Innovative Tools and Methods for the Analysis of Vertical Acquisitions: The Toyota Industries and Cascade Corporation Transaction
Analysis Group affiliate Edward A. Snyder and Analysis Group President Pierre Cremieux, Ph.D., discuss their recent assistance to the Toyota Industries Corporation (TICO), a manufacturer of lift trucks, in its vertical acquisition of Cascade Corporation, a manufacturer of state-of-the-art lift truck attachments.
Q: What differentiated the Department of Justice’s (DOJ) concerns in this case from more traditional concerns raised in mergers and acquisitions?
Edward Snyder: Dean and William S. Beinecke Professor of Economics and Management, Yale School of Management
Dean Snyder: Traditionally, the cases that receive the most antitrust scrutiny involve mergers of horizontal competitors, meaning that the merging parties operate at the same level of production. By contrast, the DOJ raised serious concerns that TICO-Cascade, a vertical acquisition, might result in exclusionary conduct. Vertical mergers can affect competition at two levels of production – in this case, lift trucks and attachments. So the analysis required an understanding of two related, yet distinct product markets.
Q: What did you learn from your review of industry conditions and past transactions?
Dean Snyder: In our assessment, we began with a careful review of competitive interactions in the industry prior to the proposed merger, including past transactions that provided a useful road map about likely consequences of the transaction at issue. We also evaluated DOJ simulations of competitive effects that were premised on the assumption that each truck manufacturer would purchase attachments from only one attachment manufacturer. The implication that the newly merged company could raise prices without any risk of loss of sales was inconsistent with our observations. Moreover, our review of the competitive impact of a prior vertical acquisition by TICO showed that TICO did not raise prices to competitors after that merger and that it generally left the competitive landscape unchanged. Our findings were at odds with the DOJ’s simulation results that suggested the transaction might result in exclusionary conduct and price increases.
Q: Can you clarify which factors are determinants of potential exclusionary conduct in this vertical acquisition?
Pierre Cremieux: Managing Principal, Analysis Group
Dr. Cremieux: In this acquisition, the concern was that the merged firm might try to raise the cost of lift truck attachments to TICO's rivals (e.g., Mitsubishi), thereby putting them at a competitive disadvantage. If the merged firm were to raise attachment prices to TICO's rivals, however, Cascade would risk losing sales to other attachment manufacturers. A review of specific factors, such as the relative prices and margins for trucks and attachments and downstream competitors’ ability to purchase the upstream product elsewhere, can help determine whether or not TICO will have an economic incentive to exclude competitors by increasing the price charged to them, thereby making it unprofitable for them to purchase from Cascade. These factors ultimately determine whether the merged company stands to realize higher prices and profits from exclusionary conduct.
In the case of TICO-Cascade, the universal connection between attachments and trucks, the maturity of the technology, and limited patent protections, all suggested that the risk of exclusionary conduct was limited. Downstream purchasers could buy suitable attachments from competitors to Cascade and could easily do so in the event that TICO instructed Cascade to raise its prices to competitors thereby no longer selling to them.
Q: Are there any new tools that can be applied to assess the competitive effects of a vertical acquisition?
Dr. Cremieux: In traditional horizontal transactions, the “gross upward pricing pressure index” (GUPPI) has become a standard analytical tool to assess the newly merged firm’s incentive to increase prices. In TICO-Cascade, which was a vertical transaction, we applied a vertical GUPPI (vGUPPI) analysis to this problem, using an innovative software tool developed by Analysis Group to quickly calculate the elements that might lead to upward pricing pressures in a variety of scenarios. This software tool implements the vGUPPI methodology and offers an extremely direct and rapid process for measuring the increase in exclusionary incentives likely to result from a vertical merger. vGUPPI is based on the economic principles underlying the merged firms’ incentives to raise prices. It leverages key economic data – on margins, prices, diversion ratios, and input substitution parameters – to express the relationship between upstream/downstream profit incentives and exclusionary conduct. Although the analytics that form vGUPPI’s backbone are complex, the software tool itself is extremely intuitive and not very demanding computationally. In advance of a more complete analysis, the tool provides both regulators and firms a valuable first look at how significant the incentives are likely to be for the newly merged firm to exclude competitors through raised prices. ■
Toyota Industries and Cascade Corporation Transaction
- Analysis Group developed a state-of-the-art vGUPPI tool that enables quick testing of alternative assumptions in vertical mergers or acquisitions.