Chris Hopkins of Barnett & Co.On Dec. 6, the Federal Trade Commission filed a lawsuit in Federal court to halt the proposed merger of Staples and Office Depot. In an even more puzzling twist, the agency did not focus on the impact of the merger on individual retail customers but instead cited the potential for higher prices to large corporate buyers with national accounts. In other words, the most sophisticated customers with the greatest buying power and the ability to switch suppliers most easily. The mind reels.
The pursuit of antitrust enforcement in America has had a noble beginning but a checkered history. Free market capitalism only operates effectively with vigorous competition. By the late 1800s, a few giant corporations known as "trusts" had effectively cornered the market for certain resources and infrastructure assets like oil, railroads and steel. This was possible because barriers to entry were too high to allow competitors to enter, or because a few firms controlled the bulk of raw material supplies. To address the problem of monopolies, Congress passed the Sherman Antitrust Act in 1890, which President Theodore Roosevelt wielded with gusto during the first decade of the 20th century.
In 1914, the Clayton Act expanded the government's antitrust tool kit and added the authority to challenge business combinations that were judged to be "anti-competitive." It is under this 100-year-old interpretation of impaired competition that the FTC action was brought.
The two office supply giants are seeking the tie-up precisely because of the hyper-competitive environment in their industry. Antitrust analysis often assumes a static landscape and fails to recognize the restless dynamism of competition and change from alternative channels. Staples and Office Depot are not at war with each other; they are losing market share to Sam's Club, Costco and BJ's Wholesale. They are dodging competitive threats from Dell and HP, Best Buy and Alibaba. And don't forget Amazon, from whom businesses can acquire anything available at Office Depot, and in some cities have it delivered the same day by an Uber driver.
This is hardly a case of a monopoly over scarce raw materials like John D. Rockefeller's Standard Oil Trust, or predatory control of critical infrastructure like Vanderbilt's New York Central Railroad. Staples and Office Depot buy stuff, mark it up and resell it. It's actually difficult to imagine an industry with lower barriers to entry by potential competitors.
Sadly this type of government interference has become all too common and is contributing to the general sluggishness of the U.S. economy. Last week, the federal government struck a blow for justice against the mighty dishwasher cartel when it successfully defeated GE's plan to sell its appliance division to Electrolux. And chalk one up for the Justice Department in its crusade against Big Tuna, killing the merger of Chicken of the Sea with Bumblebee. (Star-Kist spokesman Charlie the Tuna was unavailable for comment).
None of these examples or dozens of others in recent years involves monopoly control over critical resources that preclude competitors from entering. Markets are perfectly capable of sorting out good mergers from bad ones, to the ultimate benefit of consumer welfare. Recognition of the appropriate role for antitrust regulators and respect for those boundaries would meaningfully improve U.S. economic growth.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co.in Chattanooga.