Why FTC Accepted Conduct Remedies In Northrop Deal

Originally published by Aerospace & Defense Law360, Competition Law360, Mergers & Acquisitions Law360, Technology Law360

On June 5, 2018, the Federal Trade Commission conditionally approved Northrop Grumman's acquisition of Orbital ATK.1 Northrop Grumman, a missile system provider to the U.S. government, sought to acquire a missile component supplier, Orbital ATK. The Northrop/Orbital ATK merger is a vertical merger — the combination of a supplier and a customer — rather than a horizontal merger that combines two competitors. The FTC conditioned its approval of the transaction on several behavioral remedy commitments, rather than requiring a structural remedy, such as a divestiture.

The transaction is notable because it illustrates that, despite the antitrust authorities' preference for structural remedies, the FTC is willing to consider behavioral or conduct remedies in vertical deals in certain circumstances. The FTC recognizes that vertical mergers, unlike horizontal mergers, do not "reduce competition on their face" because the transaction will not eliminate a competitor.2 In addition to the vertical nature of the Northrop Grumman/Orbital ATK combination, the merger also presented several specific factors that the FTC indicated made a behavioral remedy appropriate in this case. Accordingly, the settlement offers important insights for merging companies seeking to obtain antitrust approval without structural remedy requirements in vertical deals — at least at the FTC. Whether the U.S. Department of Justice in some circumstances would be amenable to merger remedies that are primarily behavioral in vertical deals is yet to be seen.

Background

Northrop Grumman is an aerospace and defense company that provides the U.S. Department of Defense and other U.S. government agencies with missile systems. According to the FTC, these missile systems are "essential" for national defense.3

Orbital ATK develops and supplies solid rocket motors, or SRMs, which provide thrust to propel missiles to their targets. The FTC focused its review on SRMs used in defense systems, although Orbital ATK SRMs are also used in commercial and scientific applications. The FTC characterized the SRMs as an "essential input" to the missile systems offered by both Northrop and Northrop's competitors.

In September 2017, Northrop reached an agreement to acquire Orbital ATK for approximately $7.8 billion.4 The FTC investigated the transaction for over nine months, focusing on the merger's potential impact on the supply of missile systems to the U.S. government for national defense purposes. Specifically, the FTC noted that Northrop was one of only a few competitors capable of competing to provide missile systems to the U.S. government, and that Orbital ATK was one of only two companies providing SRMs for most U.S. missile systems. The FTC also noted that the missile products at issue required technological expertise and specialized facilities that made it difficult for new competitors to enter the market.

Ultimately, the FTC was concerned that, post-merger, the vertically integrated company could disadvantage Northrop's missile system competitors by denying or limiting their access to Orbital ATK SRMs. The FTC alleged that this might in turn force Northrop's competitors to raise prices for missile systems or compete less aggressively to win missile programs.5 Although not directly stated in the FTC's complaint, the FTC also expressed concern that the merger might provide the combined company access to competitors' sensitive confidential...