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UNITED STATES v. WILSON SPORTING GOODS CO.

July 2, 1968

UNITED STATES OF AMERICA, PLAINTIFF,
v.
WILSON SPORTING GOODS CO. AND NISSEN CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Marovitz, District Judge.

MEMORANDUM OPINION

Plaintiff's Motion for Preliminary Injunction

The Government brings this action under Section 15 of the Clayton Act, 15 U.S.C. § 25, to enjoin a proposed merger between the defendant Wilson Sporting Goods Company (hereinafter "Wilson"), a subsidiary of Ling-Temco-Vought, Inc., (hereinafter "LTV"), and the defendant Nissen Corporation (hereinafter "Nissen"), on the ground that it would violate Section 7 of the Clayton Act, as amended by the Celler-Kefauver Amendment, 64 Stat. 1125, 15 U.S.C. § 18.*fn1

On March 28, 1968, we issued a temporary restraining order temporarily preventing the companies from consummating the proposed merger, but allowing the respective shareholders, who were attending meetings to vote on the proposal that very day, to cast their votes. The merger was approved, but has been held in abeyance pursuant to our order, and pending a decision on the Government's motion for a preliminary injunction, with which this opinion deals.

At the hearings on the motion for preliminary injunction, both sides presented live testimony amounting to 350 transcript pages. Additional depositions were subsequently taken and made part of the record. The parties have presented quite elaborate briefs and documentary exhibits, and the Court has had the benefit of enlightening closing arguments, made after the papers and briefs were submitted. Hence, although further discovery remains to be completed, we have before us a substantial record upon which to base a ruling on the pending motion.

In order to justify the issuance of a preliminary injunction, we must, at the least, find that there is a reasonable probability that the Government will prevail at a trial on the merits.*fn2 As will be discussed later, other factors should be considered in deciding whether to issue a preliminary injunction, but they are generally subsidiary to the merits of the controversy.*fn3 Hence, our initial inquiry must be addressed to the issue posed by Section 7 — will the proposed acquisition tend to lessen competition in the line of commerce under consideration?

The Nissen Corporation, with headquarters in Cedar Rapids, Iowa, is the leading manufacturer and seller of gymnastic equipment in the country. It manufactures and sells a full line of gymnastic equipment, including, as illustrative examples, such items as parallel bars, sidehorses, horizontal bars, balance beams, rings, trampolines, and gymnastic apparel. It manufactures these products at its plant in Cedar Rapids. In addition, it owns or is affiliated with plants in England and Japan. During the past few years, in addition to gymnastic equipment, it has begun to manufacture and sell such other items as gym mats, table tennis tables, volleyball equipment and basketball backstops. And it apparently intends to soon introduce a line of track and field equipment that George Nissen, its founder, president, and majority stockholder believes, will be better than anything now on the market. Mr. Nissen has developed a company known as the highest quality manufacturer in the gymnastic equipment industry, with sales in 1967 of $4,207,234.

Wilson does not manufacture or sell gymnastic equipment. It hopes to enter the market via this merger. Both the defendant companies, however, sell such items as gym mats, wainscotting, sweat suits, basketball backboards, volleyball equipment, and table tennis tables. These items concededly are relatively minor items for both Nissen and Wilson at this time, and Wilson does not manufacture most of them itself, but purchases them for resale.

A Government survey prepared in connection with this case, tabulated the 1967 sales figures of 23 manufacturers of gymnastic equipment. The information was collected by way of voluntary disclosure and subpoena. The companies range from Nissen, the leader, to K-Sports Co., with 1967 sales of gymnastic equipment totaling only $2000. The survey indicates initially that the consumer market for gymnastic equipment, the majority of which consists of institutional purchasers, is rapidly expanding.*fn4 For example, Nissen's sales increased over 30% in the period 1965-1967. Nevertheless, because of the increased demand for gymnastic equipment, its share of the industry's total sales has fallen from about 38% in 1965 to 32% in 1967.

