Oliva-cemex

UNITED STATES OF AMERICA BEFORE FEDERAL TRADE COMMISSION COMMISSIONERS:

Deborah Platt Majoras, Chairman Orson Swindle Thomas B. Leary Pamela Jones Harbour Jon Leibowitz

In the Matter of CEMEX S.A. de C.V. , a corporation.

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File No. 051-0007

PUBLIC COMMENT OF THE VOLUNTARY TRADE COUNCIL S.M. Oliva President & CEO The Voluntary Trade Council Post Office Box 100073 Arlington, Virginia 22210 Tel/Fax: (703) 740-8309 [email protected] Dated: March 16, 2005

Statement of Interest The Voluntary Trade Council (VTC), acting under 16 C.F.R. § 2.34(c), files this public comment in response to the Commission’s announcement of a proposed order in the above-captioned matter. The VTC is a nonprofit research and education organization that develops practical solutions to the problems caused by violent state intervention in free markets. We focus on the harm caused to individuals and businesses by the enforcement of antitrust and other “competition” laws. Through publications, filings with government agencies, and the Internet, we apply the principles of free market economics and rational ethics to contemporary antitrust policies and cases. The VTC regularly files public comments with the Federal Trade Commission in merger review cases where the Commission has required divestiture of assets. We are the only national organization that routinely scrutinizes the FTC’s merger review policy, and accordingly our comments here should substantially contribute to the public’s understanding of the economic and constitutional issues raised by the Commission’s proposed order. Introduction Cemex S.A. de C.V. (Cemex) was formed in 1931 by the merger of two Mexican cement companies, Cementes Hidalgo and Cementos Portland Monterrey. Through subsequent acquisitions and expansion, Cemex now conducts operations in over 50 countries, with an annual production capacity of 77 million cubic meters of ready mix -2-

concrete, the product that is the subject of this proceeding. On September 27, 2004, Cemex agreed to acquire RMC Group p.l.c. (RMC) for $4.1 billion in cash and the assumption of debt. On December 9, 2004, Cemex announced that the merger had been cleared by the European Commission without conditions. On February 14, 2005, the Federal Trade Commission announced it would approve the merger subject to Cemex’s mandatory divestiture of RMC’s ready mix concrete business in Tuscon, Arizona. Cemex must sell the Tuscon RMC business to a buyer approved by the Commission no later than September 1, 2005. With this condition, Cemex completed its acquisition of RMC on March 1, 2005. The FTC objected to the combination of Cemex and RMC’s Tuscon ready mix concrete businesses because it would, according to the Commission’s complaint, “substantially lessen competition” and harm consumers. The Commission identified four specific harms that would arise from the combination of Cemex and RMC’s Tuscon businesses: (1) elimination of direct competition between Cemex and RMC; (2) an increased likelihood of “coordinated interaction” between Cemex and the remaining competitor in the market; (3) reduced incentives for Cemex to “improve service or product quality”; and (4) increased likelihood “that customers would be forced to pay higher prices.”1 The Commission said the mandatory divestiture will address these “anticompetitive effects” by maintaining the level of competition that existed in Tuscon prior to Cemex’s acquisition of RMC.2 1 Complaint ¶ 16. 2 Analysis of Agreement Containing Consent Orders at 3.

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Comments The proposed divestiture is based on the Commission’s belief that the market will be better off with a third—and at this time, publicly unknown—competitor assuming control of assets currently owned by Cemex through its acquisition of RMC. The Commission offers a number of speculative harms that may be suffered by ready mix concrete customers in the Tuscon area, but there is of course no evidence of this, as the FTC and its staff are not psychic. So we’re left with a string of arbitrary statements that can neither be proved nor disproved, and which lack any foundation in economics. Moreover, the substance of the Commission’s proposed action—mandatory “divestiture”—is nothing more than an unconstitutional seizure and redistribution of private property. Indeed, the Commission lacks the constitutional authority to even bring a complaint against Cemex, making any discussion of remedies a moot point. Accordingly, the Commission should withdraw its proposed order against Cemex and dismiss its complaint for lack of jurisdiction. 1. There is no economic justification for requiring the divestiture of RMC’s Tuscon assets. It is undisputed that the merger of Cemex and RMC would eliminate direct competition between the two firms in the Tuscon area. The other three “anticompetitive effects” cited by the Commission, however, lack a rational foundation. They represent the personal opinions of the Commission’s member and staff, not sound economic judgment.

