Appeal from a preliminary injunction issued by the District Court for the Eastern District of New York (Jacob Mishler, Judge), barring a tender offer on grounds of likely violations of § 7 of the Clayton Act and the Williams Act. Affirmed.
Before Moore and Newman, Circuit Judges, and Tenney,*fn* District Judge.
This is an appeal from the granting of a preliminary injunction that prevents the LTV Corporation from proceeding with a tender offer to acquire, in stages, all of the shares of Grumman Corporation. The District Court for the Eastern District of New York (Jacob Mishler, Judge) issued the injunction after finding that Grumman had proved a likelihood of success on its claims that the proposed acquisition would violate § 7 of the Clayton Act, 15 U.S.C. § 18 (1976), and that LTV's Offer to Purchase violates the Williams Act, §§ 14(d) and 14(e) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. §§ 78n(d) and 78n(e) (1976). Grumman Corp. v. LTV Corp., -- - F. Supp. -- (E.D.N.Y.1981). We agree that the preliminary injunction was properly issued on antitrust grounds and therefore affirm, without reaching the Williams Act claims.*fn1
On September 24, 1981, LTV commenced a tender offer for the acquisition by CKH Corporation, its wholly owned subsidiary, of common stock, convertible preferred stock, and convertible subordinated debentures of Grumman, representing or convertible into approximately 70% of Grumman's outstanding voting shares. The price was $45 per share of common stock, approximately double the market price of Grumman stock during the week preceding the offer. LTV also announced plans subsequently to acquire the remaining 30% of Grumman stock. Grumman initiated this litigation on September 28. Following limited discovery, including 19 depositions, a limited evidentiary hearing on the motion for a preliminary injunction was held on October 6 and 7. Judge Mishler rendered a detailed opinion on October 14. Pursuant to an expedited appeal, we heard oral argument on October 28.
Mindful that target companies are quick to seek refuge in § 7 against an unfriendly takeover, see Missouri Portland Cement Co. v. Cargill, Inc., 498 F.2d 851, 854 (2d Cir.), cert. denied, 419 U.S. 883, 95 S. Ct. 150, 42 L. Ed. 2d 123 (1974), we also recognize that when a takeover threatens horizontal integration, the courts have a clear duty to weigh carefully the claim for a preliminary injunction, F. & M. Schaefer Corp. v. C. Schmidt & Sons, Inc., 597 F.2d 814 (2d Cir. 1979) (per curiam ); Gulf & Western Industries, Inc. v. Great Atlantic & Pacific Tea Co., 476 F.2d 687 (2d Cir. 1973); Allis-Chalmers Mfg. Co. v. White Consolidated Industries, Inc., 414 F.2d 506 (3d Cir. 1969), cert. denied, 396 U.S. 1009, 90 S. Ct. 567, 24 L. Ed. 2d 501 (1970), even though the true concerns of the "private attorney general" may be more "private" than "attorney general." If the effect of a proposed takeover may be substantially to lessen competition, the target company is entitled to fend off its suitor. Our focus is therefore not upon Grumman's motivation for bringing this suit, but upon the adequacy of its preliminary showing that the proposed takeover will violate § 7.
Judge Mishler ruled that Grumman had shown the requisite probability of success on its § 7 claims with respect to three distinct product markets: the carrier-based aircraft market, the major airframe subassembly market, and the nacelle (aircraft engine structure) market. For purposes of this appeal, LTV does not contest the appropriateness of these three product markets. Its primary contention is that the District Court misapprehended a likelihood of diminished competition within these markets, and it also contends that the scope of the markets was incorrectly defined. LTV does not dispute that during the past two decades Vought Corporation (LTV's subsidiary) and Grumman have been substantial competitors in the production of airplanes and aircraft components. The issue is whether there currently exists a prospect of significant future competition in the three relevant product markets and whether the nature of those markets is such that the proposed acquisition will probably have an unlawful anti-competitive effect.
1. Carrier-Based Aircraft. As both sides point out, the carrier-based aircraft market has unusual characteristics. In this country there is only one buyer, the Defense Department. It decides which companies will be invited to submit bids for new planes. Bidding competitions occur infrequently and entail enormous costs. Grumman's evidence indicated that development of a proposal for the VTX, a carrier-based training aircraft, would cost more than $30 million. As for sales of currently available models, the District Court accepted Grumman's evidence that in the past three years the total for carrier aircraft was approximately $11 billion, divided among only four manufacturers: Grumman, 41.5%, Vought (alone and with Lockheed), 7.7%, and McDonnell Douglas, 50.8%. Plainly, this market is a "tight oligopoly," Stanley Works v. Federal Trade Commission, 469 F.2d 498, 504 (2d Cir. 1972), cert. denied, 412 U.S. 928, 93 S. Ct. 2750, 37 L. Ed. 2d 155 (1973), in which it is important to prevent "even slight increases in concentration." United States v. Continental Can Co., 378 U.S. 441, 462, 84 S. Ct. 1738, 1749, 12 L. Ed. 2d 953 (1964).
