General Dynamics Corporation; Analysis of Agreement Containing Consent Orders To Aid Public Comment, 787-789 [E6-22644]

Agencies

• FEDERAL TRADE COMMISSION

[Federal Register Volume 72, Number 4 (Monday, January 8, 2007)]
[Notices]
[Pages 787-789]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-22644]


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FEDERAL TRADE COMMISSION

[File No. 061 0150]


General Dynamics Corporation; Analysis of Agreement Containing 
Consent Orders To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreement.

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SUMMARY: The consent agreement in this matter settles alleged 
violations of federal law prohibiting unfair or deceptive acts or 
practices or unfair methods of competition. The attached Analysis to 
Aid Public Comment describes both the allegations in the draft 
complaint and the terms of the consent order--embodied in the consent 
agreement--that would settle these allegations.

DATES: Comments must be received on or before January 29, 2007.

ADDRESSES: Interested parties are invited to submit written comments. 
Comments should refer to ``General Dynamics, File No. 061 0150,'' to 
facilitate the organization of comments. A comment filed in paper form 
should include this reference both in the text and on the envelope, and 
should be mailed or delivered to the following address: Federal Trade 
Commission/Office of the Secretary, Room 135-H, 600 Pennsylvania 
Avenue, NW., Washington, DC 20580. Comments containing confidential 
material must be filed in paper form, must be clearly labeled 
``Confidential,'' and must comply with Commission Rule 4.9(c). 16 CFR 
4.9(c) (2005).\1\ The FTC is requesting that any comment filed in paper 
form be sent by courier or overnight service, if possible, because U.S. 
postal mail in the Washington area and at the Commission is subject to 
delay due to heightened security precautions. Comments that do not 
contain any nonpublic information may instead be filed in electronic 
form as part of or as an attachment to e-mail messages directed to the 
following e-mail box: consentagreement@ftc.gov.
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    \1\ The comment must be accompanied by an explicit request for 
confidential treatment, including the factual and legal basis for 
the request, and must identify the specific portions of the comment 
to be withheld from the public record. The request will be granted 
or denied by the Commission's General Counsel, consistent with 
applicable law and the public interest. See Commission Rule 4.9(c), 
16 CFR 4.9(c).
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    The FTC Act and other laws the Commission administers permit the 
collection of public comments to consider and use in this proceeding as 
appropriate. All timely and responsive public comments, whether filed 
in paper or electronic form, will be considered by the Commission, and 
will be available to the public on the FTC Web site, to the extent 
practicable, at https://www.ftc.gov. As a matter of discretion, the FTC 
makes every effort to remove home contact information for individuals 
from the public comments it receives before placing those comments on 
the FTC Web site. More information, including routine uses permitted by 
the Privacy Act, may be found in the FTC's privacy policy, at https://
www.ftc.gov/ftc/privacy.htm.

FOR FURTHER INFORMATION CONTACT: Christina R. Perez, Bureau of 
Competition, 600 Pennsylvania Avenue, NW., Washington, DC 20580, (202) 
326-2048.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46(f), and Sec.  2.34 of 
the Commission Rules of Practice, 16 CFR 2.34, notice is hereby given 
that the above-captioned consent agreement containing a consent order 
to cease and desist, having been filed with and accepted, subject to 
final approval, by the Commission, has been placed on the public record 
for a period of thirty (30) days. The following Analysis to Aid Public 
Comment describes the terms of the consent agreement, and the 
allegations in the complaint. An electronic copy of the full text of 
the consent agreement package can be obtained from the FTC Home Page 
(for December 28, 2006), on the World Wide Web, at https://www.ftc.gov/
os/2006/12/index.htm. A paper copy can be obtained from the FTC Public 
Reference Room, Room 130-H, 600 Pennsylvania Avenue, NW., Washington, 
DC 20580, either in person or by calling (202) 326-2222.
    Public comments are invited, and may be filed with the Commission 
in either paper or electronic form. All comments should be filed as 
prescribed in the ADDRESSES section above, and must be received on or 
before the date specified in the DATES section.

