FTC Approval of Staples-Essendant Merger Exposes Fault Lines on Merger Enforcement
The U.S. Federal Trade Commission’s (“FTC”) recent approval of Staples, Inc.’s acquisition of office supply wholesaler Essendant, Inc.—on a party-line three-to-two vote—reveals the agency’s divergent political views on merger enforcement and vertical transactions.
On January 28, 2019, Republican Commissioners Simons (FTC Chair), Phillips and Wilson issued a joint statement in support of their votes to approve the merger with conditions. The debate was joined by Democratic Commissioners Chopra and Slaughter, who each issued dissenting statements. The settlement suggests that the FTC may be more receptive than the U.S. Department of Justice’s (DOJ) Antitrust Division to behavioral remedies to resolve competitive concerns raised by vertical mergers, and provides important guidance for companies facing merger reviews before the agency.
Overview of the Transaction and Settlement
Staples is the largest reseller of office products in the U.S., and one of only two retail office supply superstores in the U.S. In addition to its retail stores, Staples also has a business-to-business division.
Essendant is one of only two U.S. wholesale distributors of office products, selling a broad range of office products exclusively to office supply resellers. Essendant offers resellers the option of receiving pre-packaged and pre-labelled products, making it easier for the reseller to deliver the products to the end customer. Essendant also owns a distribution network, allowing it to deliver products directly to a resellers’ end customer on behalf of the reseller. In order for Essendant to carry out these distribution activities, Essendant’s reseller customers provide Essendant with commercially sensitive information (“CSI”) about their end customers, including names, addresses, purchasing history, and product and service preferences.
The FTC alleged in its complaint that the transaction would allow Staples to gain access to the CSI of Essendant’s reseller customers who compete with Staples to sell their products to mid-size businesses. That information, coupled with Staples’ access to Essendant’s resellers’ costs of goods, could allow Staples to raise prices to Essendant’s customers (i.e., Staples’ competitors), potentially shifting business to Staples. Accordingly, the FTC alleged that access to the CSI could enable Staples to eliminate direct and substantial competition between itself and Essendant’s reseller customers, substantially lessening competition in the market for the sale and distribution of office products to midmarket business-to-business customers.
To remedy these competitive concerns, the Republican majority voted to approve a consent order that requires the parties to establish a firewall separating Staples’ business-to-business end-customer selling functions from Essendant’s wholesale selling function.
Commissioner Chopra’s dissent expressed concern for both horizonal and vertical aspects of the transaction. With regard to horizontal concerns, Commissioner Chopra challenged the majority’s finding that the increased buying power with upstream trading partners would result in efficiency rather than competitive harm. With respect to vertical concerns, Commissioner Chopra argued that since Staples is owned by a private equity firm (Sycamore), it will be incentivized to rapidly raise prices to attract future acquirers.
Commissioner Chopra also expressed concerns that the Commission’s economic model ignored regional differences and largely underestimated potential anti-competitive effects. Finally, Commissioner Chopra advocated for the inclusion of an in-depth analysis on buyer incentives in future merger reviews.
Commissioner Slaughter’s dissent addressed general merger enforcement and urged the Commission to commit to a retrospective investigation of the merger. Commissioner Slaughter expressed concern that the Commission’s current approach to vertical mergers has led to substantial underenforcement, and that the Commission relies on unreliable assumptions and predictions about how vertically integrated firms behave post-merger.
Commissioner Slaughter also urged the Commission to challenge mergers where evidence of a firm’s incentive and ability to engage in anticompetitive conduct is present and where the parties are unable to show that their claimed efficiencies are “verifiable, merger-specific, do not arise from anticompetitive reductions in output or service, are not mitigated by any costs necessary to achieve the efficiencies, and fully offset the anticompetitive harm.”
Finally, Commissioner Slaughter recommended that for close case mergers—a vertical merger raising competitive concerns, but where the Commission lacks sufficient evidence to justify a court challenge—the Commission adopt a general practice of retrospective investigations.
The transaction marks the first partisan split in an FTC merger review since all five commissioners were sworn in last year and provides valuable insights into the Commissioners’ individual perspectives and concerns regarding the agency’s merger enforcement. Commissioner Chopra and Commissioner Slaughter both echoed broader calls from Democrats that antitrust enforcers should be challenging more mergers. In contrast, the Republican majority adopted traditional merger enforcement guidelines to resolve the case.
Vertical mergers have received increased attention and scrutiny from the federal antitrust agencies in the U.S. over the last few years. Under DOJ Antitrust Chief Makan Delrahim’s leadership, the DOJ Antitrust Division has been much less receptive of behavior remedies and has emphasized a renewed focus on structural reliefs. The settlement in this case highlights that, unlike the DOJ, the FTC appears more willing (at least in the near term) to accept conduct remedies instead of divestitures to resolve anticompetitive concerns.
Edited by Gary J. Malone
Tagged in: Antitrust Enforcement,