Exxon Corporation

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IN THE MATTER OF EXXON CORPORATION, ET AL.

DISMISSAL ORDER IN REGARD TO ALLEGED VIOLATION OF SEC. 5 OF THE FEDERAL TRADE COMMISSION ACT AND SEC. 7 OF THE CLAYTON ACT Docket 9130. Complaint, Aug. 10, 1979-Dismissal order, July 30, 1982 The Federal Trade Commission has issued an order dismissing the 1979 complaint challenging Exxon s proposed acquisition of Reliance Electric Company, finding that the acquisition would not have had competitive effects of the magnitude of those anticipated by the company and the Commission in 1979." The dismissed complaint alleged that the acquisition would eliminate Exxon as an actual potential entrant into the U.S. electronic variable speed industrial drives market.

Appearances For the Commission: David w: Long. For the respondents: Robert M. Sayler, Covington Burling, Washington, D.C.

COMPLAINT The Federal Trade Commission, having reason to believe that the above-named respondents have undertaken an acquisition that, if consummated, would result in a violation of Section 7 of the Clayton Act, as amended, 15 U. C. 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.s.C. 45, and that said undertaking therefore constitutes a violation of Section 5(a)(1) of the Federal Trade Commission Act, as amended, 15 U. C. 45(a)(1), and having found that a proceeding by it with respect thereof is in the public interest, hereby issues its complaint, charging as follows: THE RESPONDENTS 1. Respondent Exxon Corporation (hereinafter "Exxon ) is a New Jersey corporation with its principal office at 1251 Avenue of the Americas, New York, New York. Respondent Enco, Incorporated ("Enco ) is a Delaware corporation with its principal office at the same address. It is a wholly-owned subsidiary of Exxon. 2. Exxon is the largest industrial corporation in the world in assets, and is the second largest in sales. Its principal business is the production, transportation and refining of crude oil, but it is also a , .

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434 Complaint major producer of plastics, petrochemicals and other petroleumbased products. Exxon is also engaged in non-petroleum extractive industries such as copper, coal and uranium, and has been expanding into electronic communication and data handling, semiconductors, solar energy and other technological industries. 3. At all times relevant herein, Exxon sold and shipped its products throughout the United States, and engaged in or affected interstate commerce within the meaning of Section 1 of the Clayton Act, 15 U.S.C. 12, and Section 4 of the Federal Trade Commission Act, 15 U. c. 44. The acquisition described in paragraphs 5 and 6 of this complaint likewise is in or affecting interstate commerce within the meaning of those statutes.

THE ACQUISITION 4. Reliance Electric Company (hereinafter "Reliance ) is a Delaware corporation with its principal place of business at 29325 Chagrin Blvd., Cleveland, Ohio. Reliance is a leading manufacturer of electrical equipment and related products, as well as scales and balances, and also has a sizeable telecommunications business. In fiscal year 1978, Reliance had sales of $966.3 millon and assets of $613.2 milion, ranking it 262nd and 288th, respectively, on the Fortune 500 lists of American industrial corporations. Reliance sales for fiscal year 1979, which ends in October 1979, are presently running at an annual rate of $1.5 billon. 5. On May 25, 1979, Exxon announced its intent to initiate a cash tender offer for the purchase of any and all outstanding shares of the common stock of Reliance for $72 per share and any and all outstanding shares of Reliance s Series A preferred stock for $201.60 per share. On the basis of the shares outstanding as of January 31 1979, the total value of the offer would be $1.17 bilion. The preannouncement price of Reliance common stock was $36.50 per share. 6. The tender offer was formally opened on June 28, 1979, by Enco. On July 11 , 1979, the initial termination date of the offer Exxon announced that the offer would be extended to July 13, 1979. On July 13, Exxon announced that over 95 percent of Reliance common stock had been tendered.

7. On July 27, 1979, the Commission directed its attorneys to seek a preliminary injunction against consummation of the acquisition. On July 28, 1979, the United States District Court for the District of Columbia entered a temporary restraining order enjoining consummation of the acquisition pending a hearing and decision on the Commission s application for a preliminary injunction. By Complaint 100 F.

order dated August 6, 1979, the district court extended the temporary restraining order until August 17, 1979. TRADE AND COMMERCE 8. Electronic variable speed industrial drives ("EVSD") constitute a competitively significant line of commerce, or market. 9. A competitively significant geographic area in which EVSD are marketed is the United States.

10. The EVSD market is concentrated, with the four leading producers in 1977 having in excess of 55% of all sales. 11. Barriers to broad-product-line entry into the EVSD market are high.

12. Reliance is a leading producer of EVSD. 13. Exxon possesses technology that it claims would permit it to manufacture EVSD that are superior in operating characteristics and lower in cost than other EVSD currently available. Exxon has built at least two prototype or demonstration EVSD which have been installed and are operating in Exxon s refineries. 14. But for the acquisition of Reliance, in order to reap the commercial benefits of its technology, Exxon would enter the EVSD market either de novo or through the acquisition of a toehold company, a company with a relatively small share of the EVSD market.

