The opinion of the court was delivered by: STEWART
Federal courts have become a common arena in which tender offer battles are waged. The action before this Court began with an order to show cause why Cargill, Incorporated (Cargill) should not be restrained from continuing its cash tender offer to purchase all outstanding shares of Missouri Portland Cement Company (Missouri Portland). The action and counter-action arise under Sections 9, 10(b), 13, 14(d) and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78i, 78j(b), 78m, 78n(d) and 78n(e), and under Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2, and Sections 4, 7 and 16 of the Clayton Act, 15 U.S.C. §§ 15, 18 and 26. This Court has jurisdiction over the action under 15 U.S.C. §§ 26, 78aa.
Plaintiff Missouri Portland is a corporation organized under the laws of the State of Delaware with its principal place of business in St. Louis, Missouri. Defendant Cargill is a closely held corporation organized under the laws of the State of Delaware with its principal place of business in Minneapolis, Minnesota.
After a hearing on an application by Missouri Portland for a temporary restraining order on Friday, December 28, 1973, this Court denied Missouri Portland's application on the same day and also granted an order for expeditious discovery. The following Wednesday, January 2, 1974, hearings began on Missouri Portland's application for a preliminary injunction against Cargill's tender offer to which was joined Cargill's claim that Missouri Portland had violated the Securities Exchange Act of 1934 and for appropriate relief. Missouri Portland's first claim is that Cargill violated the securities laws by misrepresenting and omitting material facts in its tender offer statements. The second claim against Cargill is based on the allegation that Cargill's takeover of Missouri Portland would constitute a violation of the antitrust laws. While the hearings for a preliminary injunction were proceeding, Cargill applied to the Court for an order requiring Missouri Portland to stop communicating with its shareholders, to correct misrepresentations, and to turn over its shareholder list to Cargill. The orders of January 7 and 14, 1974, granted Missouri Portland's application for a preliminary injunction on the basis of the antitrust allegations and generally preserved the status quo pending appeal.
The first part of this opinion is limited to a determination of the antitrust allegations.
Facts. The Portland Cement Industry.
Missouri Portland's principal business is the production of portland cement, a binding agent used in a mixture to produce concrete. The manufacturing of this dark gray fungible powder is only the first and relatively inexpensive stage in the cement business. While the manufacturing process for portland cement is well known and quite simple, the capital outlays to enter the industry are substantial, e.g., the cost of constructing a cement plant. A company planning to enter the cement business would have to have substantial resources and staying power.
The heavy bulk commodity is generally sold to ready mix concrete dealers and in some cases directly to building contractors. The cost of transporting the cement is the major expense involved in the production and distribution of the product. Ready mix dealers do not have storage facilities for cement so their needs require prompt delivery on short notice. The portland cement industry is thus characterized by substantial capital investment for the construction of plants and by the need for prompt transportation of the cement to ready mix dealers in the surrounding areas. This Court notes that Cargill's general pricing policy conforms to the structure of the cement business: to cut costs, operate on a very low margin and rely on high volume to earn profits.
Missouri Portland has three plants from which it distributes cement. They are located in St. Louis, Missouri, on the Mississippi River; Independence (Kansas City), Missouri, on the Missouri River; and Joppa, Illinois, on the Ohio River. Its plants are located on rivers so that the cement may be barged in bulk to its eight terminals located in Memphis, Tenn., Decatur, Ala., Nashville, Tenn., Owensboro, Ky., Louisville, Ky., Omaha, Neb., Peoria, Ill. and Chicago, Ill. Most of Missouri Portland's cement is transported by truck from these plants and terminals. Because of a zone pricing system used in the trucking business cement is generally not transported over 200 miles from the plant or terminal. As a result, ready mix dealers rarely order cement from suppliers who do not have terminals or plants nearby. Although Missouri Portland operates in 11 Midwestern states it has demonstrated that its principal marketing areas are generally located within a radius of 200 miles of its plants or terminals. The underlying business factors (cost and promptness of transportation) support the contention that Missouri Portland's prime market areas are centralized around its plants and terminals. Defendant urges us to find that Missouri Portland services 11 states. We so find, but we also find that the testimony and record before this Court reflect that the serviced areas with which we are concerned are tightly concentrated around Missouri's plants and terminals. To find otherwise would be to ignore economic realities. Based upon these business realities this Court finds that the metropolitan areas which Missouri Portland services are the relevant market areas for a determination of the anti-trust issues.