Secondly, the survey indicates that the industry is quite concentrated. Although figures were received for 23 companies, including all of the significant ones, it appears that the top four companies account for over 60% of the total industry sales reflected in the survey, and the top nine companies for over 97% thereof.*fn5

In addition, the concentration reflected by the above figures may be somewhat understated. That is because only four companies are able to produce products that conform to Olympic or National Collegiate Athletic Association (NCAA) standards.*fn6 Only such equipment, which must comply with rigid specifications, may be used at sanctioned meets.

Although the survey's figures include a composite of the sales of both Olympic and non-Olympic equipment, no figures were submitted to indicate the total sales of Olympic equipment relative to the remainder of the industry's products. But at the closing argument, defense counsel did not challenge the Government counsel's remark that Nissen's leading position is even more powerful in percentage terms with respect to Olympic equipment, and the market for these items even more concentrated than the market generally. Furthermore, many of the smaller companies do not sell nationally, and do not offer a full line of gymnastic equipment, and of trampolines.*fn7 Hence, they constitute competition to Nissen only regionally, and with respect to certain non-Olympic equipment.

Nissen's respected position in the industry is reflected in part by its quality products and in part by the fact that it can sell its products at a dealer's markup of only 15%, while its competitors offer a 50% spread to the dealers. To some degree, although the precise amount is indeterminate, the reason for Nissen's smaller margin to the dealer is accounted for by its sales technique. Whereas its competitors generally sell through a dealer who expends most of the effort required to make the sale, Nissen boasts an eight man sales force which usually pre-sells its products to the ultimate consumer — the coach or athletic director of an institution in most instances. The order is then placed through a dealer who receives 15% for his trouble, but who is responsible for little of the actual selling effort. In addition, Nissen's products are considerably higher priced, in many instances, and it appears that Nissen's philosophy is to retain its current high profit margins at the expense of even higher volume and a larger share of the market.

Wilson is an aggressive company which intends to expand into the lucrative gymnastic equipment field, preferably by this merger. Its projected plans also call for expansion by merger into the production of sporting goods equipment such as archery equipment, fishing tackle, skiing equipment, and rubber sporting goods products such as balls.*fn8 It has been attracted to Nissen by the expanding sales market for gymnastic equipment, Nissen's record of leadership and innovation in the industry, its financial position, and perhaps most of all by the opportunity to retain George Nissen as operating head of the business. Wilson represents that it intends to maintain Nissen as a separate corporation, with the same management, and does not intend to intermingle any of its facilities, sales operations, or other company functions with those of Wilson. In effect, according to Wilson, it intends to hold Nissen simply as an attractive investment. The Merger Agreement contained express acknowledgment of the intent to transfer the present Nissen assets to a new and separate subsidiary corporation, and the proxy statement sent to stockholders of both companies acknowledged the intention to maintain Nissen as a separate corporation and "to continue to conduct substantially the same business as is now conducted by Nissen under the same name, as a wholly owned subsidiary of Wilson."*fn9

We believe this proposed merger quite appropriately should be denominated a "product-extension" merger, a term officially coined in the Federal Trade Commission opinion in Federal Trade Commission v. Procter & Gamble Co., 386 U.S. 568, 570, 577-578, 87 S.Ct. 1224, 18 L.Ed.2d 303 (1967) (hereinafter "Clorox"). That is because Nissen manufactures a different product than Wilson, but one which is related to the sporting goods family produced by Wilson, and the merger "may enable significant integration in the production, distribution or marketing activities of the merging firms." General Foods Corporation v. Federal Trade Commission, 386 F.2d 936, 944 (3d Cir. 1967) (hereinafter "General Foods"), citing the Commission's opinion in Clorox.*fn10 Wilson's disclaimer of intention to integrate the two companies' operations does not negative the obvious availability of such a course if Wilson deemed it prudent.

In addition, this merger has some horizontal characteristics inasmuch as both companies manufacture and/or sell a few of the same products, even though they constitute a small percentage of total sales.