LTV challenges the Court's assignment to Vought of a 7.7% market share. That share represents $734 million in sales of the A-7 and $110 million in sales of the S-3 during the past three years. Apparently not disputing $533 million in revenue from A-7's in 1979 and 1980, LTV challenges the $201 million figure for 1981 on the ground that $112.6 million of the 1981 total represents A-7K's, which are land-based trainers for the Air National Guard, and $79.5 million represents modifications of existing aircraft. Grumman responds that the A-7K's are properly included since the planes are designed for carrier use and their sale keeps in operation a production line for carrier-based planes. Grumman also contends that modifications of existing aircraft are properly included within the carrier-based aircraft market. LTV also challenges inclusion of $110 million for the S-3's, since Lockheed is the prime contractor for these planes. Grumman responds that Vought and Lockheed team up to produce the S-3's and that Vought's experience with carrier-based planes was critical to the awarding of the contract. While the challenges to the 7.7% share may merit further exploration during a plenary trial, we are satisfied that the Vought share of the carrier-based aircraft market was properly found to be of sufficient significance reasonably to apprehend a lessening of competition in the event of a Vought-Grumman combination.
LTV's more fundamental challenge is that whatever the record shows as to past sales, there is an insufficient basis to believe that Vought will be a competitive factor in the future. LTV points out that the Navy's last order for A-7's was submitted in 1978 and that the Defense Department has no current plans to purchase A-7's from Vought. Judge Mishler did not ignore these facts, but concluded nonetheless that Vought can reasonably be expected to provide competition in the carrier-based aircraft market. Obviously, the District Court could not say with certainty that the Defense Department will resume purchase of A-7's at a precise date or in a precise amount. The Court noted several factors that increase the likelihood of such purchases: problems associated with the A-18 aircraft produced by McDonnell Douglas, the Navy's plans to increase the number of carriers in operation, Vought's own marketing strategy, and the heightened tensions in the Middle East.
LTV contends the Court was impermissibly considering mere possibilities. To the extent that this criticism is valid, it simply reflects an inevitable aspect of an unusual market. Carrier-based planes do not roll off assembly lines like television sets or automobiles. In a market with a single domestic purchaser, which buys intermittently, a court assessing the anti-competitive effect of a horizontal combination must consider future possibilities in assessing whether there exists a significant probability of decreased competition. Whether or not Vought will sell more A-7's to the Defense Department, the fact remains that it was properly found to be competing to do so. It hopes to keep its A-7 production line in operation by selling more A-7K's to the Air National Guard. It is attempting to sell A-7's abroad. As recently as June of this year it had pending with the Navy a proposal for a modified version of the A-7, the A-7X. The Navy's rejection of the proposal does not lessen the significance of Vought's capacity and desire to make it. "Unsuccessful bidders are no less competitors than the successful one." United States v. El Paso Natural Gas Co., 376 U.S. 651, 661, 84 S. Ct. 1044, 1049, 12 L. Ed. 2d 12 (1964). In a planning document Vought submitted to LTV's board of directors just prior to the tender offer, Vought characterized itself as "STRONG" in the naval tactical aircraft market.
Assessing all of the evidence before him, Judge Mishler concluded that in light of the history, structure, and probable future of the market for carrier-based aircraft, a merger between Grumman and Vought might tend to substantially lessen competition. We are satisfied that Grumman established at least the requisite probability of success in proving this proposition at trial to warrant a preliminary injunction.
2. Major Airframe Subassemblies. The District Court determined that there existed a relevant market for the sale of major airframe assemblies for large civilian aircraft. The key items sold in this market are the fuselage, wings, and empennage (tail assembly) of an airplane. The Court found the market limited to seven manufacturers, of which Grumman and Vought were considered to be two of the strongest competitors. The Court determined that Vought currently has a 15% share of a $1 billion market and is projected to have a 14.3% share of a $1.5 billion market by 1984; comparable figures for Grumman are 9.8% and 32%. The Court found that Grumman and Vought have engaged in head-to-head competition for sections of the fuselage for the Boeing 757 and the empennage for the Lockheed CX and that a merger would substantially weaken competition in the market.
LTV contends that the District Court erred in calculating both the aggregate market and the respective shares of Grumman and Vought, and that the actual competition between the two companies affects only an insubstantial percentage of the airframe subassembly market. First, LTV objects to the exclusion of export sales to foreign manufacturers. We see no reason why the District Court may not assess the effect of the proposed merger upon the market consisting of sales to United States purchasers.
Somewhat more substantial is the claim that the Court should have included in the market the subassembly work that the major prime contractors, Boeing, Lockheed, and McDonnell Douglas, perform for themselves. Judge Mishler excluded this work because the major contractors never award subcontracts to each other. LTV responds that the subcontractors, including Grumman, regard the prime contractors as competitors for the subassembly work in ...