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The Department of Justice Versus Alcoa (2000)
The Department of Justice Versus Alcoa (2000)
Lance Light
Tim ParringtonLance Light
Tim Parrington
BackgroundBackground
Alcoa conducts operations in 31 countries and was worth $13 Billion in 1999 and is currently worth approximately $21 Billion
Reynolds Metals Company was the 2nd largest Aluminum producer in the United States and 3rd largest in the world. They were worth $7 Billion in 1999
Department of Justice issued a complaint in 2000 when Alcoa announced its proposed $5.4 Billion merger with Reynolds (1999)
Alcoa conducts operations in 31 countries and was worth $13 Billion in 1999 and is currently worth approximately $21 Billion
Reynolds Metals Company was the 2nd largest Aluminum producer in the United States and 3rd largest in the world. They were worth $7 Billion in 1999
Department of Justice issued a complaint in 2000 when Alcoa announced its proposed $5.4 Billion merger with Reynolds (1999)
Relevant MarketsRelevant Markets
Alcoa and Reynolds primarily produce two types of alumina for the market; SGA (Smelter Grade Alumina) and CGA (Chemical Grade Alumina)
There are no ideal substitutes for either SGA or CGA Alcoa and Reynolds are both vertically integrated
production companies Only 5 percent of the SGA and CGA purchased in the
United States is imported
Alcoa and Reynolds primarily produce two types of alumina for the market; SGA (Smelter Grade Alumina) and CGA (Chemical Grade Alumina)
There are no ideal substitutes for either SGA or CGA Alcoa and Reynolds are both vertically integrated
production companies Only 5 percent of the SGA and CGA purchased in the
United States is imported
SSNIP Test SSNIP Test
The DOJ will typically employ a SSNIP test to evaluate the effects of a proposed merger by assuming a small (but significant) increase in price
About 60% of the total SGA production is internally consumed by smelters owned by the vertically integrated SGA producers
Importation of CGA and SGA into North America is unlikely to increase significantly in response to an anticompetitive increase in price (of SGA and CGA) because costs are too high
The DOJ will typically employ a SSNIP test to evaluate the effects of a proposed merger by assuming a small (but significant) increase in price
About 60% of the total SGA production is internally consumed by smelters owned by the vertically integrated SGA producers
Importation of CGA and SGA into North America is unlikely to increase significantly in response to an anticompetitive increase in price (of SGA and CGA) because costs are too high
Market ConcentrationMarket Concentration
Alcoa controlled 14.5 million metric tons of SGA production capacity ~29% of the worldwide market (1999)
Reynolds controlled approximately 4.4 million metric tons of total SGA production capacity ~9% of the market.
Alcoa’s market share would increase to nearly 40 percent of total SGA market capacity if the merger is successful
Alcoa controlled 14.5 million metric tons of SGA production capacity ~29% of the worldwide market (1999)
Reynolds controlled approximately 4.4 million metric tons of total SGA production capacity ~9% of the market.