Analysis of Agreement Containing Consent Order To Aid Public Comment

I. Introduction

    The Federal Trade Commission (``Commission'') has accepted, subject 
to final approval, an Agreement Containing Consent Orders (``Consent 
Agreement'') from General Dynamics Corporation (``GD''). The purpose of 
the proposed Consent Agreement is to remedy the competitive harm that 
would otherwise result from GD's acquisition of SNC Technologies, Inc. 
and SNC Technologies, Corp. (collectively ``SNC''). Under the terms of 
the proposed Consent Agreement, GD is required to divest its interest 
in American Ordnance LLC to a buyer approved by the Commission in a 
manner approved by the Commission within four months of acquiring SNC.
    The proposed Consent Agreement has been placed on the public record 
for thirty days to solicit comments from interested persons. Comments 
received during this period will become part of the public record. 
After thirty days, the Commission will again review the proposed 
Consent Agreement and the comments received, and will decide whether it 
should withdraw the

[[Page 788]]

proposed Consent Agreement or make it final.
    On February 23, 2006, GD entered into a Share Purchase Agreement to 
acquire SNC from SNC-Lavalin Group for approximately $275 million 
(CAN$315 million). The Commission's complaint alleges that the proposed 
acquisition, if consummated, would violate Section 7 of the Clayton 
Act, as amended, 15 U.S.C. 18, and Section 5 of the Federal Trade 
Commission Act, as amended, 15 U.S.C. 45, by bringing together two of 
only three competitors in the market for melt-pour load, assemble and 
pack services (``LAP services'') for mortar rounds and artillery shells 
in the United States and Canada. The proposed Consent Agreement would 
remedy the alleged violations by requiring a divestiture that will 
replace the competition that otherwise would be lost in this market as 
a result of the acquisition.

II. The Parties

    GD is a diversified defense company with leading market positions 
in aviation, information systems, shipbuilding and marine systems, and 
land and amphibious combat systems. General Dynamics Ordnance and 
Tactical Systems (``GD-OTS'') is a business unit within GD that 
manufactures large and medium caliber ammunition and precision metal 
components, produces spherical propellant for small caliber ammunition 
used in various military applications, provides explosive LAP services 
for a variety of tactical missile and rocket programs, and designs and 
produces shaped charge warheads and control actuator systems. GD-OTS 
also maintains a fifty percent interest in American Ordnance, a joint 
venture with Day & Zimmerman, Inc. (``DZI'') formed to operate the 
Middletown, Iowa Army ammunition plant (``Iowa AAP'') and Milan, 
Tennessee Army ammunition plant (``Milan AAP'') under a single entity 
to gain certain economic efficiencies. In 2005, GD had revenues of over 
$21.2 billion, and GD-OTS sold approximately $615 million in munitions 
and propellant.
    SNC develops and manufactures ammunition and ammunition systems for 
Canadian and United States military divisions and law enforcement 
agencies. The company's products include large, medium, and small 
caliber ammunition, propellants, propelling charges and explosives, 
pyrotechnics, and simulated ammunition products for training 
applications. It also provides a wide variety of LAP services, 
including melt-pour. In 2005, SNC garnered approximately $286 million 
in sales, including $136 million from sales within the United States.

III. The Relevant Product Market

    The relevant product market in which to evaluate the proposed 
acquisition is the market for melt-pour LAP services for mortar rounds 
and artillery shells. Mortar rounds and artillery shells are relatively 
inexpensive, mass-produced projectiles employed by infantry troops. 
Melt-pour LAP services are the critical final step in producing and 
delivering mortar rounds and artillery shells to the U.S. military. LAP 
services consist of filling (or loading) the mortar with an explosive, 
trinitrotoluene (``TNT''), assembling the various components to 
complete the munition and packing the rounds for safe shipment to 
various military installations around the world. LAP services other 
than melt-pour or using different explosives than TNT are either too 
expensive or cumbersome for use with mass-produced weapons such as 
mortar rounds and artillery shells. As a result, a five to ten percent 
increase in the cost of melt-pour LAP services for mortar rounds and 
artillery shells would not cause the U.S. military to switch to any 
other type of LAP services.
    The U.S. military contracts with suppliers for its requirements of 
melt-pour LAP services for mortar rounds and artillery shells. 
Contracts for melt-pour LAP services for mortar rounds and artillery 
shells typically are bid out every five years--one-year firm contract 
with four one-year renewal options. The Army is currently in the 
process of awarding two contracts for LAP services--a combined 60 mm 
and 81 mm mortar contract and a 120 mm mortar contract. The next melt-
pour LAP services contracts for mortar rounds and artillery shells will 
not likely be competed until 2011.

