fabricated to hide the crime and facilitate the transaction, Justice would have found evidence of such an agreement in the emails and other data, and prosecuted.  There would be some pre-deal deck somewhere showing much better rates of return, profit in the EU, or customer interest.  And if they found no such evidence, it is highly likely that none exists, and the decision to drop U.S. x-ray was likely a legitimate business decision.

Conclusion

This deal may harm “potential competitor” challenges in the future insofar as the agencies may view the decision as a repudiation of the theory.  On the other hand, it may make the next prosecution of such a case better.

What I think really happened here is the front office listened to staff’s theory of collusion—that the parties had to have agreed, had to have created all these documents and evidence post hoc, in order to defend the deal, and that any objective judge would find all of this post-announcement material phony.  The willingness to believe such a conspiracy comes from a lack of exposure to how large corporations with many people most of whom don’t think twice about what they write in a deck or email operate.

The fact is that there is always someone who will write something improvident down in an email.  If there are none, and the evidence is plausible that the parties did in fact thoroughly analyze and come to a decision unilaterally, it’s probably the case.

What they really needed was that smoking gun.  Absent that gun, they should have sent it over to Justice to die a peaceful death.