While defendant urges this Court to address itself to the general 11 state area and to the capacity of the companies in those states, we find that Missouri Portland's markets and submarkets in which competition will be adversely affected are, more particularly, metropolitan areas. Production capacities, while they are interesting, do not alone reflect actual market conditions, nor can they be used to infer the relative market positions of portland cement producers in specific metropolitan areas.
The metropolitan centers in the eleven Midwestern states served by Missouri Portland have different definable characteristics which make them distinguishable submarkets. Prices may differ from one market to another depending on the competitors present. Different markets are served by different companies. Missouri Portland has one set of competitors in Kansas City, another set in St. Louis, another in Memphis, and so on.
The seven major metropolitan marketing areas served by Missouri Portland are highly concentrated markets. Missouri Portland ranks first and accounts for 28% of the cement shipments in the St. Louis, Missouri marketing area. Ninety percent of the cement shipments are accounted for by the top four companies. In the Kansas City area Missouri Portland ranks first and accounts for 30% of the cement shipment. In this market area the top four companies account for 89% of the market. Missouri Portland ranks first in the Memphis, Tennessee metropolitan area with 30% of the market. The top three companies in this area account for approximately 100% of the cement shipments. In the Omaha, Nebraska area the top four companies account for 98% of the cement shipments. Missouri Portland accounts for 21% and ranks second in this area. Each of these metropolitan areas is a relevant market for determining whether there will be a substantial lessening of competition by a takeover of Missouri Portland by Cargill.
There is nothing in the record to reflect that the dominance of Missouri Portland in the relevant metropolitan cement markets is diminished by the existence of theoretically stronger companies in the same areas which have chosen not to produce at full capacity or not to expand their cement divisions with their extensive capital resources.
The cement industry is aptly described as capital intensive, a factor affecting market conditions. There is a trend toward larger production facilities increasing the already substantial amount of capital necessary to build production plants. This is reflected by the fact that since 1950 entry into the industry has tended to be by large companies, either foreign cement companies or large diversified American companies. The increase in capacity has been principally made by large cement producers or by cement companies owned by large well-financed companies. The lack of capital has caused smaller plants to close down. This trend has continued to make the cement industry more highly concentrated. Difficulty of entry into this capital intensive industry is demonstrated by the estimation that it would cost $200 million to reproduce Missouri Portland's present cement facilities.
A. Cargill is a huge privately held company with substantial diversification in bulk commodity markets. Cargill had net sales of $5.3 billion and a net income of $107.8 million for fiscal year ending May 31, 1973. Its net worth as of May 31, 1973 was $352.4 million. Cargill's continuing growth is reflected by the fact that on November 30, 1973 its sales were ahead of a comparable period for the prior fiscal year by $1.6 billion.
Cargill has been principally engaged in grain trading since 1865. Cargill's chief executive officer has aptly described the grain business as a commodities type business. It involves the sale of goods and shipment in bulk. Since 1932 Cargill, through a subsidiary, has engaged in the operation of river barges which carry bulk commodity products and of tow boats which push the barges. By owning its own barges and tow boats Cargill has a competitive advantage in the transportation of grain and other commodity products because its service can be more prompt and less expensive than if it had to rely on transportation facilities of another company. By having its own barges Cargill can carry bulk commodities to a customer and then return with another commodity. Cargill's capacity for transporting bulk commodities makes diversification into commodity businesses other than grain both economically feasible and advantageous. In fact, since 1940 Cargill's expansion has been directed towards businesses involving bulk commodities. Transportation is one of the principal economic factors in any bulk commodities business, and as discussed above, this fact is especially true of portland cement.