IV. Market Structure & Participants

    The market for melt-pour LAP services for mortar rounds and 
artillery shells is highly concentrated. At present, only three 
companies have the ability to effectively supply these services to the 
United States Army: SNC, American Ordnance, and DZI. Each of these 
companies currently contracts with the Army to provide at least one 
type mortar round or artillery shell melt-pour LAP service. SNC's melt-
pour operations are located in its privately-owned facility in Le 
Gardeur, Canada. American Ordnance and DZI both operate melt-pour 
facilities that are parts of Army ammunition plants (``AAPs'') owned by 
the U.S. government and run by private companies. American Ordnance 
operates two such plants, the Milan AAP and the Iowa AAP. DZI currently 
operates the AAP located in Parsons, Kansas (``Kansas AAP'').
    Through its plant in Le Gardeur, Canada, SNC produces large, 
medium, and small caliber ammunition ranging from 155 mm artillery 
shells to small caliber bullets. The company currently provides various 
caliber mortar rounds and artillery shells for the Canadian government, 
as well as 120 mm mortar rounds for the U.S. military. In 2005, SNC's 
Le Gardeur plant produced sales revenues of approximately $45 million 
in propellant, explosives and ammunition.
    American Ordnance is a joint venture owned equally by GD and DZI. 
The companies share equally in the profits of the joint venture, and 
both have representatives on American Ordnance's board of directors. 
American Ordnance, however, has its own management structure, and 
neither GD nor DZI is involved in the day-to-day operations of the 
joint venture. American Ordnance has contracts with the U.S. government 
to operate the Iowa and Milan AAPs through December 31, 2008. The Army 
has recently begun the process of seeking proposals for contracts to 
operate those plants after that date and anticipates awarding the 
contracts by September of 2008, at the latest, to provide sufficient 
transition time if a company other than American Ordnance wins the 
contracts.
    In addition to its fifty percent ownership interest in American 
Ordnance, DZI also operates the Kansas AAP. Future operations of the 
Kansas AAP are doubtful, however, as the plant was designated for 
closure as part of the 2005 Base Realignment and Closure (``BRAC'') 
legislation. The BRAC recommendations call for operations located at 
the Kansas AAP to be moved to other plants beginning in 2008, with full 
closure of the Kansas AAP scheduled to take place by 2011. Therefore, 
although three market participants existed in the most recent round of 
contracting for the provision of melt-pour LAP services for mortar 
rounds and artillery shells, it appears unlikely that the Kansas 
facility will remain a viable alternative for the next round of 
contracting, leaving only SNC and American Ordnance to bid.

V. Competitive Effects

    The proposed transaction raises competitive concerns in the market 
for melt-pour LAP services for mortar rounds and artillery shells 
because, post-transaction, GD would own 100% of SNC, while at the same 
time retaining fifty percent ownership in American Ordnance. The 
competitive concerns

[[Page 789]]

