Before KALODNER, GANEY and SMITH, Circuit Judges.
By KALODNER, Circuit Judge:
On June 1, 1956, the Federal Trade Commission ("Commission") issued a complaint charging that the acquisition of certain corporations by Scott Paper Company ("Scott") constituted a violation of Section 7 of the Clayton Act, as amended.*fn1 At the conclusion of hearings before a Hearing Examiner, he found that a violation of Section 7 had not been established and dismissed the complaint. On appeal to the Commission by counsel supporting the complaint, the decision of the Hearing Examiner was vacated and set aside. The Commission held that the acquisitions were violative of Section 7, and issued an order of divestiture. Pursuant to Section 11(c) of the Clayton Act, as amended,*fn2 Scott filed this petition to review and set aside the order of the Commission.
Scott Paper Company, a Pennsylvania corporation with its principal offices located at Chester, Pennsylvania, manufactures and sells various trade-marked paper products, including toilet tissue, facial tissue, paper napkins, paper towels, and household waxed paper (the first four of these products will hereinafter be referred to as sanitary paper products). In the manufacture of these products, timber is made into pulp, the pulp becomes paper stock, and paper stock is converted into the finished product.
Scott sells its sanitary paper products and household waxed paper to two classes of customers. Its "resale" products are intended for resale to the public and are sold by Scott largely to retail stores, primarily grocery chains and supermarkets. Scott's "industrial" products are intended for use in such establishments as industrial plants, offices, and hotels and are usually distributed through wholesalers.
Three acquisitions by Scott are challenged by the Commission in this proceeding. Scott acquired the assets of the three corporations by the issuance of its common stock. Soundview Pulp Company ("Soundview"), located at Everett, Washington, was acquired November 9, 1951, by the issuance of stock having a market value of approximately $60,000,000; Detroit Sulphite Pulp & Paper Company ("Detroit") of Detroit, Michigan, on September 2, 1954, by the issuance of stock having a market value of approximately $11,000,000; Hollingsworth & Whitney Company ("Hollingsworth") of Boston, Massachusetts, on October 27, 1954, by the issuance of stock having a market value of approximately $38,000,000. None of the acquired corporations produced sanitary paper products or household waxed paper. Soundview had extensive timber holdings and produced and sold pulp. Detroit had a pulp mill and made paper stock for sale to others for converting into finished products.*fn3 Scott was one of its customers, and Scott's purchases included Detroit's entire output of wax base stock for use in making Scott's household waxed paper. Hollingsworth manufactured an extensive line of paper stock. Its assets included timberland as well as pulp and paper mills.
Scott spent large sums of money on capital improvements and additions to the acquired properties. New buildings and paper mills were erected. New paper machines and converting equipment were installed, and some of the existing paper machines at Detroit and Hollingsworth were rebuilt for the manufacture of Scott's products. Production of sanitary paper products and household waxed paper at the acquired properties commenced when the first of the newly installed paper machines went into operation at Soundview in January, 1954. No production from the rebuilt machines was obtained until 1955 when production started at Detroit and Hollingsworth. The total cost of the additions and improvements at the acquired properties through June 30, 1956, amounted to approximately $45,000,000 at Soundview, $7,800,000 at Detroit, and $18,000,000 at Hollingsworth. Through 1958 the totals were $49,828,926 at Soundview, $11,252,589 at Detroit, and $48,121,987 at Hollingsworth.
The significant findings of the Commission may be summarized as follows:
The "lines of commerce" in which the effects of the acquisitions are to be measured consist of "toilet tissues, paper towels, facial tissues, paper napkins and household waxed paper separately and collectively"; the appropriate geographic market is the entire United States; the acquisitions, instead of constituting horizontal acquisitions of corporations which produced and sold finished sanitary paper products in competition with Scott, were primarily vertical in that they supplied Scott with raw and semiprocessed materials and additionally afforded facilities for making finished products after conversions or improvements and new construction; in 1950 Scott was the "dominant" producer in the sanitary paper products and household waxed paper industry, and in 1955 Scott had successfully retained and enhanced its position; the challenged acquisitions have been the direct cause of Scott's progressively increasing market power and dominance; Scott's greatly expanded production and concomitant enhanced market position primarily resulted from improvements and additions made at the acquired properties; the finished products manufactured on the new machines as well as those manufactured on the rebuilt machines are to be regarded as increments or fruits of the acquisitions and each helped Scott to meet the "pent-up" demand for its products; the acquisitions afforded production and marketing economies and other advantages which could be reflected by Scott in price, advertising, promotion, or profit; Scott has been the industry's leader in advertising; Scott's pricing policies have far-reaching effects in the industry; there are barriers to entry into the industry by new firms; Scott's acquisition of Detroit tended to foreclose Detroit as a potential supplier of wax base stock for Scott's competitors; and all three of the acquired companies were potential competitors of Scott in the production and sale of sanitary paper products and household waxed paper.
In holding that the acquisitions violated Section 7, the Commission set forth its reasoning as follows:
"Before the acquisitions, the respondent produced less than half of its requirements for pulp. It now markets pulp. As noted in our accompanying findings as to the facts, the acquired companies, though not actual competitors of the respondent in the sale of finished products, were potential competitors. The timber resources, pulp mills, and other facilities which passed from the acquired companies to Scott were extensive and diversified and clearly tended to increase the levels of concentration which had prevailed in the sanitary paper products field. Market concentration in the sanitary paper products industry is high. In 1955, the four largest producers accounted for two-thirds of all products marketed for resale, as distinguished from those sold for industrial use.
"In view of the respondent's dominant position in the line of commerce for sanitary paper products and certain of its component relevant markets before the acquisitions, any acquisition which tended to assist its distribution of trade-marked products could reasonably have repercussions in those markets. The present and reasonably probable future impacts of the challenged acquisitions are of much greater magnitude, however. In consequence of the acquisitions, the respondent (1) has decisively strengthened its ability to compete in that it gained needed materials and production facilities which also afforded economies and strategic marketing advantages that could be reflected in prices or profits, or in advertising and product diversification for further enhancing its position in the relevant markets, and (2) has substantially increased its shares in those markets over their prior high levels.
"Such expanded market shares did not come automatically as legacies of horizontal acquisitions but were instead achieved in the market place with telling contributions out of the acquired properties. Each of the acquisitions has concomitantly increased and will continue to increase the respondent's capacity to exert the power inherent in its dominant market position. As a corollary effect, the acquisitions have tended to widen the great disparities in resources and ability to compete which previously existed between the respondent and many of its rivals.
"From the foregoing, it follows that the effect of the acquisitions may be substantially to lessen competition and to tend to create a monopoly in the relevant lines of commerce. . . ."
The order of divestiture issued by the Commission requires that Scott divest itself of the acquired properties, together with "such plants, machinery, buildings, improvements, equipment and other property of whatever description that has been added, modified, modernized or placed on the premises of each of" the acquired companies by Scott "as may be necessary to restore each of the three . . . companies as a competitive entity to substantially the same operating form and substantially equivalent productive capacity as existed at or about the time of acquisition." The Commission expressly relied on its finding that the acquired companies ...