Class 16 Antitrust Winter 2019

Class 16Antitrust Winter 2019Modern Horizontal Merger Cases Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright © 2000-19 Randal C. Picker. All Rights Reserved.

February 14, 2019 2 CA Sec. 7 No person engaged in commerce or in any activity affecting commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital

February 14, 2019 3 CA Sec. 7 and no person subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another person engaged also in commerce or in any activity affecting commerce,

February 14, 2019 4 CA Sec. 7 where in any line of commerce or in any activity affecting commerce in any section of the country , the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly .

FTCA Sec. 13(b)(b)Temporary restraining orders; preliminary injunctionsWhenever the Commission has reason to believe—(1) that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the Federal Trade Commission, and February 14, 20195

FTCA Sec. 13(b)(2) that the enjoining thereof pending the issuance of a complaint by the Commission and until such complaint is dismissed by the Commission or set aside by the court on review, or until the order of the Commission made thereon has become final, would be in the interest of the public— February 14, 2019 6

FTCA Sec. 13(b)the Commission by any of its attorneys designated by it for such purpose may bring suit in a district court of the United States to enjoin any such act or practice. February 14, 2019 7

February 14, 2019 8 FTCA Sec. 13(b) Upon a proper showing that, weighing the equities and considering the Commission’s likelihood of ultimate success , such action would be in the public interest , and after notice to the defendant, a temporary restraining order or a preliminary injunction may be granted without bond

February 14, 2019 9 Sept 4 1996: Staples wants to buy Office Depot 3 Major Players in Office Superstores Office Depot: > 500 stores, 38 states and DC, with emphasis in South and Midwest Staples: > 550 stores, 28 states and DC, mainly Northeast and California OfficeMax: 575 stores, 48 states Proposed purchase of OD by Staples

February 14, 201910 Staples Annual Report 1996

February 14, 201911 Office Depot 10-K 1997

February 14, 201912 Office Depot 10-K 1997

February 14, 201913 FTC, Staples/Office Depot, 10 Apr, 1997 Amended Complaint

February 14, 201914 FTC, Staples/Office Depot, 10 Apr, 1997 “ One relevant product market or submarket in which the competitive effects of the proposed merger may be assessed is the retail sale of office supplies (sometimes called ‘consumable’ office supplies) through office supply superstores .” Product Market Definition

February 14, 201915 FTC, Staples/Office Depot, 10 Apr, 1997 “ Another relevant product market in which the competitive effects of the proposed merger may be assessed is the broader market consisting of the sale of office supplies (sometimes called ‘consumable’ office supplies) through retail stores to small businesses and individuals with home offices .” Product Market Definition

February 14, 201916 FTC, Staples/Office Depot, 10 Apr, 1997 “ Staples and Office Depot are the only two office supply superstore firms in the following fifteen relevant geographic markets : San Diego, California; Salinas, California; Visalia-Tulare-Porterville, California; Lakeland-Winter Haven, Florida; Ocala, Florida; Tampa-St. Petersburg-Clearwater, Florida; Fort Pierce-Port St. Lucie, Florida; Champaign-Urbana, Illinois ;.” Geographic Market Definition

February 14, 201917 FTC, Staples/Office Depot, 10 Apr, 1997 “ Louisville , Kentucky; Baltimore, Maryland; Greenville, North Carolina; Florence, South Carolina; Charlottesville, Virginia; Washington, D.C.; and Spokane, Washington.” Geographic Market Definition

February 14, 201918 FTC, Staples/Office Depot, 10 Apr, 1997 “ OfficeMax, Inc., the only other office supply superstore firm in the United States, operates office supply superstores in all the remaining relevant geographic markets .” Geographic Market Definition

February 14, 201919 FTC, Staples/Office Depot, 10 Apr, 1997 “ In addition, the effect of the proposed merger, if consummated , may be substantially to lessen competition by eliminating actual potential competition between Staples and Office Depot in other metropolitan areas where they would compete in the future , including, but not limited to: (1) Bergen County, New Jersey; (2) Fayetteville, North Carolina; (3) Albany-Schenectady-Troy, New York; and (4) Fredericksburg, Virginia.” Potential Competition

February 14, 201920 FTC, Staples/Office Depot, 10 Apr, 1997 Relief Sought

February 14, 2019 21 Possible Market Definitions FTC 2 “Sale of consumable office supplies through retail stores to small businesses and individuals with home offices” Defendant Market Definitions Office products (and would give combined market share for OD/S of 5.5%)

