[Federal Register Volume 62, Number 196 (Thursday, October 9, 1997)]
[Notices]
[Pages 52773-52775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26828]
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DEPARTMENT OF JUSTICE
Antitrust Division
[Civil Action No. 1:97CV01515]
Public Comments and Response on Proposed Final Judgment United
States v. Raytheon Company, et al.
Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C.
16(b)(h), the United States of America hereby publishes below the
comments received on the proposed Final Judgment in United States v.
Raytheon Company, et al., Civil Action No. 1: 97CV01515, filed in the
United States District for the District of Columbia, together with the
United States' response to the comments.
Copies of the comments and responses are available for inspection
in Room 215 of the U.S. Department of Justice, Antitrust Division, 325
7th Street, N.W., Washington, D.C. 20530, telephone: (202) 514-2481,
and at the office of the Clerk of the United States District of
Columbia, United States Courthouse, Third Street and Constitution
Avenue, N.W., Washington, D.C. 20001. Copies of any of these materials
may be obtained upon request and payment of a copying fee.
Constance K. Robinson,
Director of Operations Antitrust Division.
U.S. Department of Justice
Antitrust Division, 1401 H Street, City Center Building,
Washington, DC 20530.
September 26, 1997.
John Heston, Senior MMIC Designer,
David Heston, Technical Director Space Programs,
Texas Instruments, Inc., 13510 North Central Expressway, MS 209,
Dallas, Texas 75265
Re: United States, et al. v. Raytheon Company, et al.; Civil Action
No.: 1:97CV01515 (District of Columbia, July 2, 1997)
Dear Messrs. John Heston and David Heston: This letter responds
to your letter of August 4, 1997, commenting on the proposed Final
Judgment in the above-captioned civil antitrust case challenging the
acquisition by Raytheon Company of Texas Instruments' Defense
Systems and Electronics Unit. The Complaint alleges that the
acquisition violates Section 7 of the Clayton Act, as amended, 15
U.S.C. Section 18, because it is likely substantially to lessen
competition in the manufacture and sale of gallium arsenide
monolithic microwave integrated circuits (MMICs) in the United
States. Under the proposed Final Judgment, the defendants are
required to divest Texas Instruments' Defense Systems and
Electronics Unit MMICs business located in Dallas, Texas.
In your letter, you expressed concern that the proposed Final
Judgment may degrade national security, cause prices of MMICs to
increase substantially, eliminate efficiencies, slow technological
development of MMICs as well as transmit and receive modules (TR
modules), which house the MMICs, and harm synergies between the
development of MMICs and TR modules. Your letter recommended
approval of the proposed acquisition, or in the alternative, that
Texas Instruments' Defense Systems and Electronics Unit TR module
business be divested along with the MMICs business.
With regards to the national security issue, the U.S. Department
of Justice and the Department of Defense (DoD) found no evidence
that challenging this transaction would compromise national
security. After a thorough investigation, the Antitrust Division and
DoD concluded that the proposed transaction, if not blocked, might
lead to higher prices for MMICs. In addition, access to these
critical components of advanced radar systems might be foreclosed to
Raytheon's radar competitors, thereby, increasing DoD's costs for
new radar programs. These radars are an important part of our
nation's defense.
The MMIC cost increases you project, should the acquisition not
occur, are not supported by the evidence obtained in the
Department's investigation. Indeed, the very MMIC and TR module
synergies you hypothesize that would be obtained from the
acquisition will likely also be obtained by an alternative
purchaser. For example, if the alternative purchaser is a commercial
MMIC and/or TR module supplier, the design and capacity utilization
efficiencies you discuss should accrue to that purchaser as well.
Under these circumstances, the costs of MMICs will not increase and,
ultimately, may decline. Moreover, there is little incentive for the
commercial alternative purchaser to spurn military business, as you
claim, especially in view of the excess capacity in the industry.
This same rational applies to the likelihood of advancement of
the MMIC and TR module technology. As you point out, DoD programs
require state-of-the-art MMICs and TR modules. First, technological
advancements should be enhanced by maintaining competition in the
industry not by eliminating it. Second, ``cost plus'' contracts,
which are common in military procurement, by themselves will not
ensure low costs or more technological development without ample
competition in the marketplace. Without competition, there is little
incentive to keep costs down or innovate in MMICs or TR modules.
Third, Raytheon, by acquiring the Texas Instruments' TR module
business, likely will achieve efficiencies in the research and
development and production of its TR modules and MMICs making the
achievement of ``cross functional technology breakthroughs''
possible.
Finally, because our investigation found that competition in the
TR module industry is robust and that the MMIC business could easily
be segregated for purposes of divestiture, sale of the entire R/F
Microwave Unit, as you propose, is not required.
The Antitrust Division appreciates you bringing your concerns to
our attention and hopes that this response will alleviate them.
