Tuesday, June 25, 2019

How the Feds Used Quad's and LSC's Own Words Against Them

The U.S. Justice Department's lawsuit seeking to block Quad's purchase of printing rival LSC Communications relies heavily on comments from the two companies themselves.

"As LSC CEO Tom Quinlan remarked to investors mere months before the current deal was announced, combining LSC and Quad would eliminate ‘battle[s]’ between the two and could help lead to ‘[p]ricing stability,’” Justice’s lawsuit says.

The lawsuit argues that the combined company would indeed have the power to stifle price competition in four markets – the production (and in some cases distribution) of magazines, catalogs, single-color trade books, and textbooks. The deal would “significantly increase concentration in already concentrated markets,” the lawsuit says.

“As Quad executives explained in an internal presentation, ‘we are the only printer other than LSC that can offer the largest [book] Publishers a complete solution,’” according to the lawsuit.

LSC has a similar view of the book business: “When LSC sales staff learned that one of the next largest printers might bid on a major account, they described that competitor as a ‘band of bandits’ and concluded, ‘it’s all about [Q]uad, nobody else.’”

A two-horse race
“Catalog printing services is a ‘two-horse race between LSC and Quad,’ with the two firms holding a combined 69% share of the market according to a Quad Board of Directors deck,” says the lawsuit. It also claims that the two companies “control ‘more than half of all publication printing’ for magazines, with LSC the apparent source of that claim.

“LSC dismissed the next largest catalog printer (behind Quad and LSC itself) as a niche firm that merely ‘lives off our scraps,’” says the lawsuit, without stating who at LSC made the “scraps” comment.

Justice says the two companies dominate the production of medium-run and long-run magazines and catalogs because “they control a particularly high percentage of web offset presses and all rotogravure presses in the United States.” The lawsuit includes an especially dramatic “Magazine & Catalog Presses” chart showing that Quad and LSC have a combined total of more than 270 web offset and rotogravure presses, while the next largest competitor has about 20 offset presses.

(Justice doesn’t define what it means by “publication printing” or “web offset presses.” Based on the context, it seems to include only presses that can print on coated paper and deliver product suitable for binding – excluding presses that produce such products as newspapers, brochures, or direct-mail inserts.)

One thing Justice definitely didn’t claim is that there’s any collusion between the two giant printers. The lawsuit cites several examples of Quad and LSC slashing prices or offering multimillion-dollar signing bonuses to steal or retain major publishing customers from the other printing giant.

"The intensity of competition has concerned many at Quad, including one senior executive who remarked, 'We’ve been in a price war with them for some time. Don’t see that changing.'”

Such price wars have benefited publishers, Justice points out. Allowing Quad and LSC to combine would not only end the price wars, it would enable Quad to raise prices in the four markets where it would have a dominant share, the lawsuit contends.

“We believe the acquisition of LSC will result in time- and cost-saving opportunities for clients while protecting jobs for employees," Quad countered in a press release last week. “The DOJ’s position ignores the dynamic conditions in the U.S. commercial printing industry, which consists of nearly 50,000 companies," it added -- as if every screen print shop and invitations printer competes with Quad and LSC.

On the contrary, Justice's opposition is right on target, ignoring the printing business as a whole and focusing on four print-related markets in which Quad and LSC have virtual duopolies.

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Thursday, June 20, 2019

Justice Department Tries to Block Quad-LSC Deal

The U.S. Department of Justice asked a federal court late this afternoon to block Quad's proposed acquisition of fellow megaprinter LSC Communications.

JUNE 21 UPDATE: Quad says it will "vigorously defend" the proposed acquisition despite Justice's objections. It also said it won't predict when the court will issue a ruling. LSC, whose stock price started today down 19%, also expressed continued support for the deal.

"The combination of Quad and LSC—the two most significant magazine, catalog, and book printers in the United States—threatens to increase prices, reduce quality, and limit availability of printed material that millions of Americans rely on to receive and disseminate information and ideas," reads the first paragraph of Justice's complaint, filed in the U.S. District Court for the Northern District of Illinois.

The move is counter to Justice's usual laissez faire approach to mergers in the printing industry, which it had previously viewed as highly fragmented and therefore not subject to antitrust regulations. (There's No Such Thing as a Printing Industry explains that, in fact, printing is a collection of disparate marketplaces.)

Justice isn't even suggesting any divestitures or other moves that would make the combination of Quad (AKA Quad/Graphics) and LSC acceptable. Here's the conclusion of its filing:

The United States requests: 
(a) that Quad’s proposed acquisition of LSC be adjudged to violate Section 7 of the Clayton Act, 15 U.S.C. § 18; 
(b) that the Defendants be permanently enjoined and restrained from carrying out the proposed acquisition of LSC by Quad or any other transaction that would combine the two companies; 
(c) that the United States be awarded costs of this action; and 
(d) that the United States be awarded such other relief as the Court may deem just and proper.

Justice issued a press release that nicely summarizes its 40-page filing, including this statement, "The Antitrust Division’s lawsuit alleges that the transaction would combine the only two significant providers of magazine, catalog, and book printing services, denying publishers and retailers throughout the country the benefits of competition that has spurred lower prices, improved quality, and greater printing output."

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