As the Supreme Court recognized in Clorox, it does not particularly aid analysis to discuss mergers in terms of their conventional labels as horizontal, vertical or conglomerate (386 U.S. at 570, 87 S.Ct. 1224). What is significant is the effect of the proposed merger upon the market structure of the relevant industries, and whether the merger will tend to lessen competition in the relevant market. Indeed, the governing facts in litigation involving a conglomerate merger are usually different from those in a horizontal or vertical situation, and their analysis required emphasis upon different market effects. Whereas the Supreme Court has fashioned virtually a per se rule based upon the extent of the relative market shares of the merging firms, in considering horizontal mergers,*fn11 such an analysis will not do when considering a conglomerate merger, simply because the merging companies are not direct competitors in the same markets. Turner, supra at 1315-1316. Cf. F.T.C. v. Procter & Gamble, supra, 386 U.S. at 589-590, 594, 87 S.Ct. 1224 (Harlan, J. concurring.)*fn12 The author of the Commission's exhaustive opinion in Clorox has suggested, in a recent paper commenting upon the Clorox case, the vital importance of weighing the effects of a conglomerate merger upon the condition of entry by a process of economic analysis of the market structure. Elman, Clorox and Conglomerate Mergers, 36 A.B.A. Antitrust L.J. 23, 27-28 (1967). The shift in antitrust analysis to an approach based upon considerations of market structure rather than considerations of "performance" or "conduct," is discussed in Mueller, The New Antitrust; A `Structural' Approach, 1 Antitrust L. & E. Rev. 87 (1967).

As Justice Harlan recognized while concurring in Clorox, mergers of the instant type are "becoming increasingly important as large corporations seek to diversify their operations,"*fn13 but pose exceedingly difficult problems for the lower courts, both because of the serious economic queries which they pose, and because the pertinent issues have not as yet been considered extensively by the Supreme Court. The only Supreme Court case to deal with a conglomerate merger was Clorox and the only major Court of Appeals decision thereafter has been General Foods Corp. v. F.T.C., 386 F.2d 936 (3d Cir. 1967), cert. denied 391 U.S. 919, 88 S.Ct. 1805, 20 L.Ed.2d 657, May 20, 1968. Few such mergers have as yet been challenged by the Justice Department. In part, the reason is the relatively recent enthusiasm for "conglomerates" in the business community, and the emergence in a modern antitrust context of the giant conglomerate company.*fn14 But perhaps of even greater significance is that the effect of a conglomerate merger "on the relevant market is not so readily apparent as is the case with vertical and horizontal mergers." General Foods v. F.T.C., 386 F.2d 936, 944 (3d Cir. 1967).

The starting point in judging this merger, as with any other, regardless of its characterization, is the statute. Section 7 prohibits any merger "* * * where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition * * *." (15 U.S.C. § 18). While the "mere possibility" that competition will be lessened is not sufficient,*fn15 neither is it necessary to demonstrate or prove actual restraints on competition in order to invalidate a merger. The correct test was stated in Clorox: (386 U.S. at 577, 87 S.Ct. at 1229)

    "Section 7 of the Clayton Act was intended to
  arrest the anticompetitive effects of market power in
  their incipiency. The core question is whether a
  merger may substantially lessen competition, and
  necessarily requires a prediction of the merger's
  impact on competition, present and future. See Brown
  Shoe Co. v. United States, 370 U.S. 294, [82 S.Ct.
  1502, 8 L.Ed.2d 510;] United States v. Philadelphia
  National Bank, 374 U.S. 321, [83 S.Ct. 1715, 10
  L.Ed.2d 915.] The section can deal only with
  probabilities, not with certainties. Brown Shoe Co.
  v. United States, supra, [370 U.S.] at 323, [82 S.Ct.
  at 1522;] United States v. Penn-Olin Chemical Co.,
  378 U.S. 158, [84 S.Ct. 1710, 12 L.Ed.2d 775.] And
  there is certainly no requirement that the
  anticompetitive power manifest itself in
  anticompetitive action before Section 7 can be called
  into play. If the enforcement of Section 7 turned on
  the existence of actual anticompetitive practices,
  the congressional policy of thwarting such practices
  in their incipiency would be frustrated."