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First, there is no evidence that a reduction in the number of ready mix concrete firms from three to two in Tuscon will lead to “coordinated interaction” between Cemex and its remaining competitor. The Commission has offered a hypothetical scenario where “each competitor would have an enhanced ability to monitor the other’s conduct, and would know with certainty the source of any discounting,” thereby creating the potential for successful price collusion by the two firms.3 The Commission has not set forth any evidence that demonstrates such a scenario is likely to happen in this case, however. The fear of hypothetical collusion is unfounded speculation on the Commission’s part. Even if the Commission could demonstrate the likelihood of future price coordination between Cemex and its remaining Tuscon competitor, such activity would not violate free market principles. The Commission has argued that coordination might raise the price of ready mix concrete and that this would deprive consumers of the benefit of a competitive marketplace. This argument mischaracterizes the nature of the price system. Prices represent the voluntary interaction of buyers and sellers. They convey information about the state of the market, and ultimately, prices reflect the subjective values of the buyers and sellers. Contrary to the Commission’s belief, there is not a “competitive” price for ready mix concrete and a “monopoly” price that violates the rights of consumers. In a free market, all prices are market prices. The Commission’s argument, as applied to this 3 Analysis, at 2.

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case, suggests that the current price of ready mix concrete in Tuscon is competitive, but a future price that is higher would be anti-competitive merely because the number of competitors has been reduced from three to two. But this is a subjective argument. Assume that the current price of ready mix concrete in Tuscon is x and the post-merger price is x+y. What makes x a competitive price and x+y a monopoly price? What if x was a below competitive price and x+y is in fact the “correct” price? There is no objective criteria to reach a conclusion either way. That is precisely why the market must be allowed to determine prices unhampered by the government’s subjective opinions about “competitive” versus “monopoly” pricing. The Commission has long justified its pricing theory by maintaining consumers “would be forced to pay higher prices” if a firm acquires substantial market share. That claim has been made in this case. But once again, the Commission has distorted free market principles. No consumer of ready mix concrete in Tuscon is, or would be, forced to pay higher prices. They can choose not to purchase ready mix concrete if they determine the selling price exceeds what they are willing to pay. The fact that a customer may choose to purchase a product with a price of x+y when he previously paid x is not, however, evidence that the customer was forced into the transaction. Prices often increase for reasons having nothing to do with the merger of former competitors. The Commission has no grounds for per se condemning post-merger price increases, especially hypothetical price increases that cannot be objectively analyzed as they did not take place. -6-

Similarly, the Commission has no basis for speculating that a combination of Cemex and RMC’s Tuscon assets would reduce incentives to “improve service or product quality.” The Commission believes that Cemex will improve its products and services if it has two competitors as opposed to one. But market innovation is driven by the profit motive, not the number of competitors. A company that deliberately limits itself to an existing level of operations is foregoing the potential profits innovation would bring. This potential exists irrespective of the number of firms already in the market. Indeed, new markets are created by innovators seeking profit, not by businesses looking to add to the number of existing competitors. Cemex’s own history refutes the Commission’s theory of innovation. Since the founding of Cemex’s predecessor, Cementos Hidalgo, in 1906, the firm has become a worldwide leader through a chain of mergers and acquisitions. In the past ten years alone, Cemex has made nine major acquisitions of existing cement manufacturers (not including RMC). Under the Commission’s economic theory, each of these transactions should have stifled innovation, but there is no evidence that has been the case. If the loss of direct competition alone could stifle innovation, then every merger would have to be presumed illegal by the Commission. That the Commission does not take that position demonstrates the arbitrary and capricious nature of its attack on Cemex’s acquisition of RMC. It’s also notable that the divested Tuscon assets represent less than 0.5% of the total

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acquisition value of RMC.4 It is implausible that innovation would continue unabated with 99.5% of the acquired assets, but would cease exclusively in Tuscon. Cemex is a worldwide company, and it is unlikely to sabotage the long-term profitability of its Tuscon operations for the sake of maintaining a perceived short-term competitive advantage. Accordingly, the Commission has demonstrated no economic basis for interfering with Cemex’s acquisition of RMC. There is no evidence that free market principles would be violated or that any consumer would be injured. 2. The Federal Trade Commission may not simultaneously exercise executive, legislative, and judicial powers. Even if there was credible evidence that Cemex’s acquisition of RMC would violate the antitrust laws, the Commission would still lack the constitutional authority to issue a complaint or issue an order mandating divestiture. The Commission’s exercise of authority in this case under Section 5 of the Federal Trade Commission Act (FTCA) cannot be reconciled with the Constitution’s framework of government and the rights guaranteed to Cemex. The Commission is classified as an independent agency of the executive branch. Section 5 of the FTCA directs the Commission to punish “unfair methods of competition . . . and unfair or deceptive acts or practices in and affecting commerce.”5 The Commission is empowered to define which specific acts are prohibited by Section 4 Cemex S.A. de C.V., U.S. authorities clear RMC acquisition (February 15, 2005) . 5 15 U.S.C. § 45(a)(1).

