Allis-Chalmers Mfg. Co. v. White Consolidated Indus., Inc., Civ. A. No. 3646.

• Decision Date: 22 January 1969
• Docket Number: Civ. A. No. 3646.
• Citation: 294 F. Supp. 1263
• Parties: ALLIS-CHALMERS MANUFACTURING COMPANY, Plaintiff, v. WHITE CONSOLIDATED INDUSTRIES, INC., Defendant.
• Court: U.S. District Court — District of Delaware

294 F. Supp. 1263

ALLIS-CHALMERS MANUFACTURING COMPANY, Plaintiff, v. WHITE CONSOLIDATED INDUSTRIES, INC., Defendant.

Civ. A. No. 3646.

United States District Court District of Delaware.

January 22, 1969.

S. Samuel Arsht and Lewis S. Black, Jr., Morris, Nichols, Arsht & Tunnell, Wilmington, Del., S. Hazard Gillespie, Roland W. Donnem, and Christopher Crowley, Davis, Polk & Wardell, New York City, John S. Lieb, Milwaukee, Wis., for plaintiff.

Blaine T. Phillips, Potter, Anderson & Corroon, Wilmington, Del., George I. Meisel, Richard M. Donaldson and John T. Scott, Jr., Squire, Sanders & Dempsey, and Ward Smith, for White Consolidated

Industries, Inc., Cleveland, Ohio, for defendant.

OPINION

WRIGHT, Chief Judge.

This is an action by plaintiff, Allis-Chalmers Manufacturing Company (Allis-Chalmers), for a preliminary injunction restraining defendant, White Consolidated Industries, Inc., (White), from violating § 7 of the Clayton Act, 15 U.S.C. § 18, by exercising its present stock interest in or acquiring further stock interest in Allis-Chalmers.¹ Jurisdiction is based on 28 U.S.C. § 1651(a), 28 U.S.C. § 1337, and 15 U.S.C. § 26.

Allis-Chalmers is a diversified manufacturing enterprise whose principal business is the production of diverse capital goods equipment and construction and agricultural machinery. Its annual sales total about $821,000,000. White is also a diversified manufacturer, specializing in a wide variety of machinery and equipment, household appliances, and industrial supplies. Its sales total about $825,000,000 per year. White's great diversification has been accomplished most notably by its acquisition of no less than ten companies since 1963; White now seeks to acquire another — Allis-Chalmers. To this end, White has purchased 31.2% of Allis-Chalmers stock from Gulf and Western Industries.² White now proposes to make a tender offer to Allis-Chalmers stockholders for the purpose of substantially increasing its share of ownership. The date and terms of that tender offer are still unknown.

Section 7 of the Clayton Act, 15 U.S.C. § 18, prohibits acquisition, in whole or in part, of the stock of a corporation "where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition * * *." Section 7 does not require a showing of existing or certain anti-competitive effects; indeed, its purpose is to interfere with movement toward undue concentration of economic power before anti-competitive effects can manifest themselves. United States v. Philadelphia National Bank, 374 U.S. 321, 362, 83 S.Ct. 1715, 10 L.Ed.2d 915 (1963); Vanadium Corporation of America v. Susquehanna Corp., 203 F.Supp. 686, 695 (D.Del.1962). Accordingly, it is sufficient for the complaining party to establish a "reasonable likelihood * * * that the acquisition will result in a restraint of commerce * * *." United States v. E. I. du Pont de Nemours Co., 353 U.S. 586, 592, 77 S.Ct. 872, 877, 1 L.Ed.2d 1057 (1957).

Injunctive relief is particularly suited to the preventive function of § 7 and Congress has expressly extended the availability of the injunctive remedy to private parties. 15 U.S.C. § 26. The standards applicable to preliminary injunctive relief, sought here, are well-settled:

"To justify a temporary injunction it is not necessary that the plaintiff's right to a final decision, after a trial, be absolutely certain, wholly without doubt; if the other elements are present (i. e. the balance of hardships tips decidedly toward plaintiff), it will ordinarily be enough that the plaintiff has raised questions going to the merits so serious, substantial, difficult and doubtful, as to make them a fair ground for litigation and thus for more deliberate investigation." Hamilton Watch Co. v. Benrus Watch Co., 206 F.2d 738, 740 (2 Cir. 1953).

See also Vanadium Corp. of America v. Susquehanna Corp., supra, 203 F.Supp. at 697. In other words, plaintiff must demonstrate a reasonable probability of success on final hearing. United States v. Ingersoll-Rand Co., 320 F.2d 509, 525 (3 Cir. 1963).

