Shocker: DOJ Files Suit to Block Quad From Acquiring LSC Communications
In what many printing industry observers, including myself, view as a shocking development, the U.S. Department of Justice (DOJ), Antitrust Div., filed a civil antitrust lawsuit in the U.S. District Court for the Northern District of Illinois on June 20 seeking to block Quad’s proposed $1.4 billion, all-stock acquisition of LSC Communications.
According to an article published by CTFN that quoted a person with inside knowledge of negotiations which were in process to reach a settlement agreement, "As early as the morning of June 20, the DOJ was prepared to approve the merger with divestitures, but Quad's lawyers pushed back on the package." The same individual also reportedly indicated that some type of resolution could still be presented, at some point, that would meet DOJ approval.
However, the DOJ lawsuit (click here to read the full complaint) on the surface appears very adamant about its opposition to the proposed merger of the two companies, and doesn't specifically divulge what divestitures would be required, if any, for the antitrust regulatory agency to ultimately approve the deal.
If the transaction is not consummated by Oct. 30, 2019—or if there is a final, non-appealable court order preventing the acquisition—either Quad or LSC can terminate their merger agreement. In this case, Quad would also be required to pay LSC a “regulatory approval reverse termination fee” of $45 million.
The DOJ complaint maintains that the transaction would combine the only two significant U.S. providers of magazine; catalog; and education and one-color trade 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.
“American publishers and retailers rely on Quad and LSC to print and distribute billions of magazines, catalogs, and books each year,” said Assistant Attorney General Makan Delrahim, of the DOJ’s Antitrust Div., in a statement. “LSC is Quad’s primary competitor. If this deal were allowed to proceed, Quad would dominate the markets for magazine, catalog, and book printing services, and be able to raise prices and reduce quality at the expense of publishers, retailers, and, ultimately, American consumers.”
The lawsuit also contends that Quad/LSC’s gravure (Quad is the only remaining gravure long-run publication printer) and web offset printing and distribution resources vastly exceed those of their competitors, making them "the only realistic options for many publishers and retailers."
The DOJ complaint, which also cited several examples, alleges that Quad’s proposed acquisition of LSC would put an end to the “price war” between the two head-to-head competitors and allow the combined company to dominate the magazine; catalog; and education and one-color trade book printing markets.
They bid aggressively against each other by leveraging their scale and scope, and by undercutting one another’s prices, the DOJ complaint argued. This has led to reduced margins, which ultimately led Quad and LSC to contemplate a merger. "As LSC [Chairman, President and] 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,'” the DOJ indicated.
The DOJ complaint specifically quotes internal presentations and emails describing the level of intense competition that exists between Quad and LSC:
- Internal documents outline the “two-horse race between LSC and Quad.”
- A Quad internal presentation explained, “we are the only printer other than LSC that can offer the largest publishers a complete solution.”
- Executives observed a publisher “exploiting the fact that LSC [and] Quad[’s] CEOs want to beat each other into oblivion.”
- A senior Quad executive remarked of LSC, “We’ve been in a price war with them for some time. Don’t see that changing.”
- After hearing news of the merger, one Quad executive reflected on a recent battle between it and LSC and remarked, “I admit, in the case of [a large customer] I’m taking significant satisfaction in the news ... I’m sure it’s a bitter pill for them to swallow.”
Quad and LSC Will Defend Their Case Vigorously
For their part, Sussex, Wis.-based Quad and Chicago-based LSC plan to fight the ruling "vigorously," arguing that their merger would create a highly efficient print manufacturing and distribution platform that will strengthen the role of print in an increasingly multichannel media world dominated by digital advertising.
“The DOJ’s position ignores the dynamic conditions in the U.S. commercial printing industry, which consists of nearly 50,000 companies, generates an estimated $76 billion in aggregate annual revenues, and provides ample competition for the supply of printed products, especially in the face of decreasing demand," Joel Quadracci, Quad chairman, president and CEO, said in a release issued by Quad. "Neither Quad nor LSC accounts for more than 5 percent of that total print industry revenue. By comparison, two digital media companies, Google and Facebook alone, have worldwide digital ad sale revenues totaling more than $75 billion—nearly the same amount as the entire printing industry.
"This underscores a key point: Our competition is not only other printers, but also other forms of media. Quad is in the business of manufacturing advertising and, therefore, is a direct competitor to digital channels," Quadracci added. "Given the continued migration of advertising dollars to digital channels, the printing industry has pursued platform consolidations as a key way to eliminate inefficient and expensive overcapacity, streamline operations and create the efficiencies. This will help ensure print remains an economically feasible alternative to digital channels for publishers and retailers.
"Our goal is to make print a more effective and affordable media option to that of digital giants such as Google and Facebook. The DOJ does not appear to recognize the competitive effect of digital media on the print industry."
Similarly, LSC issued a statement contending why the merger would benefit the companies’ clients:
- There is significant excess capacity in the printing industry today and this transaction would improve efficiencies and lower printing costs;
- Many printers have the capability to print the same jobs as LSC Communications or Quad and successfully compete with both companies on quality and price;
- Barriers to expansion and entry in the printing business are low and printers can easily expand their production capacity through acquisitions or with modest capital expenditures on equipment and facilities that are readily available; and
- The trend toward digital substitution increases competition and disincentives price increases.
“We believe that the DOJ is wrong in its assessment of our transaction and that its action is counterproductive, especially in the context of the industry trends and continued consolidation," LSC Chairman, President and CEO Quinlan said. "We continue to believe that our proposed combination will provide an overall more efficient experience for our clients."
What Were the Stumbling Blocks for Approval?
As reported by Printing Impressions earlier, apparently one of the DOJ's issues was the fact that Quad is the only remaining printer with rotogravure printing capabilities suited for long-run (1 million or more copies) publication printing. More likely, though, what DOJ considered is the dominant position the combined entities would have on the mailing and distribution side of the business.
In May 2018, LSC announced its acquisition of RR Donnelley's Print Logistics business. That followed on the heels of its July 2017 acquisition of Fairrington Transportation, a mailing and logistics provider. And, in November of last year, it purchased The Clark Group, a third-party logistics provider of distribution, consolidation, transportation management and international freight forwarding services.
As one savvy reader commented to Printing Impressions, "Unless the DOJ intercedes, Quad is going to have a virtual monopoly on mail consolidation such as co-mail, co-pal and cross-docking, and also on newsstand distribution. Other than a small company here or there, nobody else has the kind of firepower that Quad will have.
"I should point out that other printers have long relied on RRD/LSC/Quad or companies they have recently acquired, like Fairrington or The Clark Group, for these distribution services," he added. "Let's face it, Quad is not paying for the merger via synergies by combining Quad with LSC. They will pay for it by charging more for distribution of printed product. They can—and will—muscle their smaller competitors out of business to take the work that fits their platform.
"These are the conversations I have had with competitors in the printing business and partners in the publishing world. But because we all will rely on Quad for these services, we can only hope and pray the DOJ intercedes some how," he concluded.
For now, the wish of that printer appears to have been granted. And, one can only wonder about the amount of turmoil that must now be occurring internally within the Quad and LSC organizations, as well as among their respective customer bases. For some time now the companies undoubtedly have been preparing their internal operations and advising their external customer bases in preparation for the merger they assumed would happen. But now, with this latest development, everything remains up in the air as to whether or not the deal will ultimately be consummated.
In the end, that's not good for Quad nor LSC. Nor is that sense of uncertainty good for an industry as a whole that—at least from the perspective of Wall Street and Main Street—is already facing a large degree of uncertainty and upheaval.