Let us now consider the application of the statute to the facts at hand. There is no dispute between the parties regarding the relevant line of commerce or the section of the country involved, the relevant geographical market is agreed to be the country as a whole, and the relevant product market that of gymnastic equipment.*fn16

Essentially, the Government argues that the merger will engender anticompetitive consequences in three ways, each of which, it insists, constitutes an independent basis for imposing a preliminary injunction. First, it would entrench and possibly increase Nissen's already leading market position in gymnastic apparatus, while at the same time discouraging smaller competitors from aggressive competition with Nissen and deterring other companies from entering the market. Second, it would eliminate Wilson as an important potential entrant into the market through either internal expansion or through merger with a smaller company, and end its role as a company on the fringe of the market as a restraining influence on prices and profit margins. Third, it would entrench and increase Wilson's leading role in the sporting goods market and eliminate the actual and potential competition that an independent or otherwise merged Nissen might have mounted against Wilson.

We believe it is fair to say that this case presents analytical difficulties of greater magnitude than did either Clorox or General Foods. The acquiring companies in both of those cases were giant producers of a variety of heavily advertised household items. Prior to its merger with General Foods, the S.O.S. company, a manufacturer of steel wool pads, was the largest competitor in an "almost perfectly balanced duopoly." (386 F.2d at 938). Prior to its merger with Procter & Gamble, Clorox was the leading manufacturer in the highly concentrated household liquid bleach industry. Because the products of both Clorox and S.O.S. could not be said to enjoy a qualitative distinction from the competitive products,*fn17 the impact of advertising and sales promotion was unusually high — indeed decisive — as it would be with respect to virtually every interchangeable mass-consumer product. In Clorox, the Supreme Court concluded that the substitution of Procter, with its huge assets and advertising budget, for the already dominant Clorox, would reduce the competitive structure of the industry, by raising already high entry barriers, dissuading present competitors from aggressively competing, and eliminating Procter as a potential entrant itself, and as an influence on prices and profit margins by its presence on the fringe of the market.

The instant case poses quite different problems than either Clorox or General Foods. Primarily, this is because sales of gymnastic apparatus, unlike steel wool pads or bleach, are based largely upon the product's quality. Despite the Government's argument that advertising is important in this industry, it is quite clear that mass-advertising plays no significant role whatsoever. In contrast, the role of mass-advertising in selling high turnover products was found to be directly related to the probable anticompetitive effects of the Clorox and General Foods mergers. The huge resources of both Procter and General Foods, it was found, would enable them to divert significant portions of their advertising budgets to meet threats from new entrants and to use their volume discounts to advantage. The immense capital necessary to cope with advertising needs was a significant reason for the substantial barriers to new entry already extant in both markets prior to the mergers, but heightened even further as a result of the mergers. Thus advertising was largely responsible for the concentrated market structures existing in both markets. As the Supreme Court has recognized previously in American Tobacco Co. v. United States, 328 U.S. 781, 797, 66 S.Ct. 1125, 90 L.Ed. 1575 (1946), high turnover, low priced, mass marketed commodities which for all practical purposes are functionally and chemically identical, must rely heavily upon advertising, for they tend to be purchased by unsophisticated buyers on the basis of emotional appeal rather than upon the intrinsic merits of the product.

But where, as here, products are not purchased emotionally, but on the basis of a rational and well considered decision, large advertising expenditures are not likely to play a major role. This was recognized in Butler Aviation Co. v. Civil Aeronautics Board, 389 F.2d 517 (2d Cir. 1968), where the Court rejected a contention that the acquisition of a supplier of executive jet aircraft by Eastern Airlines would give the acquired company an undue competitive edge over sellers lacking comparable resources. The Court reasoned that a purchaser of jet aircraft, unlike a purchaser of chemically identical household bleach, "is likely to make a rational and well-considered choice as to which airplane best suits its requirements rather than yield to a salesman's blandishments." (520).

