DOJ Blocks Software Merger

On November 5, 2014, the DOJ announced that Embarcadero Technologies Inc. and CA Inc. terminated Embarcadero’s proposed acquisition of CA Inc.’s ERwin data modeling product suite.

Background

In March of 2014, Embarcadero Technologies announced that it would acquire CA Inc.’s ERwin data modeling suite. Data modeling software is used to view and streamline enterprise data, centralize data management and reduce data redundancies.

ERwin has been the leader in the data modeling market for two decades.  Embarcadero has been the leading specialty provider of data-oriented modeling, development, and administration technologies, and competes directly with ERwin with its own ER/Studio product.  Embarcadero would have owned the clear market leadership position as provider of independent data modeling and design tools.

While it seems clear that the acquisition would have eliminated direct competition, there appears to be ample evidence that a number of other software developers offer data modeling tools.  Indeed, the leading enterprise database providers, such as Oracle, IBM, SAP/Sybase, Software AG, and Microsoft, all sell data modeling tools.  IBM and Oracle offer full feature data modeling tools, as well as related development and data management products.  Several of the integration vendors also offer data modeling capabilities, albeit not to the feature-function extent of ER/Studio and ERwin.

Nevertheless, according to the DOJ, Embarcadero’s ER Studio products and CA’s ERwin have been particularly close competitors.  By purchasing the ERwin Data Modeler, Embarcadero Technologies would have eliminated a vigorous competitor that has competed to provide expanded functionality and more affordable pricing in recent years. The Antitrust Division stated that an increase in the price of data modeling products would likely result in significant harm to users of these tools.  After the DOJ expressed concern about the transaction’s potential for anticompetitive effects, the parties terminated the deal.

Lesson Learned

Clearly, the DOJ’s press release announcing that the parties abandoned this deal demonstrates that the Antitrust Division is not only scrutinizing software mergers, but the DOJ appears to be willing to challenge them if the facts support it.  This action is noteworthy because the DOJ has approved a number of software mergers without conditions since it lost its court battle with Oracle in 2004.  Indeed, recent history suggested that the DOJ usually does not conduct long drawn out investigations in software deals.  Over the past ten years, the Antitrust Division has issued second requests to review a number of software deals that presented concentration issues, but handled them very efficiently and quickly.  The staff is open to hearing arguments relating to entry of potential and fringe competitors, as well as expansion by some of the competitors already in the overall category.  Normally, the existence of competitors such as Oracle, IBM, SAP, and Microsoft would be sufficient, but here the Antitrust Division emphasizes that Embarcadero’s ER Studio and ERwin, are each other’s closest substitute in what appears to be a narrowly defined market.  The DOJ does not provide much more in terms of information on what else made the block of this software merger necessary, but clearly the fact that they were directly competitive with each other was important to the Antitrust Division.  Not to overstate the significance of the Antitrust Division’s win in Baazarvoice, but the Division may be suggesting that the Bazaarvoice win supports its ability to define narrow antitrust markets, even in dynamic and fast moving technology environments.  Competent antitrust counsel knows that merger reviews are based on case-by-case factual determinations, and the mere fact that an arguably narrow market was found here or in Bazaarvoice does not mean that the government can always support a narrow market in a software merger.  Given the lack of information, we can only speculate that internal documents from the parties’ files may have helped define the narrow software market or characterize the anticompetitive motivation for the acquisition, either of which would have influenced the DOJ’s investigation and conclusions.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com