EFFECTS OF THE ACQUISITION 15. Exxon s acquisition of Reliance would eliminate Exxon as an actual potential entrant into the United States EVSD market thereby eliminating the likelihood that entry by Exxon would: (a) decrease concentration in the market; (b) increase competition in the market; or (c) increase competition in the development of EVSD technology and products.

16. Exxon s acquisition of Reliance would likely have anticompetitive effects in the United States EVSD market, including but not limited to:

(a) increasing the level of concentration in the market; (b) elevating barriers to entry into the market; or (c) eliminating competition in the development of EVSD technology and products.

434 Dismissal Order VIOLATIONS CHARGED 17. The effect of the acquisition of Reliance by Exxon may be substantially to lessen competition or to tend to create a monopoly in violation of Section 7 of the Clayton Act, as amended, 15 U. C. 18. 18. Acquisition of Reliance by Exxon and Enco would constitute an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act, as amended, 15 U.s.C. 45. 19. By undertaking the acquisition that would give rise to the violations described in paragraphs 17. and 18., Exxon and Enco have violated Section 5(a)(1) of the Federal Trade Commission Act, as amended, 15 U. C. 45(a)(1).

ORDER DISMISSING COMPLAINT On August 10, 1979, the Commission issued an administrative complaint against respondents challenging the intended acquisition of Reliance Electric Company by Exxon Corporation, through its subsidiary Enco, Incorporated. The complaint alleged that the acquisition, which was subsequently consummated pursuant to a hold-separate order, would eliminate Exxon as an actual potential entrant into the United States electronic variable speed industrial drives ("EVSD") market, thereby eliminating the likelihood that entry by Exxon would: (a) decrease concentration in the market; (b) increase competition in the market; or (c) increase competition in the development of EVSD technology and products. The factual premise of the complaint was that Exxon had made a breakthrough in EVSD technology and, but for the acquisition of Reliance, would enter the market either de novo or through the acquisition of a toehold company.

After substantial pretrial discovery, complaint counsel moved on May 14, 1982, for a dismissal of the complaint. The motion was certified to the Commission by the ALJ without a recommendation on May 17, 1982. Respondents did not fie an answer. In their motion and accompanying papers complaint counsel have explained in detail how recent discovery has shown that Exxon, and consequently the Commission, misjudged the commercial viability of its new technology, called " alternating current synthesis" CACS" I A temporary restraining order Wll isued on July 2H, 1979 by United States District ,Judge Harold H Greene. On August 17, 1979, District .Judge John H. Pnltt entered the hold-..p.paraw order. That order was modified on October 26, 1979, to exclude Reliance s "motors unit" from the hold-sep!lrate requirement !md also on June 25, 1980. Certin aspets of the June 25 modification not relevant here were struck down by the Court of Appeals in December, 1980. FT v. Erron Corp. 636 F.2d 1336 (D.C. Cir. 1980J. 2 The motion dismi!3 and Attachments A.M were filed on the public record. Complaint counsel alan filed camera a lengthy memorandum in support and 68 attachments, consisting of internal Exxon documents and investigational transcripts.

Dismissal Order 100 F. Thus, rather than marketing ACS for Exxon, as Exxon had hoped Reliance guided the company to the realization that ACS was not the breakthrough it had been thought to be and that, moreover, the prospects even for modest commercial exploitation were questionable: ACS suffered from serious reliabilty and serviceability problems, and its production costs were vastly greater than originally estimated. Consequently, on March 20, 1981, Exxon announced that it had abandoned its efforts to develop the ACS design. While Reliance s "ACS Group" (the unit not subject to the court's holdseparate order) explored the possibility of another technology, that effort was terminated in August, 1981.

In light of these newly discovered facts, it is now apparent that Exxon never was the significant potential entrant that it was alleged to be in the Commission s complaint. Even if Exxon had attempted to enter the EVSD market by alternative means,' the Commission has no reason to believe that such entry, without a new technology, would have offered "a substantial likelihood of ultimately producing deconcentration of that market or other significant procompetitive effects. "4 In any event, it now appears that the acquisition would not have had competitive effects of the magnitude of those anticipated by the company and the Commission in 1979. The complaint is hereby dismissed.

, Absent . the Reliance acquisition, Exxon might have acquired a tohold company or continued internal development of the ACS tehnology. However, in either cas, it would have learned eventually of the failings of ACS. This probably would have ended Exxon s interest in the EVSD market, since the company Acems to have ben iotereste in entering that marketonly as a tehnological innovator. . United Staff! v.Marine Ba",:;orfXration 418 U.S. 602, 633 (1974). , ( 439 Complaint