On January 28, 2019, the Federal Trade Commission (FTC) entered into a consent order allowing, with firewall conditions, the vertical merger between Staples and office-supply distributor Essendant. In order to resolve the FTC’s allegations that the merger may harm competition in the market for office-supply products sold to small- and mid-sized businesses, the merging parties have agreed to establish a firewall separating Staples’ business-to-business operations and Essendant’s wholesale business, thereby shielding Essendant customers’ commercially sensitive information (CSI) from Staples.1
The FTC came to this decision via a 3-2 vote split along party lines, with Chairman Joseph Simons and Commissioners Noah Phillips and Christine Wilson voting to approve the merger with conditions, and Commissioners Rohit Chopra and Rebecca Slaughter dissenting. The decision is noteworthy because Commissioners Chopra and Slaughter expressed concerns with the FTC’s historical record on vertical merger enforcement. It is also significant because it imposes a behavioral remedy in a predominantly vertical merger situation, despite the Antitrust Division, Department of Justice’s (DOJ) stated preference for structural remedies. Perhaps most importantly, it demonstrates a continuing commitment to mainstream antitrust policy by the commission’s majority, and in contrast a desire by the dissenters for significantly increased antitrust enforcement.
Decision and Dissent
The FTC complaint alleged that through the merger, Staples would gain access to the CSI of Essendant’s reseller customers who compete with Staples to sell their products to end-consumers. The merger would also allow Staples to have access to Essendant’s reseller customers’ cost of goods, and Staples could eliminate direct and substantial competition between itself and Essendant’s reseller customers in the market for the sale and distribution of office products by raising prices to Essendant’s reseller customers. Having access to CSI and the ability to raise prices for reseller customers would allow Staples to have significant bargaining power when bidding against the reseller customers for the end-customers’ business.2
The merger involved concentrated markets for the both the sale of office products to small- and medium-sized business, and market for wholesale distribution to resellers to those businesses. The distribution market was especially concentrated, with Essendant as one of just two major firms. Taking the potential anticompetitive effect of access to reseller CSI into account, the majority allowed the merger to go through with a consent order that included a behavioral remedy to correct for the likely anticompetitive effects of the deal. The remedy requires Staples (and its private equity owner, Sycamore) to create a firewall separating Staples' business-to-business end-customer selling functions from Essendant’s wholesale selling function.3 In contrast to some prior orders in vertical cases, the consent does not include a non-discrimination provision.
The Majority Rejected Horizontal and Vertical Theories of Harm
The majority examined and rejected other theories of harm put forward by the FTC staff. First, the majority examined and rejected the theory that Staples would potentially raise Essendant’s prices forcing Essendant’s independent dealer customers to raise prices for their own end-customers and causing the end-customers to switch to Staples instead. The majority rejected this theory on the grounds that evidence showed that the independent dealer customers would not absorb Staples higher costs, but rather switch to Essendant’s competitor S.P. Richards instead.4
Importantly, the majority also decided that a monopsony problem would not arise from this merger. The merger would have been anticompetitive if the combined entity was able to exercise such significant market power as a buyer that it was able to reduce overall market demand and price by reducing its own purchases. However, the combined entity of Staples and Essendant would only be able to obtain reduced prices from suppliers in exchange for buying more of their products or by reducing the supplier’s transaction costs. These lower prices would result in a beneficial pro-consumer outcome and not a welfare loss.
Commissioner Chopra’s Dissent
Commissioner Chopra stated concerns for both the horizontal and vertical merger aspects. Under horizontal concerns, he disputed the majority’s decision that the combined entity’s increased buying power vis-a-vis its upstream suppliers would result in an efficiency as opposed to a harm. Under vertical concerns, Commissioner Chopra expressed doubt that Sycamore would not increase Essendant’s prices and reduce service to its customers to make customers switch to Staples, thereby increasing overall margins.5
Commissioner Chopra proposed that the Commission take buyer incentives into account when evaluating a transaction for anticompetitive effects. Because Staples is owned by a private equity firm (Sycamore) that has previously bought and sold merged assets, Commissioner Chopra believes that Sycamore will aim to quickly increase margins to attract a buyer to whom it can sell the combined entity to at a profit, as opposed to engaging in vigorous competition in the market.6
Finally, Commissioner Chopra accused the majority of putting too much faith in economic models that ignore regional differences in markets and likely underestimate anticompetitive effects. He would have the Commission look more closely at and take into account geographic markets where effective switching would be difficult.7
Commissioner Slaughter’s Dissent and Discussion on Vertical Merger Enforcement
Commissioner Slaughter’s dissent is notable because it included a general criticism of vertical merger enforcement and urged the commission to do a retrospective investigation of the merger. She states that vertical mergers are under enforced because the commission does not challenge vertical mergers outright or because it settles through behavioral remedies as opposed to divestitures. Vertical mergers are also under enforced because the commission relies on unreliable assumptions and predictions about how vertically integrated entities conduct themselves.8
Commissioner Slaughter’s advice to enforcers is to challenge the merger if the parties cannot show that 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.”9
Furthermore, given the difficulty of reliably predicting the anticompetitive effects of vertical mergers at the time of the transaction, Commissioner Slaughter proposes that the commission should adopt a general policy of planned retrospective investigations and include commitments to these investigations in the consent orders of close case mergers.10
A Few Takeaways
Behavioral Remedy Instead of Structural Remedy
Under the DOJ Antitrust Chief Makan Delrahim, the DOJ has publicly stated that it will shift away from behavioral remedies and favor structural ones. That the FTC would choose a firewall remedy is especially notable given the DOJ’s insistence of structural relief.
FTC Decision Split Along Party Lines
The commissioners were divided 3-2 on voting for this decision, with the three Republican commissioners voting to allow the merger to go through and the two Democratic commissioners opposing.
Difficulty of Crafting Vertical Merger Guidelines
Commissioner Chopra’s and Commissioner Slaughter’s dissents express the view that the FTC should be challenging many more mergers, both vertical and horizontal. Crafting a new set of vertical merger guidelines has been a subject of the FTC hearings, and these dissents and the majority’s response show the difficulty of such a task. This present transaction is a case in point representing the complexity of the analysis, as the transaction is a vertical deal with a concentrated downstream market (national suppliers of office supplies) and a duopoly upstream.
Commentary on Private Equity Deals
Commissioner Chopra proposes that the identity and past behavior of private equity owners should be used to extrapolate the private equity firm’s intentions to determine the likely competitiveness of the merged entity. The majority, on the other hand, does not agree that the conduct and intentions of private equity firm should be made part of an antitrust analysis; those commissioners follow instead that standard presumption of profit maximization for the merged entity.
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Overall, the case highlights the differences between those following the sort of antitrust principles that have operated largely as a consensus over the past 25 years and those urging far more vigorous antitrust enforcement. Antitrust has not provided fodder for political disputes for an extended amount of time, but as the FTC hearings and this controversial case demonstrate, the times seem to be changing.
For more information about the FTC’s decision on Sycamore Partners, Staples & Essendant, please contact any member of the antitrust practice at Wilson Sonsini.