Turning to the specific facts of this action, the anti-trust implications of the White takeover have, after review of the evidence and argument of counsel, assumed an unusual cast. Despite generic similarity of a number of the markets in which White and Allis-Chalmers compete, there appears to be little actual overlap in the products of these two companies when the generic categories are broken down into specific markets. Indeed, virtually all direct competition is between Allis-Chalmers and the Blaw-Knox Company, a subsidiary of White, and even there, the overlap is not sufficient to indicate reasonable probability of a Clayton Act violation. Allis-Chalmers conceded this point at the hearing held January 14, 1969. See Transcript of Oral Argument, January 14, 1969, pp. 18-19; see also p. 61. In view of this concession, Allis-Chalmers grounds its entire action on the effects a White takeover will have on potential competition between the two companies. Specifically, Allis-Chalmers claims that it is a likely entrant into the electrical appliance and metal rolling mill markets in which White is already a significant factor. In addition, Allis-Chalmers claims to be a potential competitor of White in the area of "custom machine shop capacity." In these three areas, Allis-Chalmers alleges that a combination of the two companies will substantially lessen imminent competition.³

It is well-established that probable elimination of potential competition is one ground for injunctive relief under the Clayton Act. United States v. Wilson Sporting Goods Co., 288 F.Supp. 543, 559-563 (N.D.Ill.1968).⁴ See also Federal Trade Commission v. Proctor & Gamble Co., 386 U.S. 568, 87 S.Ct. 1224, 18 L.Ed.2d 303 (1967). In evaluating the effect of a takeover on potential competition, there are two distinct inquiries the Court must make. First, will the acquisition "remove as an independent competitive force a firm that, although not actually selling in the market of the acquired firm, has had a substantial impact on the behavior of companies in that market because it was recognized as a likely entrant?" Turner, Conglomerate Mergers and Section 7 of the Clayton Act, 78 Harv.L.Rev. 1313, 1362 (1965). Secondly, will the acquisition remove "a firm that would actually have entered the acquired firm's market by internal expansion if the merger had not occurred?" Id. See United States v. Wilson Sporting Goods Co., supra, 288 F.Supp. at 559. The factors relevant to these inquiries are, briefly stated, "the rate of growth and competitive structure of the market, the number of other potential entrants, the company's interest in and capability of entering." American Bar Association, Antitrust Developments 1955-1968 (1968), p. 87. See United States v. Penn-Olin Chemical Co., 378 U.S. 158, 175, 84 S.Ct. 1710, 12 L.Ed.2d 775 (1964); see also United States v. El Paso Natural Gas Co., 376 U.S. 651, 660, 84 S.Ct. 1044, 12 L.Ed.2d 12 (1964).

Considering first the allegation that Allis-Chalmers is a likely entrant into the electrical appliance market, the evidence before the Court in support of the allegation consists entirely of statements by key members of Allis-Chalmers management, particularly Allis-Chalmers' President, David C. Scott, that Allis-Chalmers has instituted negotiations with a foreign manufacturer of electrical appliances for the purpose of establishing supply arrangements and that it is the intention of Allis-Chalmers to become "another General Electric." Verified Complaint, ¶ 30; Scott Affidavit ¶ 29. In addition, Allis-Chalmers raises as objective evidence of likely success in the proposed expansion an established brandname and an established chain of Allis-Chalmers distributors capable of merchandising household appliances.

The evidence presented in opposition to the likelihood of Allis-Chalmers' entry, however, is overwhelming. To begin with, it appears that the electric appliance industry is saturated with competitors so that profitable entry into the market is difficult. The failure of both International Harvester and Philco-Ford to establish viable positions in this field in recent years highlights the difficulty. The dominance of such giants as General Electric, Westinghouse, Whirlpool, Frigidaire (a division of General Motors), and Kelvinator (a subsidiary of White) in the appliance industry make successful entry even less likely.

Entry is, of course, out of the question without an established system for distributing the products. While Allis-Chalmers does indeed have 2300 outlets available for merchandising of appliances, none of these outlets have any significant experience in handling indoor appliances.⁵ In addition, the vast majority of these outlets are in the rural areas, well removed from the burgeoning urban market for appliances.

Allis-Chalmers financial capacity to enter the appliance market is also open to question. Any significant thrust into this field would most certainly require a substantial investment, even where the entrant does not undertake to manufacture its own appliances. Allis-Chalmers has predicted a pre-tax loss of $50,000,000 for 1968; its net earnings on more than $820,000,000 in sales in 1967 were but $5,000,000 or $.41 per share....