Alcoa’s market share would increase to nearly 40 percent of total SGA market capacity if the merger is successful
Change in HHI Change in HHI
DOJ evaluated that the HHI for the world SGA market will increase by 530 points
Projected Post-merger HHI of 1,800 Pre-merger HHI of 1,270 Increased production share will also increase Alcoa’s
North American market share from 39% to 59% (market moves towards oligopoly)
Post-merger: the top three CGA producers will account for almost 90 percent of total production
DOJ evaluated that the HHI for the world SGA market will increase by 530 points
Projected Post-merger HHI of 1,800 Pre-merger HHI of 1,270 Increased production share will also increase Alcoa’s
North American market share from 39% to 59% (market moves towards oligopoly)
Post-merger: the top three CGA producers will account for almost 90 percent of total production
Anticompetitive EffectsAnticompetitive Effects
The DOJ’s complaint proposed the following anticompetitive effects:
1) Future competition between Alcoa and Reynolds will be completely eliminated
2) Consumer surplus will be partially depleted after the acquisition (lack of production competition)
3) Prices for SGA and CGA are projected to increase worldwide because of the high market concentration
4) Overall production quantity of SGA and CGA is likely to decrease
The DOJ’s complaint proposed the following anticompetitive effects:
1) Future competition between Alcoa and Reynolds will be completely eliminated
2) Consumer surplus will be partially depleted after the acquisition (lack of production competition)
3) Prices for SGA and CGA are projected to increase worldwide because of the high market concentration
4) Overall production quantity of SGA and CGA is likely to decrease
Market Concetration EffectsMarket Concetration Effects
It is a proposed 5 to 4 merger Demand for SGA and CGA is extremely inelastic By reducing its output in the SGA market
domestically, Alcoa will have enough projected market share to profit from an increase in price; this is caused by a unilateral reduction in output to third-party SGA and CGA smelters and consumers
It is a proposed 5 to 4 merger Demand for SGA and CGA is extremely inelastic By reducing its output in the SGA market
domestically, Alcoa will have enough projected market share to profit from an increase in price; this is caused by a unilateral reduction in output to third-party SGA and CGA smelters and consumers
Theory of HarmTheory of Harm Violation of the Sherman Act Section 2
Unilateral Action (Classical) SGA Market: Control 40% of market, and can use
power to dominate the market CGA Market: Control 60% of the market, significant
power to manipulate price Greater likelihood to Collude
Homogenous product, transparent prices, high concentration of market
Entry & Efficiencies Entry isn’t possible; Takes 4 years and $1 billion to build
a plant capable of competing Efficiencies argument used by the two firms
Violation of the Sherman Act Section 2 Unilateral Action (Classical)
SGA Market: Control 40% of market, and can use power to dominate the market
CGA Market: Control 60% of the market, significant power to manipulate price
Greater likelihood to Collude Homogenous product, transparent prices, high
concentration of market Entry & Efficiencies
Entry isn’t possible; Takes 4 years and $1 billion to build a plant capable of competing
Efficiencies argument used by the two firms
Final JudgmentFinal Judgment
Merger allowed, following divestitures US requirements:
Corpus Christi refinery (owned 100%) With contract for providing raw product for 2 years Worsley Interest (owned 56%)
EU Requirements: Longview, Washington smelter (owned 25%) Stade, Germany refinery (owned 50%)
Merger allowed, following divestitures US requirements:
Corpus Christi refinery (owned 100%) With contract for providing raw product for 2 years Worsley Interest (owned 56%)
EU Requirements: Longview, Washington smelter (owned 25%) Stade, Germany refinery (owned 50%)
Our OpinionOur Opinion
Corpus Christi divestiture (not enough) too high of costs, bought by private investment firm
Worsley interest divestiture (good choice) Low cost with ability to expand But it was sold to another large firm
Could still promote collusion Didn’t evaluate vertical repercussions at all Overall, we believe it should have been given a
more thorough review
Corpus Christi divestiture (not enough) too high of costs, bought by private investment firm
Worsley interest divestiture (good choice) Low cost with ability to expand But it was sold to another large firm
Could still promote collusion Didn’t evaluate vertical repercussions at all Overall, we believe it should have been given a
more thorough review
ConclusionConclusion
It set a dangerous precedent; Alcoa merged again, more aluminum mergers allowed
Prices increased (but this correlates with a high demand for aluminum)
It set a dangerous precedent; Alcoa merged again, more aluminum mergers allowed
Prices increased (but this correlates with a high demand for aluminum)
Average aluminum distribution
prices (1999-2011)
SourcesSources AAI Attacks Proposed Acquisition of Reynolds. (2000). Retrieved April 15, 2011, from American Antitrust Institute Web site:
http://www.antitrustinstitute.org/node/10161 http://www.alcoa.com/global/en/news/news_releases.asp?year=2000&catID=&catName=Select+a+Category Aluminum Industry. (n.d.). Retrieved April 15, 2011, from Aluminum Leader: http://www.aluminiumleader.com/en/serious/industry/ Aluminum Prices. (2011). Retrieved April 16, 2011, from Mongabay Web site:
http://www.mongabay.com/images/commodities/charts/aluminum.html Communities, C. o. (May 3, 2000). Case No COMP/M.1693 - Alcoa/Reynolds. Official Journal of the European Communities , Article 8
(2). Curran, W. J. (2004). Coordinated Effects. The Antitrust Bulletin , 226-310. Justice, D. o. (2002). Coordinated Effects in Merger Review. Antitrust Division Reports , 1-23. United States v. Alcoa and Reynolds Metals. (2000). Retrieved March 28, 2011, from Department of Justice: Antitrust Case Filings:
http://www.justice.gov/atr/cases/indx157a. (1) Yeardley, James L. "The Alcoa Proposition." InterestPeople 4th ser. 13.3 (2000): 21-23. Chinook. Web. 20 Apr. 2011 (2) Horacio, M. Glimpchin, T. “Merger Busts?” The Transit 2nd ser. 3.6 (2003): 50-51. Chinook. Web. 20 Apr. 2011. (3) Wayne, Leslie. "Alcoa and Reynolds Reach Merger Agreement - New York Times." Breaking News, World News & Multimedia. New
York Times, 20 Aug. 1999. Web. 22 Apr. 2011. http://www.nytimes.com/1999/08/20/business/alcoa-and-reynolds-reach-merger-agreement.html.