While the Department understands your positions, we believe that the
proposed Final Judgment will adequately address the competitive
concerns created by the Raytheon's acquisition of Texas Instruments'
Defense Systems and Electronics Unit. Pursuant to the Antitrust
Procedures and Penalties Act, a copy of your letter and this
response will be published in the Federal Register and filed with
the Court.
Thank you for your interest in the enforcement of the antitrust
laws.
Sincerely yours,
J. Robert Kramer II,
Chief, Litigation II Section.
To: J. Robert Kramer
From: John Heston, Senior MMIC designer RTIS, David Heston,
Technical Director Space Programs RTIS
Claim: We claim that the July 2 order of the Department of
Justice (97 1515) to break up the R/F Microwave business unit of
Raytheon TI Systems (i.e. divestiture of the `MMIC Business') will
degrade the national security in both the short term and long term.
It is our premise that the Department of Justice made a premature
decision due to time pressures, political pressures, and lack of
complete information. This paper presents additional information
relevant to the Department of Justice decision and asks for
reconsideration.
[[Page 52774]]
Our perspective of the July 2 consent decree: On January 6, 1997
Raytheon proposed to purchase the Defense Systems and Electronics
Group of Texas Instruments for $3B. In clearing the
anti-trust issues with the proposed acquisition the technology used
to manufacture radar components (i.e. GaAs MMIC circuits and
microwave modules) became an issue. Several months were spent in an
investigation of this technology and both Raytheon and Texas
Instruments provided information on microwave power amplifiers and
modules to the Department of Justice. With direction from the Office
of the Secretary of Defense the Department of Justice issued a
consent decree to allow the acquisition of TI's defense group
provided the `MMIC Business' of Texas Instruments RF/Microwave
Department be divested. The RF/Microwave Department employees
800 people and had annual sales of $125M in
1996. The RF/Microwave department is comprised of: GaAs operations
(MMIC fabrication), module manufacturing, MMIC and module design
groups, and program management. The `MMIC business' as decreed by
the Department of Justice comprises 300 of these people
(all of GaAs operations, a portion of the MMIC design and program
management capabilities, and the microwave GaAs research lab) and
had equivalent revenues of $50M in 1996.
The goal of the Department of Justice decision was to keep
Northrop Grumman and other military system suppliers competitive in
the microwave module business by ensuring it a supply source of
outstanding GaAs MMICs. It was the underlying assumption that this
competition was necessary to drive down the cost of military-use
MMICs.
However, there are four facts that need to be reviewed again
before the consent decree is issued. The conclusions previously
reached regarding the impact of this consent decree need to be
reconsidered.
Fact 1
The `MMIC Business' spin-off company will have to raise MMIC
costs.
Reasons for FACT 1: The same fabrication overhead will now be
spread over a much smaller revenue and people. Short term MMIC costs
will soar. Initial estimates provided to the programs from the now
`fire-walled' MMIC Business group indicate a 50% to 100% price
increase for MMIC devices. This price increase is effective August
1, 1997. The price increase does not include GNA or profit since
they are still part of RTIS.
Also, the synergy existing and being developed between the
module and MMIC business will be broken. This synergy includes
sharing office space, test equipment, printer/copiers, secretarial
support, financial support, prototype parts stock, design seminars,
and profit. As a result of eliminating this synergy, the long term
cost of the `MMIC Business' spin-off will remain higher than they
would have been regardless of the Buyer.
Revised Conclusion 1A
Northrop Grumman and other military system suppliers will not be
able to compete against Raytheon at the microwave module level in
cost since it will be purchasing higher priced MMICs from the `MMIC
Business' spin-off. Raytheon will still have access to their own
MMICs which will not change in price. Raytheon will also be able to
lower module costs due to synergy between the two module factories
(i.e. its own module factory and the one acquired from Texas
Instrument's RF/Microwave department.
Revised Conclusion 1B
Short term cost to F-22 and all other RTIS microwave military
(cost plus) programs will increase.
Fact 2
The commercial market (not military competition) dominates the
volume and cost of every GaAs fabrication plant and thus the cost of
military radar MMICs.
Reasons for FACT 2: The bulk of the fab cost is fixed.
Therefore, volume drives the cost/die down and allows profits to
grow. Military programs have low volumes. Even a military phased
array such as F-22 only requires an estimated 500 wafers/year of
high yielding power amplifier MMICs [estimate based on 440 planes
produced in a 10 year period]. By contrast, cellular phones require
millions of units per year (7000 wafers/year for every 1
million phones.) And the potential commercial telecommunications
phased array market (Teledesic, Motorola, Alcatel) is also much
larger than the military market. To place this in perspective, in
1996 Texas Instrument's GaAs facility produced only 414 wafers of
high power X-band MMICs for all of its microwave customers (military
and commercial). The only way to achieve low cost military use MMICs
without allowing commercial volume to set the price would be to
operate a very tiny GaAs fab.