O Max O Depot Staples Post-Merger N N N 0 to 0: No change Y N N 1 to 1: No change N Y N 1 to 1: OD -> S, no change in effective competition N N Y 1 to 1: No change Y Y N 2 to 2: OD -> S, no change in effective competition Y N Y 2 to 2: No change N Y Y 2 to 2 w/fix: Sell OD to OM, then no change in effective competition Y Y Y 3 to 2: This is the box that matters February 14, 2019 22

February 14, 2019 23 Staples Competition Forecast Overlap: 1995 Actual and 2000 Projected Year Staples Only S & OD S & OM All 3 Total 1995 17% 29% 37% 17% 100% 2000 12% 7% 12% 69% 100%

Understanding Market Config 8: What Happens to Prices?February 14, 2019 24 OSS3 P/P/P OSS1 P/P/P OSS2 P/P/P OSS1 P/P/P OSS2 P/P/P Pen Store Paper Store Post-Its Store I II III IV OSS1 P/P/P OSS2 P/P/P OSS1 P/P/P OSS2 P/P/P Pen Store Paper Store Post-Its Store OSS3 P/P/P

February 14, 2019 25 Comparing the Stores Functional characteristics OSS: 20K to 30K sq. ft. w/anywhere from 5000 to 7500 SKUs devoted to consumables Warehouse clubs: 100 to 289 SKUs consumables K-Mart, Target: < 570 SKUs consumables Wal-Mart: 1067 to 2400 SKUs consumables

Merger Policy: Controlling Incremental Market PowerWhat Merger Policy Can and Can’t DoMerger policy can’t do anything about whether we are in Quadrant I or Quadrant IIInstead merger policy controls whether we are in Quadrants (III or I) and (IV or II) If we are already in III or IV, allowing the merger to go through will move us to I or II February 14, 2019 26

Merger Policy: Controlling Incremental Market PowerMarket power will clearly increase as we move from QIII to QI, but the question is by how much? Does a single OSS effectively constrain a second OSS?As to moving from QIV to QII, how much market power increases depends on how effective the non-OSS stores are as competitors February 14, 2019 27

February 14, 2019 28 Actual Case Data Direct economic evidence Jan 1997 Data Staples prices are 13% higher in one OSS markets than in 3-firm OSS markets ODs prices are 5% higher in one OSS markets than in 3-firm OSS markets Should we care about comparisons between 1 OSS markets and 3 OSS markets?

Slicing the Actual DataStaples Prices 13% Higher in 1 OSS Mkt v. 3 OSS Mkt Extreme Alt 1: Full Competition with 2 nd FirmMove from 1  2: prices drop to 3 OSS levelMove from 2  3, no change in prices“Full” competition as move from 1 to 2Moving from 3 to 2 unimportantFebruary 14, 2019 29

Slicing the Actual DataStaples Prices 13% Higher in 1 OSS Mkt v. 3 OSS Mkt Extreme Alt 2: 13% Higher in 2 OSS Mkt Move from 1  2: no change in prices Move from 2  3: prices drop to 3 OSS levelNo incremental competition until third OSS shows upFebruary 14, 2019 30

Slicing the Actual DataStaples Prices 13% Higher in 1 OSS Mkt v. 3 OSS MktExtreme Alt 2: 13% Higher in 2 OSS MktMoving from 3 to 2 a big deal as the 13% price difference emerges only at that point Reality? These data don’t tell us February 14, 2019 31

February 14, 2019 32 Actual Case Data Direct economic evidence Staples prices 1-2% higher in one OSS market w/o warehouse club vs. those w/warehouse club This is the OSS v. non-OSS data

February 14, 2019 33 Costs and Market Structure Key Stat Higher prices in markets with just one OSS brand present Could higher prices by explained by higher costs? Advertising costs shared by stores in area Just one OSS brand present may mean fewer stores overall and less sharing

February 14, 2019 34 How should we assess the market? Through the eyes of producers? Documents refer to office superstore industry, define market shares based on that as the denominator Defendants establish price zones calibrated to competition present; price differently when competing office superstore is present

February 14, 2019 35 How should we assess the market? Through the eyes of customers? Surveys of customer behavior? As shopper exits office super store, ask “Do you shop at Wal-Mart? Do you go there to buy pencils?” As shopper exits Wal-Mart, do the same?

February 14, 2019 36 Court’s Bottom Line Consumer Behavior “Despite the high degree of functional interchangeability between consumable office supplies sold by the office superstores and other retailers of office supplies, the evidence presented by the Commission shows that even where Staples and Office Depot charge higher prices, certain consumers do not go elsewhere for their supplies.”

