In 2006, the Federal Trade Commission (“FTC”) approved the merger of Seagate and Maxtor while, a few months prior in 2005, Antitrust Division of the Department of Justice (“DOJ”) approved the merger of WebCT and Blackboard, neither issuing a second request for information. In both cases, the two merging firms had sufficiently high market shares that most analysts expected at least a second request, if not some call for divestitures. Yet, the DOJ and the FTC did not issue a second request, much less initiate a suit to block the merger, proving that high market shares do not always guarantee second requests.

On October 12, 2005, Blackboard announced that it would acquire WebCT for $180 million. Both of the companies produced Course Management Software (“CMS”), which enables universities and colleges to place critical academic information, such as taped classes, class registration, and grades, on the Internet, allowing students to access and professors and administrators to update the information more conveniently. Blackboard held the lion’s share of the market, controlling approximately 54% of the market, while WebCT had approximately 27% of the market, meaning that Blackboard would acquire 81% of the market through the acquisition, giving it a potential monopoly. Although smaller players, such as Desire2learn, Jenzabar, Angel Learning, and ConcordUSA also served the CMS market, they tended to focus on smaller institutions, meaning that their ability to compete with Blackboard and WebCT for larger contracts was questionable. Larger database companies, such as Oracle and SAP, did not have a proven product, meaning that colleges and universities could be wary of ordering a product without having it first evaluated by other institutions.

Despite these high market shares, the DOJ did not issue a second request to investigate the merger. Although the DOJ had defined a narrow market when litigating Oracle’s purchase of Peoplesoft, limiting the market by function and customer, in this case the DOJ found that CMS was not sufficiently different from other types of software that other companies could not make it or could not scale up current versions of software designed for smaller institutions. In addition, the DOJ may have looked at the fact that 59% of higher educational institutions did not use any CMS suite, indicating that the software competed against traditional methods of course distribution and non-academically oriented suites.

One month after the DOJ cleared Blackboard’s purchase of WebCT, Seagate and Maxtor, two hard drive manufacturers, announced that they had entered into a merger agreement. Seagate and Maxtor had large shares of the worldwide hard drive markets, with Seagate selling 30% of the hard drives in 2005, while Maxtor sold 20%, for a combined share of 50%, although Seagate would control upwards of 60% of the market for hard drives used in enterprise servers and desktop computers. The next largest competitor, Western Digital, had approximately 15% of the overall market.

The FTC did not issue a second request to investigate the transaction, despite the high market shares. Part of the explanation may be found in the dynamics of the hard drive market, where the final manufacturers have a great deal of influence over the design of the inputs. For example, Maxtor had 75% of the market for hard drives for consumer electronics in 2003. The next year, however, Seagate and Western Digital entered the market with their own products, and Maxtor’s share dropped to 30% by the end of 2004. In the overall consumer electronics hard drive market, Maxtor’s share dropped to 8%, because it did not produce a 1” or 2.5” drive, which became increasingly important as products continued to decrease in size. Although the production of hard drives requires enormous capital investments along with substantial technical expertise, the FTC must have found that the final equipment manufacturers had sufficient market power and that a sufficient number of companies had the hard drive manufacturing capability to make an attempt at exercising market power potentially fatal. Finally, the FTC may have noted that the hard drive market, far from enjoying price stability, faced constant price decreases even as quality increased, leading to the conclusion that the market was very competitive.

DOJ’s approval of Blackboard’s purchase of WebCT and the FTC’s approval of Seagate’s purchase of Maxtor could be seen as a sign that the agencies have backed off aggressive merger enforcement. However, the more logical explanation may be that both agencies seriously consider the threat of entry as a deterrent to market power abuse, particularly in markets that have demonstrated past pricing pressure or which are niche segments of an overall market with many larger competitors. Going forward, merging companies with potential problems from high market shares should emphasize present and potential competitors in broad product markets going into an investigation, rather than waiting for the agencies to raise concerns.

Authored by:
Christopher Bowen
202-772-5384
cbowen@sheppardmullin.com