(4) Alcoa Logo retrieved from: http://www.google.com/imgres?imgurl=http://www.goodlogo.com/images/logos/alcoa_logo_2881.gif&imgrefurl=http://www.goodlogo.com/extended.info/2881&
(5) Reynolds Metals Company logo retrieved from: http://www.google.com/imgres?imgurl=http://upload.wikimedia.org/wikipedia/en/thumb/7/76/Reynolds_Metals_Company.svg/500px-
Reynolds_Metals_Company.svg.png&imgrefurl=http://en.wikipedia.org/wiki/File:Reynolds_Metals_Company.svg&usg=__M-tPz7sDLm3Duk2lq
AAI Attacks Proposed Acquisition of Reynolds. (2000). Retrieved April 15, 2011, from American Antitrust Institute Web site: http://www.antitrustinstitute.org/node/10161
http://www.alcoa.com/global/en/news/news_releases.asp?year=2000&catID=&catName=Select+a+Category Aluminum Industry. (n.d.). Retrieved April 15, 2011, from Aluminum Leader: http://www.aluminiumleader.com/en/serious/industry/ Aluminum Prices. (2011). Retrieved April 16, 2011, from Mongabay Web site:
http://www.mongabay.com/images/commodities/charts/aluminum.html Communities, C. o. (May 3, 2000). Case No COMP/M.1693 - Alcoa/Reynolds. Official Journal of the European Communities , Article 8
(2). Curran, W. J. (2004). Coordinated Effects. The Antitrust Bulletin , 226-310. Justice, D. o. (2002). Coordinated Effects in Merger Review. Antitrust Division Reports , 1-23. United States v. Alcoa and Reynolds Metals. (2000). Retrieved March 28, 2011, from Department of Justice: Antitrust Case Filings:
http://www.justice.gov/atr/cases/indx157a. (1) Yeardley, James L. "The Alcoa Proposition." InterestPeople 4th ser. 13.3 (2000): 21-23. Chinook. Web. 20 Apr. 2011 (2) Horacio, M. Glimpchin, T. “Merger Busts?” The Transit 2nd ser. 3.6 (2003): 50-51. Chinook. Web. 20 Apr. 2011. (3) Wayne, Leslie. "Alcoa and Reynolds Reach Merger Agreement - New York Times." Breaking News, World News & Multimedia. New
York Times, 20 Aug. 1999. Web. 22 Apr. 2011. http://www.nytimes.com/1999/08/20/business/alcoa-and-reynolds-reach-merger-agreement.html.
(4) Alcoa Logo retrieved from: http://www.google.com/imgres?imgurl=http://www.goodlogo.com/images/logos/alcoa_logo_2881.gif&imgrefurl=http://www.goodlogo.com/extended.info/2881&
(5) Reynolds Metals Company logo retrieved from: http://www.google.com/imgres?imgurl=http://upload.wikimedia.org/wikipedia/en/thumb/7/76/Reynolds_Metals_Company.svg/500px-
Reynolds_Metals_Company.svg.png&imgrefurl=http://en.wikipedia.org/wiki/File:Reynolds_Metals_Company.svg&usg=__M-tPz7sDLm3Duk2lq