February 14, 2019 37 Court’s Bottom Line Pricing Evidence “The pricing evidence indicates a low cross-elasticity of demand between consumable office products sold by Staples or Office Depot and those same products sold by other sellers of office supplies.

February 14, 2019 38 Court’s Bottom Line This same evidence indicates that non-superstore sellers of office supplies are not able to effectively constrain the superstores prices, because a significant number of superstore customers do not turn to a non-superstore alternative when faced with higher prices in the one firm markets.”

February 14, 2019 39 How should we evaluate the possibility of entry? New Pure Entrants into OSS Market? Decline from 23 OSS chains to 3 in 11 years Failure of Office 1 Failure of chains associated with existing retailers Expansion of others? Wal-Mart? Best Buy? Tried and backed away

February 14, 2019 40 How should we evaluate the claims of efficiency? Assessing the numbers Internal inconsistencies: 500% difference between FTC numbers and those presented to boards of directors Projected vendor cost savings: limited base, casual extrapolation (omission of HP), and questions of merger-specificity

February 14, 2019 41 How should we evaluate the claims of efficiency? Pass through rates Projected pass through of benefits to consumers of 2/3s vs. historic rates of 15-17% Use of efficiencies as defense to concentration problems uncertain under caselaw

February 14, 2019 42 FTC, Office Depot/OfficeMax, Nov. 1, 2013 2013: Deal 2: No Challenge

February 14, 201943   1997 2012 Ann Growth Rate United States $ 8,316,300,000,000 $15,887,600,000,000 4.41 Walmart $ 104,859,000,000 $ 443,854,000,000 10.10 Amazon $ 147,758,000 $ 61,093,000,000 49.43 Office Depot $ 6,717,514,000 $ 10,695,652,000 3.15 Office Max $ 2,597,000,000 $ 6,920,000,000 6.75 Staples $ 5,181,035,000 $ 24,400,000,000 10.88 Selected Annualized Growth Rates 1997-2012

February 14, 2019 44 FTC, OD/OM, Nov. 1, 2013 “ The Commission has unanimously decided to close its seven-month investigation of Office Depot, Inc.’s proposed merger with OfficeMax, Inc., a transaction that aims to combine the country’s second and third largest chains of office supply superstores (OSS ).” No Challenge

February 14, 2019 45 FTC, OD/OM, Nov. 1, 2013 “ Although sixteen years ago the Commission blocked a proposed merger between Staples, Inc. and Office Depot , the nation’s two largest OSS, our current investigation has shown that the market for the sale of consumable office supplies has changed significantly in the intervening years .” Market Has Changed

February 14, 2019 46 FTC, OD/OM, Nov. 1, 2013 “ One is that customers now look beyond OSS for office supply products and rely more heavily on non-OSS brick-and-mortar retailers. Mass merchants like Wal-Mart and Target and club stores like Costco and Sam’s Club have proliferated and expanded their product offerings and sales of office supplies .” Market Has Changed

February 14, 2019 47 FTC, OD/OM, Nov. 1, 2013 “The other is the explosive growth of online commerce , which has had a major impact on this market. Online retailers stock a vast array of office supply products and can deliver them quickly anywhere in the country at nominal cost .” Online Commerce

February 14, 201948 Staples PR, Feb. 4, 2015 “ Staples, Inc. (Nasdaq: SPLS) and Office Depot, Inc. (Nasdaq: ODP) today announced that the companies have entered into a definitive agreement under which Staples will acquire all of the outstanding shares of Office Depot .” 2015: Deal 3

February 14, 2019 49 Staples SEC 8-K Filing, Feb. 4, 2015

February 14, 201950 Staples SEC 8-K Filing, Feb. 4, 2015 Deadline and Termination Rights “ The Merger Agreement contains certain termination rights for both the Company and Office Depot, including if the Merger is not completed on or before November 4, 2015 (the “End Date”) (which date will be automatically extended to February 4, 2016 if certain closing conditions related to antitrust approvals have not been satisfied) and if the approval of Office Depot’s stockholders is not obtained.”

February 14, 201951 Staples SEC 8-K Filing, Feb. 4, 2015 Break-Up Fees: OD Pays Staples “ The Merger Agreement also provides that, upon termination of the Merger Agreement under certain circumstances, including termination of the Merger Agreement by the Company as a result of an adverse change of recommendation of Office Depot’s board of directors or a termination by Office Depot to accept a superior proposal, the Office Depot may be required to pay the Company a termination fee of $185 million .”

