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Management Side
Merger Of Largest U.S. Printers Should Be Blocked By Justice Department, Advocacy Groups Say

CHICAGO (From news reports) -- The pending combination of the magazine industry's two largest printers should be blocked by the Department of Justice because it represents a merger into monopoly that will put power over long-run magazine printing in the hands of one company, according to a letter published last week by the nonprofit anti-monopoly organization Open Markets Institute and two venerable writer's groups.

The merger would also concentrate a major part of the magazine-distribution system in the hands of a single monopolistic company and have a similar anti-competitive impact on the book industry, according to the Open Markets Institute, a Washington, D.C., based think tank that spun out of New America, a Google-backed advocacy organization, in 2017.

The letter, dated March 6th and addressed to Assistant Attorney General Makan Delrahim, head of the DOJ's Antitrust Division, was cosigned by two writers' organizations, the Authors Guild and Pen America. Its focus was opposition to the merger of Quad Graphics and LSC Communications, a deal announced last October, with an anticipated closing in the middle of this year, pending regulatory review.

In the deal, Quad is acquiring LSC in an all-stock transaction valued at $1.4 billion. It will create a combined company with revenue over $8 billion, including $3.6 billion in the magazine and book printing markets alone, according to the Open Market Institute letter. The companies are acknowledged as the two remaining long-run printers in the United States. (Long-run printing is generally defined as in the millions of copies, but it can be as few as 500,000 copies.) The next largest two publication printers generated a combined $275 million in 2018, according to the Open Markets Institute.

The transaction is easily the largest and most significant deal in a publication-printing industry that's seen relentless consolidation for more than a decade. It is likely to result in one or more plant shutdowns and other business efficiencies, which Quad says will amount to $135 million in less than two years.

The Open Markets institute letter suggests there's fear rippling across the magazine industry about the loss of price stability the merger might create. One well-known commentator who writes under the pseudonym D. Eadward Tree told the Open Markets Institute that "the concentration of printers reduces competition, which drives up printing prices and can stifle innovation." And Dan Weber, a printing industry veteran and current sales executive at Royle Printing, said "[One] kept the other honest."

The Open Markets institute letter also cited the impact on distribution the merger would have. Because of the volume of copies they print, Quad and LSC have built efficient vertically integrated distribution and logistics arms into their printing operations. "A publisher currently looking to get their magazine onto newsstands across the country after the Quad and LSC merger will have to confront two monopolies along their supply chain," the letter states. "Quad-LSC as printer and Quad-LSC as distributor."

Smaller printers will feel this effect as well, the letter argues. In order to deliver those publications onto newsstands and into stores, smaller competitors depend on Quad or LSC. "In addition to raising competitors' distribution costs so as to make distribution infeasible, Quad and LSC also could gain an unfair advantage by wielding valuable access to potentially sensitive competitive information," the letter continues. "Along with driving up competitors' cost of distribution, access to this information could facilitate illegal collusion."

The letter states that LSC and Quad could invoke what's commonly known as the "Failing Firm Defense," presumably noting the brutal external circumstances in the print-magazine industry, where consolidations, magazine shutdowns, and large-scale layoffs have been the order of the day for at least a decade.

In an S-4 filing with the Securities and Exchange Commission, Quad projected that from 2018 to 2022, if its acquisition of LSC does not proceed, its net sales will drop 18 percent, while LSC's net sales will drop 21 percent, the letter notes. But the Open Markets Institute argues that the failing-firm justification doesn't apply to Quad and LSC. The letter states:

"This defense is satisfied only if "(1) the allegedly failing firm would be unable to meet its financial obligations in the near future; (2) it would not be able to reorganize successfully under Chapter 11 of the Bankruptcy Act; and (3) it has made unsuccessful good-faith efforts to elicit reasonable alternative offers that would keep its tangible and intangible assets in the relevant market and pose a less severe danger to competition than does the proposed merger."

"Neither Quad nor LSC appear to have met a single one of these requirements, the letter concludes. "Given that Quad and LSC are proposing a merger to monopoly in two markets, the Antitrust Division should block this merger, and further, require Quad and LSC to sell off their magazine distribution subdivisions."

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