Revised Conclusion 2A
To provide a good supply of military MMICs, the `MMIC Business'
spin-off must be viably competitive in the commercial market. The
increased overhead rate of the `MMIC Business' spin-off may cause it
to lose business to commercial competitors such as MA/COM, Triquent,
and RFMD. Unless they are extremely successful in the commercial
market the long term cost/availability of the military radar MMICs
from this group is questionable. The `MMIC Business' spin-off will
also be focusing their resources on commercial MMICs instead of
military MMICs since they know that their survival is dependent upon
success in that market.
Fact 3
Military component costs (i.e. radar MMICs and modules) are
driven by technology immaturity.
Reasons for FACT 3: Military programs require the latest MMIC
technology (0.25um gates, pHEMT material, highest power levels) that
has been developed. The program costs are typically driven more by
development of this technology and solving unexpected travails of
the technology development than by competitive pricing analysis. All
the process development costs involved in solving technology
development difficulties are passed onto the government through cost
plus contracts.
The GaAs industry is still struggling to solve the two key
problems that held Silicon growth down until the 1970's: reliability
and FET pinchoff control. These two issues are not as thorny for
lower requirement commercial MMICs.
Revised Conclusion 3
Military MMIC cost and availability will likely be improved more
by allowing consolidation than by increasing competition. The use of
cost plus contracts will prevent the consolidated companies from
arbitrarily raising prices on military programs. Commercial
competition will keep the MMIC costs low. Teaming agreements between
military system suppliers (as is the case on F22 where RTIS and
Northrop Grumman are teamed together) can be used to provide a
continuous source of microwave components to competitors.
Fact 4
Divestiture of the `MMIC Business' divides a team that is
acknowledged as a leader in military microwave solutions and may
impair technical breakthroughs on future military programs. Cost of
future military programs will be higher without these breakthroughs.
Reasons for FACT 4
The RF/Microwave department at Texas Instruments has very good
synergy between system requirements from government agencies and the
technology needed to achieve these requirements. There is synergy
between module and MMIC designers, between MMIC designers and the
GaAs facility, and between programs and the research lab that has
developed over the past 25 years. A number of cross functional
engineering teams are in place to promote technology development and
minimize re-invention. We have both worked on programs where a
Government agency had a technology roadmap of desired system
capability and the year they anticipated this capability becoming
available. Through a combination of Government research programs and
internal investments key technical areas in the research lab and
GaAs facility were targeted for development to achieve specific
module performance levels. Over a 3 to 4 year period, a number of
technical breakthroughs occurred at both device (GaAs process and
material) and design (MMIC and module) levels. These breakthroughs
enabled system architectures up to 5 years sooner than previously
anticipated. Hopefully this pull-up has benefited the National
Security and also provided a lower cost solution. This type of
technical breakthrough will be much more difficult with the `MMIC
Business' divestiture and a breakup of the cross functional
engineering groups developed over many years within the RF/microwave
department.
A secondary result of the `MMIC Business' divestiture is an
increased turnover of personnel. Since the decision, three MMIC
designers and six process personnel in the `MMIC Business' have
already given notice of
[[Page 52775]]
their intention to leave the company and many others are openly
talking of leaving due to career uncertainty created by the Justice
Department decree. Morale is extremely low and it possibly endangers
the core team of MMIC design/process expertise that is being
divested.
Revised Conclusion 4
The `MMIC Business' divestiture will increase the cost of future
military microwave components through increased difficulty in
achieving cross functional technology breakthroughs.
Revised Conclusion 4B
The `MMIC Business' spin-off could potentially lose critical
mass of its key personnel due to morale problems associated with the
Justice Department decree.
Proposed Solution
Keep the R/F Microwave Business unit intact. This will prevent
an increase in MMIC costs, keep the company viable for commercial
business, and allow the company to continue development of advanced
technology.
Option 1: Keep the unit with Raytheon. This will provide the
greatest opportunity for high performance, low cost military MMICs
and modules. Since RTIS is teamed with Northrop Grumman on the F22
program they will be provided necessary MMICs for their module build
as part of that agreement.
Option 2: Spin off the entire R/F Microwave unit from RTIS. This
will make Northrop Grumman and other military system suppliers more
competitive. The downside is a loss of possible maturity for
advanced MMIC processes that would have occurred with the merger
(i.e. combination of Raytheon and TI engineers sharing information.)
Regards
John Heston, (972) 995-6051, RTIS, 13510 North Central Expressway,
MS 209, Dallas, TX 75265
David Heston, (972) 995-6048, RTIS, 13510 North Central Expressway,
MS 262, Dallas, TX 75265
[FR Doc. 97-26828 Filed 10-8-97; 8:45 am]
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