arising from GD having some level of ownership interest in two of the 
three companies currently in the market for melt-pour LAP services for 
mortar rounds and artillery shells are compounded by the fact that DZI 
appears likely to lose access to the Kansas AAP and, thus, may be 
unable to compete for the next round of contracts. This raises the 
likelihood that GD could act unilaterally to raise prices or otherwise 
engage in anticompetitive behavior in the market for melt-pour LAP 
services for mortar rounds and artillery shells. The proposed 
transaction also raises competitive concerns relating to the current 
round of competition for melt-pour LAP services for 120 mm and 60 mm 
and 81 mm mortar rounds.
    Absent Commission action, it appears likely that the only two 
potential bidders for current and future melt-pour LAP service 
contracts for mortar rounds or artillery shells are SNC and American 
Ordnance. With the proposed acquisition, GD has an incentive to act 
unilaterally to raise prices in the relevant product market because it 
will own all of SNC and receive half of the profits from American 
Ordnance. GD would have an incentive to submit bids with higher 
pricing, or other less competitive terms, than SNC would have submitted 
as an independent company because even if GD/SNC loses the bid, it 
would lose to American Ordnance, in which GD shares fifty percent of 
the profits. Therefore, GD would have less incentive to compete 
vigorously for these contracts, because it would benefit financially 
regardless of which company wins the contract.
    The proposed transaction also increases the likelihood that GD and 
American Ordnance could coordinate their competing bids for contracts. 
Through its ownership in American Ordnance, GD would have certain 
contacts and access to competitively sensitive information that could 
facilitate reaching terms of coordination, and the detection and 
punishment of deviations from those terms.

VI. Entry Conditions

    Entry into the market for the provision of melt-pour LAP services 
for mortar rounds and artillery shells appears unlikely to occur within 
the relevant time frame. Establishing a melt-pour operation to 
effectively enter and compete in this market is expensive and time-
consuming, and is unlikely to occur in the next two years, particularly 
because the Army is not planning any new acquisitions before 2011. 
Further, even if a firm were to enter the market, it would face the 
difficult task of winning a bid for a critical product without a 
demonstrated track record of being able to produce and deliver the 
product.

VII. The Proposed Consent Agreement

    The proposed Consent Agreement effectively remedies the competitive 
harm that would likely result from the acquisition by requiring GD to 
divest its interest in American Ordnance, at no minimum price, to a 
purchaser that receives the prior approval of the Commission and in a 
manner that receives the prior approval of the Commission. The proposed 
Consent Agreement requires GD to divest its interest in American 
Ordnance within four months after it completes its acquisition of SNC. 
By requiring the divestiture of General Dynamic's interest in American 
Ordnance to a third party, the proposed Consent Agreement ensures that 
American Ordnance and a combined GD/SNC will remain independent 
competitors in the market post-acquisition.
    Because the Consent Agreement contemplates a divestiture by GD of 
its interest in American Ordnance after acquiring SNC, an order to hold 
the American Ordnance business separate (``Hold Separate Order'') is 
included. The Hold Separate Order requires that GD keep the American 
Ordnance business separate and apart from its other GD businesses, and 
that the company refrain from involvement in the direction, oversight, 
or influence of American Ordnance's business. The Hold Separate Order 
also requires that GD's members of American Ordnance's board of 
managers be replaced with independent managers who are not affiliated 
with GD in any way. GD may not permit any of its employees, officers, 
or directors to be involved in the operations of American Ordnance 
while the Hold Separate Order remains in effect.
    The proposed Consent Agreement also allows the Commission to 
appoint an interim monitor to oversee GD's compliance with all of its 
obligations and performance of its responsibilities pursuant to the 
Commission's Decision and Order. The interim monitor, if appointed, 
would be required to file periodic reports with the Commission to 
ensure that the Commission remains informed about the status of the 
divestiture and the efforts being made to accomplish the divestiture.
    The proposed Consent Agreement includes a provision that requires 
GD to notify the Commission within five days of submitting a proposal 
to obtain the facilities use contract for either the Iowa AAP or the 
Milan AAP, and to provide the Commission with copies of all documents 
submitted as part of the proposal. This notification will allow the 
Commission to consult with the Department of Defense and the Army 
regarding possible competitive concerns that may arise in the future 
should GD be awarded the contracts to operate these melt-pour 
facilities in addition to owning SNC.
    The purpose of this analysis is to facilitate public comment on the 
Consent Agreement, and it is not intended to constitute an official 
interpretation of the Consent Agreement or to modify its terms in any 
way.

    By direction of the Commission.
Donald S. Clark,
Secretary.
 [FR Doc. E6-22644 Filed 1-5-07; 8:45 am]
BILLING CODE 6750-01-P