Since 1940 Cargill has been engaged in the vegetable oil processing (soybeans) and animal feeds businesses. These products are fungible products, like grain, which are shipped in bulk. In entering these businesses Cargill began by acquiring small plants and then greatly expanding the business. Cargill's chief executive since 1960, Mr. Kelm, asserts that Cargill always endeavors to become a significant factor in any business it enters. Approximately eighty percent of Cargill's business in 1960 was in grain trading and vegetable oil processing. Cargill has developed considerable expertise in the production, marketing and distribution of bulk commodities. The commodities business requires skill in negotiation of price with sophisticated industrial users, an ability to control and limit excessive transportation costs and an ability to provide service that is expected by usual industrial customers. These skills are substantially transferable from one commodity to another. In this area Cargill has salesmen who know how to sell fungible products and have been transferred by Cargill from the sale of one bulk commodity to another. Cargill has also developed the ability to transport heavy bulk products profitably, promptly and reliably. Because Cargill is a large shipper it is given preferential treatment by railroads and other shippers. Railroads and other shippers respond quickly to service requests by Cargill. Being an immense company with prompt access to transportation services of its own as well as of other places Cargill in an ideal position to exploit these abilities by expanding its business into different bulk products.
Since 1960 Cargill's diversification has accelerated for two significant reasons: (1) Cargill wanted opportunities to reinvest its capital at a return that was greater than in grain and soybean, and (2) diversification promised to provide more stable earnings because the grain business was "dramatically cyclical." Cargill's diversification plans begin at the department levels where determinations to go into a particular product could be based on daily business factors. A Long Range Planning Committee of the Board aids Cargill's chief executive in studying various areas of possible diversification. The record reflects that since 1960 Cargill has diversified into several bulk commodity businesses. Its entry into other businesses was accomplished by acquisition of either a small or medium sized company or plant or by de novo entry in a business. After entering the area Cargill significantly expands production and sales by substantial expenditures.
Cargill has entered one bulk commodities business after another in which its skills and facilities have enabled it to become a dominant factor in the market. In the 1960s Cargill entered the sugar trading business. Because sugar is a fungible bulk commodity Cargill eased into the business by hiring a man experienced in the field who then trained employees of Cargill to run the sugar business on their own. Also, in the 1960s Cargill purchased a long established medium sized ores and metals company for $6,000,000. Again these fungible products involved many of the same business skills as used in Cargill's other businesses. Cargill's subsequent purchase of a steel distributing company expanded its ores and metals business. Cargill also entered the fertilizer business in the 1960s by establishing mixing plants in strategic country locations, building warehouses and by using its personnel from other similar bulk commodities products to run its fertilizer business.
Cargill entered de novo into the business of international shipping of commodities and now has ocean-going vessels built for shipping bulk commodities. This expansion cost approximately $54 million and required the difficult task of hiring expert personnel and trained seamen.
A classic example of Cargill's ability to enter related bulk commodities businesses was its entry into the flour milling and corn wet milling businesses. After acquiring a small company in each business, Cargill expanded the businesses substantially. It expanded a small corn wet milling plant at a cost of $6.8 million and then built a second plant for approximately $45 million.
The chemical division of Cargill has expanded into the manufacture of man-made resins and polyurethanes, which are shipped in bulk by train or truck. The poultry products business attracted Cargill in the early 1960s and it acquired small plants in Arkansas, Florida and Delaware. It has since expanded these plants. Because transportation is a significant aspect of this business, Cargill's best skills and assets were employed in the poultry business also.
The salt business was also entered by Cargill in the 1960s. In its general fashion, Cargill entered the business through a rather small operation and thereafter expanded. By entering the salt business Cargill now possesses an additional business skill in mining. Entry into the portland cement business has now been termed "very logical" by Cargill.
Cargill's Decision to Enter the Portland Cement Industry.
In August of 1972 the Salt Department established a Salt Expansion and Diversification Group (Salt Group) to investigate priorities and expansion opportunities. The Salt Group met on August 4, 1972 and decided that expansion into a related industry should only be considered if the industry was similar to salt with respect to two of the department's skills in production, marketing and distribution. After researching such industries as coal, cement, lime, chlorine, kaolin, aggregates, zinc, flour-spar, asphalt, potash, phosphate and caustic soda, and studying preliminary reports, at a meeting on October 24, 1972, the Salt Group rated the cement industry as the number one acquisition prospect.
Mr. Leisz who had been researching the cement industry was assigned to expand the investigation and to gather financial information about cement companies. Cargill determined from independent research and from professional assistance from outside consultants that there was similarity between the cement industry and the milling industry. The consultant's report, An Overview of the Cement Industry, discussed the regional markets in the cement industry, the concentrated and concentrating nature of the markets and the cost factors involved in constructing a new cement plant. After considering reports and studies the Salt Group met on December 26, 1972 and agreed that the cement industry was the primary prospect for diversification.
