DOJ files suit to block Quad purchase of LSC Communications

The U.S. Department of Justice (DOJ) Antitrust Division, filed a civil antitrust lawsuit in the U.S. District Court for the Northern District of Illinois June 20 seeking to block printing giant Quad/Graphics Inc.’s proposed $1.4 billion acquisition of competitor LSC Communications. The all-stock transaction was announced on Oct. 31, 2018, and was approved Feb. 22, 2019, by shareholders of both companies. Either Quad, which is based in Sussex, Wisconsin, or LSC, of Chicago, Ill., can terminate the merger agreement if the transaction is not consummated by Oct. 30, 2019, or if there is a final, non-appealable order preventing the transaction, according to a Quad announcement.

In 2018, Quad’s revenues were approximately $4.2 billion, whereas LSC’s revenues were about $3.8 billion.

In a press release, the DOJ 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.”

“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 Justice Department’s Antitrust Division. “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 DOJ alleges the head-to-head competition between the two behemoths benefits customers and end consumers through lower prices and better services. A combined company would have lower incentives to be as competitive, the government says, citing these quotes from internal presentations and emails:

• 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] CEO’s 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.”

The complaint alleges Quad’s proposed acquisition of LSC would put an end to the “price war” between the two and allow it to dominate the magazine, catalog, and book printing markets.

“We believe the acquisition of LSC will result in time- and cost-saving opportunities for clients while protecting jobs for employees. We also believe that the business combination will create a highly efficient print manufacturing and distribution platform that will strengthen the role of print in an increasingly multichannel media world that is dominated by digital advertising,” said Joel Quadracci, Quad chairman, president and CEO, in a press release. “We are fully committed to defending the DOJ’s lawsuit in court. We believe the combination of Quad and LSC is the best outcome for all stakeholders and that the DOJ’s attempt to stop the transaction will unfavorably impact our clients, our employees, and the print industry.”

Quadracci noted the DOJ errs in assessing the relevant market as solely the print market.

“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,” says Quadracci. “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. 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.”

Given the proposed merger of market-leading photo personalization companies Shutterfly and Snapfish, which is also subject to the Hart-Scott-Rodino Act, there’s potential for similar government scrutiny.