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SunGard Data Systems Inc. and the Department of Justice squared off Nov. 8 before U.S. District Judge Ellen Segal Huvelle, though the judge gave no hint of whether she will block the company’s $825 million acquisition of Comdisco Inc.’s disaster recovery unit. During the abbreviated antitrust trial, the judge asked expert witnesses many questions about how they calculated which services were included and excluded from the relevant market. But she did not express doubts about approaches advocated by the Justice Department or Wayne, Pa.-based SunGard. The case centers on market definitions. Justice officials argued in their complaint that the merger would combine two of the three biggest vendors of disaster recovery technology and services, which corporations outsource to so called hot-site providers. In exchange for monthly payments, the company has the right to bring its backup tapes to the hot-site facility if the company’s primary computer center is disrupted. The judge is expected to rule early next week. The case has been on a fast track because a bankruptcy judge in Chicago is deciding whether to accept the bid from SunGard or a $750 million offer from Hewlett-Packard Co. Creditors of Rosemont, Ill.-based Comdisco, which filed for Chapter 11 July 16, prefer the HP bid, while equity holders favor SunGard. If Huvelle decides for the Justice Department, SunGard would be forced out of the bidding. During the trial, Peter Bronsteen, the government’s economic expert, said he excludes from the relevant market other types of disaster recovery services, including expedited shipment of new computer systems, internal disaster recovery sites and duplicative facilities. That assertion came under attack from SunGard lawyer John Harkrider, a partner in New York law firm Axinn, Veltrop & Harkrider. He questioned why Bronsteen did not examine Windows NT servers and other low-end equipment. Bronsteen responded that mainframes and midsize computer systems were more likely to use hot-site services, while other options such as the quick shipment of new hardware were more suited for less expensive servers such as NT systems. The response gave Harkrider his opening to argue that quick shipment of technology is a viable disaster recovery alterative to hot sites and should be included in the Justice Department’s market definition. In a series of questions, Harkrider revealed that many midsize servers cost less than NT-based servers. That means that quick shipping makes more economic sense for less expensive midsize systems than for the NT systems. Also, he noted in a question that 50 percent of SunGard’s hot-site customers could shift to quick shipment. Bronsteen, however, said there is little evidence that users of complex servers would shift to quick shipment in response to a hot-site price hike. “The simpler the equipment and the more less critical the application, the more likely to switch to quick ship,” he said. Harkrider next argued that SunGard and Comdisco do not compete for the same customers. In a question, he revealed that SunGard’s computer capacity limits are more suited to smaller clients, whereas Comdisco caters to large companies with massive computer systems. He also noted that Comdisco has 411 customers that pay less than $2,500 a month while SunGard has 3,000 customers that pay less than $2,500, of which 2,000 pay less than $1,000 per month. The third line of argumentation revolved around whether companies would build their own hot-site facilities if a merged SunGard-Comdisco raised prices. Harkrider suggested SunGard lost customers to businesses hosting their own disaster recovery facilities. Bronsteen said homegrown systems were inadequate substitutes because they are expensive to build. He also said there is little evidence that the competitive threat of companies developing their own crash sites is taken seriously because margins for hot-site providers remain extremely high. SunGard lost less than 1 percent of its business to companies operating proprietary disaster recovery systems, Bronsteen said. The final attack on the government’s analysis centered on prospective new entries to market. Bronsteen said new competitors in the disaster recovery market were unlikely because a company needed a strong reputation, scale and long-term contracts. Harkrider responded by asking if Electronic Data Systems Corp., a major tech and professional services provider in Dallas, could enter the sector. Bronsteen said that while EDS has a reputation for competence, it is for providing computer services, not for keeping backup computers ready for a disaster. Bronsteen disqualified another tech giant, EMC Corp. of Hopkinton, Mass., as a possible SunGard competitor because it primarily provides storage services. Harkrider responded by asking if Bronsteen knew that EMC has said it periodically considers entering the hot-site market, that it believes it would need only 90 days to enter and that it might enter if prices rose 5 percent to 10 percent. As other possible rivals, Harkrider cited two European companies, Guardian IP and Sema, a unit of Schlumberger Ltd. Sema, he noted, serves eight of the world’s 10 largest financial institutions while Guardian is opening a Newark, N.J. facility. An expert for SunGard appeared to fare better on cross-examination. Michael Keating, a consultant for Marsh Inc., said both in his work advising companies on disaster recovery that he never considered there to be separate markets for hot sites, cold sites, quick ship and mobile hot sites. “I am absolutely positive that for some percent of the market that quick ship or mobile are alternatives,” he told the judge. Copyright (c)2001 TDD, LLC. All rights reserved.

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