Cargill's firm determination to enter the cement business is further evidenced by steps taken in 1973 beginning in February when Cargill retained Robert Morrison, former President of Marquette Cement Company, to assist in selection of a cement company. It is significant to note that in setting forth Cargill's intentions to Mr. Morrison, Mr. Leisz (the cement man of the Salt Group) stated that Cargill desired an acquisition that "would allow Cargill to become the tenth largest cement company in ten years, the fifth largest in fifteen years and the largest in twenty years." This desire relates to the country as a whole but it is relevant to show what Cargill's anticipated market position will be regarding the pertinent market areas in the present lawsuit.2a
Having received reports on various companies by Mr. Morrison, on March 26, Mr. Leisz submitted his final report which amplified his previous conclusions and specified the following similarities between the salt and cement industries: both products are primarily bulk; products move either directly from production or through terminals to customers; the Interstate Commerce Commission regulates these commodities; trucking accounts for over 80% of product deliveries to customers; the season for cement usage is opposite from that of salt; users have small inventories, so producers must provide excellent service; the market served from production or terminal point is generally within 150 miles; the quarrying of limestone is similar to mining salt; the needs and caliber of the sales force is the same; production equipment is similar for cement and salt; and there are two or more competitors calling on customers on a regular and frequent basis.
It was recommended that Cargill acquire a plant producing between 1 1/2 and 3 million barrels per year. Missouri Portland's present capacity is about 10 million barrels per year. Cargill's management had advised the Salt Group that it could spend no more than $10 million for entry into the cement industry. Cargill thereafter decided to spend substantially more than $10 million. The Salt Group had previously recommended the acquisition of a small cement company or plant. Mr. Kelm testified that the Salt Department was in the best position to judge the proper size of an efficient cement plant.
At this point Cargill's interest in the cement industry spurred concrete approaches to cement companies. While many cement companies were studied, 23 of the 51 United States cement companies were actually contacted by letter as to whether they were interested in acquisition by Cargill. Thirty-one companies were finally contacted either in person or by letter. Executive level meetings were also held with ten companies who responded positively. Extensive discussions were held relating to the acquisition of the assets or part of the assets of several cement companies, including Valley Cement Industries, Alpha Portland Cement Company, American Cement Company, Coplay Cement Company and the River Cement Plant. Except for American Cement Company, all of the above firms, or the specific assets sought to be acquired by Cargill, are smaller than Missouri Portland. We find that acquisition of these and other firms was feasible and seriously considered by Cargill.
On September 27, 1973 Mr. Leisz submitted to the Long Range Planning Committee a report which repeated the desirability of entry into the cement industry and recommended purchasing either Coplay or Valley Cement Company. Coplay Cement possesses approximately 2/3 of Missouri Portland's present capacity. Valley Cement possesses approximately 1/11 of the capacity of Missouri Portland. The September 27, 1973 report also stated that the Financial Department viewed Missouri Portland as the number one potential tender offer target. The list included several other companies, some smaller than Missouri Portland. The Long Range Planning Committee at this time concluded that it was disposed to invest $20 to $40 million to enter the cement industry and that Missouri Portland was its first choice.
This Court finds that there is no evidence that Cargill would not enter the cement industry through some other company if it did not acquire Missouri Portland. In fact, the extensive research, study and pursuit of entry by Cargill into the cement business is conclusive of one thing -- Cargill has amply demonstrated its intention to enter the cement industry. This intention is well known to the cement industry because of Cargill's active conduct in attempting to enter the industry before actual contact was made with Missouri Portland
and long before initiating its tender offer. The fact that there are large cement companies outside the markets relevant in this case does not as a matter of fact make them likely entrants. Finally, based upon the evidence of Cargill's subjective interest in the cement industry as well as the abundant objective criteria which makes the cement industry perfect for Cargill's diversification plans, this Court finds that Cargill was for some time and still is the most likely potential entrant into the cement industry markets in which Missouri Portland has been found to be dominant.
Cargill will not be foreclosed from renewing its tender offer at a future time if this Court decides at the trial on the merits that there are no antitrust violations. Thus, enjoining the tender offer results in inconvenience and financial ...