The evidence is reasonably clear that gymnastic equipment is not purchased on impulse or on the basis of an emotional response to advertising. Apparently, gymnastic coaches have a decisive voice in purchasing decisions, and their decisions rest primarily upon the intrinsic merit of the product. They examine equipment displayed at demonstrations, meets, or clinics, and have their gymnasts try it out. A coach is primarily interested in the safety, durability and performance characteristics of the equipment, and is able to differentiate among various items of apparatus on the basis of his own knowledge and experience, or on the basis of team members' comments. As one witness testified, "it is too big an investment" to be made on the basis of advertising.*fn18

The purchasing pattern is similar in institutions lacking a knowledgeable person in the field. The practice is for the person responsible for purchasing to consult persons who are sophisticated in the gymnastic field.

Indeed, Nissen's advertising is limited to coaches' publications, and is modest in amount (about $30,000 per annum). Several years ago it placed a full page ad in Life magazine, but the results were so dismal that the experiment has not been repeated. Wilson's larger resources would be of no use to Nissen for advertising purposes, since Nissen now spends as much as can be productively expended for this purpose.*fn19

Promotion, at clinics, demonstrations, and meets is somewhat more significant in the industry than advertising. Nissen spends about $100,000 a year for this purpose, and considers this the maximum amount which could be productively expended. The company is capable of spending much more for this purpose, said Mr. Nissen, but it would be economically imprudent to do so.*fn20 Thus access to Wilson's assets would be of no help here either, for Nissen, unlike Clorox, has not been hindered by lack of resources in carrying out more beneficial advertising or promotional activities.

The effect of advertising upon market structure and competition in Clorox and General Foods is totally absent here. It is safe to say that the market structure and the condition of entry is not at all affected by the factor of advertising here, which means that the considerations governing in both preceding cases will not be decisive on the facts now presented.

Nevertheless, the Government contends that existing competition will be adversely affected by the merger.

Effects on Present Competition

The industry is highly concentrated as was pointed out above. Nevertheless, since competition is based only partially on price because of product differentiation, there has remained a relatively healthy degree of product competition. Nissen, of course, is the premier firm in the industry, but as a rule, many of its prices are higher than those of its competitors. The market is small enough, however, so that each competitor is keenly aware of innovations, prices and competitive steps taken by his adversaries. No concrete evidence was introduced to indicate any type of price leadership or "conscious parallelism." Because of rising demand, Nissen's market share has fallen from 38% to 32% since 1965, despite a substantial sales and profit increase.

The rate of demand and profit has attracted a number of new companies into the industry in recent years. The technology is not complex, the relevant machinery is available, and entry on the basis of a relatively modest initial capital outlay is feasible.*fn21 Some companies have entered the market by first having the products manufactured for them and then have graduated to do their own manufacturing.

Of course, on an individual basis, new companies entering on a "shoestring and a prayer" would not offer direct competition to Nissen, since it is likely they would not manufacture their own products, or if they did, would be unable to manufacture Olympic apparatus. Collectively, of course, the effect of their increased competition has been the reduction of Nissen's market share. It appears that despite the industry's relative concentration, the same barriers to entry present in Clorox and General Foods — the immediate need for large advertising capital — are not present here. But because the market is relatively small, and concentrated, and the companies are keenly aware of their competitors' activities, we think it fair to characterize the market as "oligopolistic," although not nearly as highly "oligopolistic" as in Clorox.

The Wilson-Nissen merger would certainly change the character of the industry by casting a relative colossus (Wilson-LTV) into the midst of a group of small competitors. But unless it would tend to substantially "lessen competition," the merger cannot be barred, for size alone is an insufficient criterion, at least as yet, in the field of conglomerate mergers. Despite Wilson's representation that Nissen will be maintained as a separate subsidiary, the Court believes it is highly unlikely that Nissen's competitive position could be worsened by the merger. Wilson's corporate planners believe that after the merger, Nissen will grow fast enough to retain its dominant position until at least 1975, and George Nissen thinks such estimates are "conservative."

One danger that may be introduced into a market by a disproportionately sized firm which sells other related products, is that the product involved in the merger may tend to receive favored treatment from distributors. In Clorox and General Foods, there was a danger of Clorox and S.O.S. receiving preferred shelf space from ...


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