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Bitterly divided FTC approves Staples-Essendant merger

By Kirk Victor

Published on February 4, 2019 in Issue 954

Federal Trade Commission Chairman Joe Simons’ goal of building a new consensus on antitrust or confirming the old one isn’t going to be easy to achieve.

Just look at a recent FTC decision. A bitterly divided commission approved a vertical merger — office supply behemoth Staples’ acquisition of Essendant, the largest US office products wholesale distributor — on a party-line vote in which the members came out punching, even throwing some personal jabs.

The transaction, approved subject to safeguards designed to protect against anticompetitive conduct post-merger, provoked four separate statements from the five-member commission and laid bare stark differences between the three Republicans — Simons and Commissioners Noah Phillips and Christine Wilson — and the two Democrats, Rohit Chopra and Rebecca Slaughter.

Former veterans of the agency opined that they had never seen such dueling statements of this order, and it was prompted by a vertical merger, the very kind of deal that typically gets approved without much fanfare.  

“Is this unusual to see this kind of dueling statements?” Stephen Calkins, a former general counsel of the commission, asked rhetorically. “The answer is certainly 'yes'.”

The red-hot debate was prompted partly by Slaughter’s decision to go beyond the details of the $483 million Staples-Essendant deal to raise questions about the effectiveness of vertical merger enforcement generally.  

“Is this debating of big-picture merger issues not directly related to the case at hand unusual?” Calkins asked. “The answer is I can’t recall ever seeing that kind of back and forth before as part of a consent order.”

That this deal provoked such intensity is also noteworthy because vertical mergers typically don’t prompt nearly as many challenges as horizontal mergers, which generate more scrutiny because they involve joining head-to-head competitors.

Vertical deals, by contrast, involve the combination of firms at different places on the supply chain. They typically are justified by claims of efficiencies and are viewed by antitrust watchdogs as not raising the same level of potential competitive harm.

But Slaughter, pointing to vertical mergers’ growing impact on the economy and the paucity of challenges to them, wrote that she is “particularly concerned that the current approach to vertical integration has led to substantial under-enforcement.”

She urged the commission to conduct a retrospective review of the Staples-Essendant deal and contended on cases that involve close calls, the commission “would do well to adopt a general practice of planned retrospective investigations that could inform subsequent enforcement decisions.”

Chopra, meanwhile, insisted the majority acted hastily to approve the Staples deal on a record that was insufficiently developed. He also said the record underestimated the deal’s anticompetitive harms. The commission’s decision “to wave through this transaction with few strings attached rests on an incomplete picture of the competitive landscape over the long term,” he wrote.

Chopra singled out the role of private equity fund Sycamore Partners, which controls Staples, as raising special issues. It will have a “strong incentive to rapidly increase margins to make a clear case to a potential future acquirer.”

He noted Sycamore’s history, including its role as a divestiture buyer in a deal the commission approved in 2015 in which it “quickly resold the assets. The majority seems to believe we should wear blindfolds when it comes to this type of buyer evidence.”

Those dissents prompted Wilson to all-but-charge that the two Democrats were driven by their ideology rather than the evidence in the Staples-Essendant merger. Their dissents, she wrote, cite to “left-leaning Washington think tanks and a few academics.”

As for concerns about concentrated markets, Wilson noted “there is scant evidence that markets are less competitive today than they were in some ill-defined age of yore.”

The dissents rely on “highly flawed analyses,” Wilson charged. And if retrospectives were undertaken on the scale that Slaughter favors, there’s a risk of “returning the Commission to its earlier role as the ‘national nanny’ with an ongoing mandate to monitor prices, output, entry, and other marketplace developments throughout the economy.”

That reference to “national nanny” is especially stinging as it dates to a famous editorial in The Washington Post in 1978 in which the newspaper excoriated the FTC for its aggressive involvement in the television advertising market. The “national nanny” potshot continues to be used by critics seeking to head off initiatives by the commission that they see as overreaching.

By moving beyond the specifics of the Staples deal, Slaughter drew other critics as well. “The merger implicates the agency’s law-enforcement function. In order to maintain the public’s trust in the agency as a responsible exerciser of its law enforcement powers, you want a commission that bases its decisions only on the record before it,” Henry Su of Constantine Cannon said in an interview.

“It very well may be that Commissioners Slaughter and Chopra are trying to draw the battle lines with respect to vertical mergers — that this is part of the larger progressive antitrust message that is going around on the Hill,” Su said. “It very well may be that 3-2 divisions on these types of cases is unavoidable.”

If so, that outcome would be bad news for Simons, who launched an ambitious schedule of hearings last year on competition and consumer protection in the 21st century, saying his goal is “to try to put back together the strong bipartisan consensus that we have had previously,” because it “was a huge service to the agency itself and also to the country.”

He has elaborated on that goal, noting that in antitrust policy there had been “a pretty tight consensus for 30 years,” but today “people are really questioning the consensus. So, we think this is a good time to try to have people talk to each other, expose these issues, get it all worked out and, in the best of all possible worlds, come to a new consensus or confirm the old one.”

But just looking at the majority statement underscores the difficulty of reaching a consensus. The Republican commissioners pointedly dismissed each of the concerns raised by the two dissents and in the process underscored the sharp differences that exist within the commission.

The majority found that the Staples-Essendant deal raised only one competitive concern that Staples dealt with by imposing firewalls and other safeguards to protect competitively sensitive information involving Essendant’s customers.

Essendant sells office products to office supply resellers. Staples competes with Essendant’s customers to sell office supplies to mid-sized businesses. By protecting that sensitive market data, Staples would not be able to use that information to raise prices to wholesalers.

If Staples were to do that, then the wholesalers would pass the higher prices on to their customers. Those customers could then decide to switch suppliers — and buy, for example, from Staples. The firewall is intended to prevent that anticompetitive chain of actions by Staples to gain an unfair competitive edge.  

As for Chopra’s concern about Sycamore, the majority was dismissive, saying antitrust laws “focus on curbing harm to the competitive process,” and this concern “has nothing to do with the competitive process.”

The majority countered Chopra’s notion that the record wasn’t sufficiently developed by detailing the staff’s investigation — interviewing more than 100 market participants, reviewing millions of documents and conducting sophisticated economic analyses.

The majority was equally dismissive of Slaughter’s concern about vertical merger enforcement. In a withering rejoinder, they wrote the dissent “seems to suggest that our decision in this case is part of a decades-long, bipartisan pattern of faulty analysis, improper assumptions, unreliable predictions, underweighting evidence of anticompetitive effect and overweighting evidence of efficiencies.”

“But there is a vigorous debate over whether that assertion has any merit, and the sources cited in the dissent have been subject to substantial criticism for both methodological flaws and irrelevance to competition policy,” the majority wrote.  

Citing the series of hearings that Simons launched, the majority expressed hope that the Democratic commissioners “are willing to subject the sources on which they rely to the same scrutiny they apply to those that have garnered widespread acceptance in the past.”

The majority also dismissed Slaughter’s call to boost the number of retrospective reviews, writing that “the practical reality is that we do not have remotely enough resources to institute such a program.”

The intensity of the exchanges left Calkins hoping that this doesn’t portend contentious times ahead.

“I hope that the dueling statements in this proceeding won’t harden positions and turn what should be a bipartisan search for truth into partisan disagreement,” he said.