February 14, 201952 Staples SEC 8-K Filing, Feb. 4, 2015 “ In addition, the Company would be required to pay Office Depot a termination fee of $250 million if the Merger Agreement is terminated (i) by either party as a result of any antitrust-related final, nonappealable order or injunction prohibiting the closing or law making the Merger illegal ;” Break-Up Fees: Staples Pays OD

February 14, 2019 53 Staples SEC 8-K Filing, Feb. 4, 2015 Break-Up Fees: Staples Pays OD “ ( ii) by Office Depot as a result of a material breach of the Company’s antitrust-related covenants such that the antitrust-related closing condition or the condition that there be no final, non-appealable legal restraint is incapable of being satisfied; or”

February 14, 201954 Staples SEC 8-K Filing, Feb. 4, 2015 Break-Up Fees: Staples Pays OD “ ( iii) by either party as a result of the failure of the closing to occur on or before the End Date, as it may be extended, due to the antitrust-related closing condition not being satisfied or the condition that there be no final, non-appealable legal restraint not being satisfied as a result of any antitrust law .”

February 14, 201955 FTC Admin Complaint, Dec. 7, 2015

February 14, 201956 FTC Admin Complaint, Dec. 7, 2015 Market Definition “ The relevant market is the sale and distribution of consumable office supplies to large B-to-B customers in the United States . Large B-to-B customers are particularly vulnerable to the proposed Merger because many have nationwide or multi-”

February 14, 201957 FTC Admin Complaint, Dec. 7, 2015 Market Definition “regional operations and require an office supplies vendor that can provide low pricing, high levels of service, and delivery across all of their operations . For such customers, Staples and Office Depot are the two best options .”

February 14, 201958 FTC Admin Complaint, Dec. 7, 2015 Market Definition: Consumable Office Supplies “ Consumable office supplies consist of an assortment of office supplies, such as pens, paper clips, notepads, and copy paper, that are used and replenished frequently.”

February 14, 201959 FTC Admin Complaint, Dec. 7, 2015 Market Definition: And Not … “Consumable office supplies do not include ink and toner for printers and copiers . Many B-to-B customers, particularly large B-to-B customers, buy ink and toner directly from ink and toner manufacturers, or as part of a package of ‘managed print services ,’”

February 14, 201960 FTC Admin Complaint, Dec. 7, 2015 Market Definition: And Not … “in which vendors bundle ink and toner sales with leases of copier and printers, repair services, and/or copy or printer maintenance services. As a result, large B-to-B customers often purchase ink and toner from different vendors, under different contracts, that those from which they purchase consumable office supplies.”

February 14, 201961 FTC Admin Complaint, Dec. 7, 2015 Market Definition: And Not … “29 . Consumable office supplies do not include other office-related products, such as janitorial or break-room products. Janitorial or break-room products are sold under substantially different competitive conditions than consumable offices supplies .”

February 14, 2019 62 FTC Admin Complaint, Dec. 7, 2015 Applying the Grid from the Guidelines “Post-Merger , the market would be substantially more highly concentrated than it is today. Post-Merger, Staples would control more than 70% of this relevant market. The next largest competitor would possess less than 5% of the relevant market .”

February 14, 2019 63 FTC Admin Complaint, Dec. 7, 2015 Applying the Grid from the Guidelines “The Merger would result in a post-Merger HHI of well over 2500, and an increase in concentration of well over 200 points. Post-Merger market concentration would be more than 4900, and would increase HHIs in an already concentrated market by well over 200 points .”

February 14, 2019 64 FTC Admin Complaint, Dec. 7, 2015 Applying the Grid from the Guidelines “ The Merger is presumptively unlawful under relevant case law and the Merger Guidelines .”

FTC v. Staples (DDC 2016)Baker Hughes Structure re Success on the Merits(1) Gov’t must show undue concentration (often per the Merger Guidelines) (2) Defendant must rebut (3) Gov’t then bears burden of proof (and continues to have burden of persuasion) February 14, 201965

FTC v. Staples (DDC 2016)Market Definition QuestionsCluster marketsFocuses on complementary goods together, not substitutes Targeted Markets Not all consumers are the same; merger may matter more or less for different consumers February 14, 201966

February 14, 201967 FTC v. Staples (DDC 2016)

February 14, 201968 FTC v. Staples (DDC 2016)

February 14, 201969 FTC PR, May 19, 2016