June 6, 2007
Sokol on the Whole Foods-Wild Oats Deal
Posted by Jeff Lipshaw
Our friend Danny Sokol (Hastie Fellow at Wisconsin; Visiting Professor, Missouri-Columbia) has a quote in this morning's Wall Street Journal on the FTC's decision to challenge the Whole Foods-Wild Oats merger, expressing the same intuitive skepticism about the challenge we felt at the Lipshaw breakfast table: it seems a little surprising. Alene evoked the "George H.W. Bush" regulatory model: "Probably the FTC lawyers have never been in a grocery store." Jeff responded by evoking the advice he used to give his business clients. "FTC staffers are not looking for antitrust truth. They are usually young lawyers looking for notches in their holster that are the ticket to advancement in the FTC or lateral partnerships at big law firms. So don't give them visceral and unfounded ammunition by writing unthoughtful memorandum." [Note to practitioners: merger enforcement lawyers generally have a Pavlovian response and begin salivating uncontrollably when reading the executive summary of the sale memorandum written by the investment bankers for the seller in a deal.]
I practiced or supervised the antitrust side of deal work for many years, and I admit to never quite understanding the relationship between the published merger guidelines and the enforcement decisions in practice. The merger guidelines used to provide (and I assume still do) for the definition of markets based on pricing power - you started with the core product or area, and continued expanding until a hypothetical monopolist in the hypothetical product or geographic market could hold a non-transitory five percent price increase. We never got far enough along, it seems to me, to test that proposition - the deals always seemed to hang on other deal characteristics. For example, is it a "4 to 3" merger or a "3 to 2" merger? Or in the auto industry, very little mattered because the oliogopsonistic purchasers were the best regulators.
Danny Sokol's reaction to this deal seems the right one to me. Regardless of the present state of the market, in which it's probably the case that there is a price premium built into the upscale natural-organic food store over the typical store, where are the barriers to entry if Whole Foods tries to expand the premium? The local Marsh stores in Indianapolis already look like Whole Foods from the spot where you walk in the store until the meat department, at which point it looks like an ordinary grocery store again. Since there are some things even the most organic of us cannot get at Whole Foods or Wild Oats (diet soda, what are known are "water beverages" because they contain flavoring and artificial sweeteners such as Propel or Fruit2O, good croutons, or a broad selection of frozen yogurt, to name a few), an upscale department in a more mundane grocery store would seem to be a competitive advantage.
Hmm. I need to check with some of my friends, like Weil Gotshal merger uber-lawyer Steve Newborn (above right), later today.
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