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5; to appoint staff to investigate potential violations; to decide whether to prosecute a particular person or company; to decide questions of fact and law before a Commissionappointed administrative law judge; to issue a final order that is presumed correct on appeal; and to monitor compliance with final orders. This combining of executive, legislative, and judicial powers within the Commission sharply contrasts with the warning of the Constitution’s principal drafter, James Madison, in Federalist No. 47: The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, selfappointed, or elective, may justly be pronounced the very definition of tyranny. Were the federal Constitution, therefore, really chargeable with the accumulation of power, or with a mixture of powers, having a dangerous tendency to such an accumulation, no further arguments would be necessary to inspire a universal reprobation of the system.6 The Constitution vests “the judicial Power of the United States” in the Supreme Court and any “inferior courts” established at the discretion of Congress. Article III, Section 1, requires all judges hold their office “during good Behaviour,” subject only to impeachment and removal by Congress. As the Supreme Court has explained, “The provisions of Article III were designed to give judges maximum freedom from possible coercion or influence by the executive or legislative branches of the Government.”7 Section 1 of the FTCA, in contrast, vests the Commission’s adjudicatory powers with five commissioners appointed for seven-year terms, subject to removal by the President

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The Federalist 336 (Benjamin F. Wright, ed., 1961). United States ex rel. Toth v. Quarles, 350 U.S. 11, 16 (1955).

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for “inefficiency, neglect of duty, or malfeasance in office.”8 The Commission’s chairman serves in that post solely at the President’s pleasure. The Commission’s structure does not entitle it to both issue and try complaints against Cemex, or any other person or corporation. Only Article III judges can exercise the judicial power—which includes the approval of antitrust settlements--and such judges must have life tenure, not a fixed term subject to executive control. Appellate lawyer Howard Bashman discussed the Supreme Court’s own case law on this point in a column questioning the constitutionality of recess appointments of Article III judges: In Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), six Justices concluded that judges who lacked the tenure and compensation protections provided in Article III of the U.S. Constitution could not preside over Article III cases. See also Glidden Co. v. Zdanok, 370 U.S. 530 (1962) (recognizing that only Article III judges can exercise the judicial power of the United States). In Evans v. Gore, 253 U.S. 245, 252 (1920), the Supreme Court explained that the purpose of Article III’s tenure and compensation protections “was to invest the judges with an independence in keeping with the delicacy and importance of their task and with the imperative need for its impartial and fearless performance.” And, in United States v. Will, 449 U.S. 200, 218 (1980), the Court explained that Article III’s tenure and compensation clauses recognized that a “[j]udiciary free from control by the Executive and the Legislature is essential if there is a right to have claims decided by judges who are free from potential domination by other branches of government.” The Court also observed that Article III was intended to prohibit the English monarchy’s practice, in colonial times, of “mak[ing] Judges dependent on his Will alone, for the tenure of their offices, and the amount and payment of their salaries.” Id. at 219.9

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15 U.S.C. § 41. Howard J. Bashman, Questioning the Constitutionality of Recess Appointments to the Federal Judiciary, The Legal Intelligencer (March 12, 2001) .

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The Commission’s unconstitutional exercise of judicial power infringes upon numerous other constitutional rights guaranteed to Cemex: The right to a trial by jury under Article III and the Sixth and Seventh Amendments, the right to be secure against unreasonable searches under the Fourth Amendment, and the right not to be deprived of liberty or property without due process of law under the Fifth Amendment. The mandatory divestiture of assets by Cemex also contradicts the Fifth Amendment’s prohibition of government seizures of private property for anything but a “public use.” Redistributing property because the Commission believes another owner would make the market more “competitive” falls well outside the Fifth Amendment’s concept of a “public” use. Conclusion Since the Commission lacked the constitutional authority to issue its complaint against Cemex, the subsequent proposed order is void, and thus no further public interest determination is necessary. Respectfully Submitted, /s/ S.M. Oliva President & CEO THE VOLUNTARY TRADE COUNCIL Post Office Box 100073 Arlington, Virginia 22210 Telephone/Fax: (703) 740-8309 E-mail: [email protected]

Dated: March 16, 2005 - 11 -