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A Weakened Firm Defense Can Be Strong If The Competitive Threat Is Weak

Posted  July 7, 2009

Just how weak does a company have to be to rely on a weakened firm defense in a merger analysis?  While the case law is sparse, courts have found such a defense compelling when one of the parties to a merger has been too weak to be a competitive threat.

In United States v. General Dynamics Corp., 415 U.S. 486 (1974), the Supreme Court approved a merger between coal producers who together had a high market share in a concentrated industry, finding that market share and concentration were “not conclusive indicators of anticompetitive effects.”  Id. at 498.  In that case, one party to the merger was unable to compete for new customers because it did not have uncommitted coal reserves.  Id. at 504-506.  In other words, it had a competitive weakness – a structural barrier – that prevented it from becoming a competitive threat.

The Supreme Court stressed that it was important to consider all relevant facts, including a firm’s weakness, in cases in which the market or industry is unpredictable or instable.  Id.  The court found that where a firm lacks resources to engage in new competition, its acquisition would not substantially lessen competition.  Id. at 510-11.

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