Commentary: MSC Reaches Agreement with the Federal Trade Commission

Concerns that MSC may have gained an unfair competitive advantage in the marketplace as a result of recent acquisitions prompts Federal Trade Commission investigation

by Ira Breskin

MSC Software Corp. reached an eleventh hour agreement on Monday (7/08/02) with the Federal Trade Commission, heading off an administrative hearing scheduled to begin Tuesday in a Washington D.C. federal court. At issues were government allegations that the company had run afoul of anti-trust rules.

The agreement, signed on Monday by both sides and Administrative Law Judge D. Michael Chappell, is subject to review by the full FTC. MSC Software expects agency approval within 30 days, when full details of the settlement will be released.

"We view this agreement as a win-win for both parties," said Frank Perna, chairman and chief executive officer of MSC.Software. “This action removes considerable uncertainty from MSC.Software’s future. Our strategy of delivering software, services and systems remains totally intact and we look forward to continuing to provide value for our customers and shareholders,” he said in a prepared release.

The Federal Trade Commission had contended that two recent MSC acquisitions substantially reduced competition among suppliers of finite element analysis software. At issue was whether MSC had disproportionate control over the market for finite element solvers that are used to determine how product designs react to heat, vibration and stress.

The FTC had asked the judge to mandate that MSC license its Nastran solver engine software to two competitors to restore market competition. While MSC disputed FTC allegations, it had tried to address the agency’s demands, spokeswoman Joanne Keates said last week.

The court was expected to hear testimony for several weeks. A decision was likely by early fall in a case which the FTC began last October. Subsequent filings by both parties have been contentious.

The FTC alleged that MSC’s purchase in 1999 of Universal Analytics Inc. and Computerized Structural Analysis & Research Corp. for a total of $17 million gave it a dominant position in the marketing of the popular Nastran solver.

The reason: the two acquired companies, despite claiming only modest market share, were the prime alternative sources for Nastran. Moreover, these suppliers had active marketing efforts that targeted some of MSC’s largest accounts, forcing MSC to cut its Nastran sale price and continually upgrade the product, the FTC contends.

Several major industrial customers said that the FTC decided to pursue its case after MSC Software significantly raised Nastran license fees—several times over in some cases—after closing on the two acquisitions. In fact, MSC voided existing long-term contracts to impose the higher fees, they added.

Not so, said MSC, based in Santa Ana, Calif., which contended that the deals allowed it to raise prices from 5% to 10%.

The FTC didn’t have to look very far to find a disgruntled Nastran customer; the Department of Energy is one of largest licensees of the software. MSC has done major upgrades to Nastran, originally developed by NASA.

The FTC also contended that major Nastran users, primarily makers of cars and automobiles, have too much sunk cost tied to product development using the MSC solver engine to switch to alternatives provided by such competitors as Ansys Inc. and Hibbitt, Karlsson & Sorensen Inc.’s ABAQUS, primarily used as a high- end development tool.

The FTC had brought charges before an administrative law judge, rather than a U.S. District Court, because only the former can order MSC to restore lost competition. The district court couldn’t do so with a preliminary injunction because the deals have closed.

Separately, MSC, formerly known as MacNeal-Schwendler Corp., late last month introduced MSC.visualNastran V5i, a family of products that complements recently released Catia V5 CAD software.

Ira Breskin, a freelance editor/writer specializing in business and technology issues, is a frequent contributor to Business Week, Newsday, and the New York Times. He holds a B.A. from Columbia University and a Knight-Bagehot Fellowship in Economics and Business Journalism, Columbia University Business School. He may be reached at Email Contact.

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