Process simulation software is arguably the most exciting development in the chemical engineering profession in our generation. A well-designed model of a chemical plant can estimate its construction cost, work out its control scheme and train its operators (see "Simulation Finds a New Model for Growth"). Process simulation also now serves as a key tool in the education of undergraduate chemical engineers. So, the news that the U. S. Federal Trade Commission (FTC) is examining the merger of the two leading simulation vendors, Aspen Technology and Hyprotech, deserves our attention.
Aspen, Cambridge, Mass., finalized its $106.1-million acquisition of Hyprotech in May 2002. That June, the FTC said it was reviewing the merger, and, finally in August of this year, charged violations of the Clayton Act, an antitrust law. An FTC press release noted that Aspen now controls "between 67 and 82 percent of the relevant product market for various engineering process simulation software," and that several competing products were either shut down or have been woven into Aspen's products. The agency's proposed remedy is to split off Hyprotech, making it a separate company again.
Aspen will mount a "vigorous defense" against the complaint, says its CEO David McQuillan. He adds that the company is "confident that the acquisition has brought significant benefits to our customers and is not anticompetitive."
The FTC action raises two critical questions for the chemical industry: how soon will this dispute be resolved, and what consequences will arise from its resolution?
An FTC administrative judge will review the case in April and likely will issue a decision a couple months later. At that point, either party can appeal the decision to FTC commissioners or to federal courts. The process could go on for several years. If Aspen ultimately wins, the whole issue goes away; if FTC triumphs, Hyprotech technology is expected to be extracted out of Aspen, along with some portion of the customer base, and Aspen developers are supposed to forget anything they may have learned about Hyprotech technology.
At the present time, Aspen, its customers and competitors all say that they are conducting business as if the FTC ruling is not pending.
"We will be proceeding with our strategy," says Alastair Fraser, a VP of SimSci-Esscor, Lake Forest, Calif., "based on our core expertise in simulation; we're very excited about the products we have just introduced."
"We are informed by Aspen as to developments, but we are neutral and will go either way with our work irrespective of a court decision," notes Ashish Shah, an executive with Fluor Corp., in Greenville, S.C., who also sits on a customer-advisory committee at Aspen.
"We have tried not to allow the FTC process to interfere with our business direction," says Stephen Doyle, Aspen chief counsel, "and, as the facts come out, it should be apparent that [customers] will benefit significantly from the merger." The company has rolled out a number of new or updated products, is supporting industry-standardization efforts, and is developing a richer palette of operation-management tools. "We're moving forward," Doyle asserts, reiterating the company's commitment to innovation. Doyle's point is backed up by what Aspen reports to Wall Street: Even though Aspen lost over $83 million in 2002, it still committed $65.1 million to R&D this year, which represents an eye-popping 20.2 percent of sales.
Aspen's large market share certainly gives it the leverage to dictate pricing and terms. However, its market share only slightly increased with the acquisition, because many customers already used products from both Hyprotech and Aspen. Moreover, FTC seems to mostly ignore other simulation vendors, companies such as Epcon, Byran Research & Engineering, Chemstations, WinSim, Intelligen, Gensym, Prode and ProSim. These are all much smaller companies, but their products have stood the test of time. (Some of these firms forecast the imminent downfall of Aspen, which, let's say, is overly optimistic.)
FTC antitrust actions often turn on its definitions of what constitute "markets," and here the picture is fuzziest of all. True, process simulators are a distinct product, but they frequently work in conjunction with other software tools, such as CAD systems or process control software. An outsider, looking at all the data and graphic displays, probably only could conclude that there's a lot of computing going on in the chemical industry. In this context, Aspen, as mighty as it is for chemical engineering, is merely one of many significant players.
Whatever justification FTC has for bringing its action, many in the chemical industry probably would agree that the agency's long drawn-out review process is a misguided model, because it can disrupt the very markets it seeks to protect.