The U.S. Department of Justice filed a lawsuit Thursday to block the acquisition of LSC Communications by Sussex-based Quad/Graphics Inc., arguing the deal would end aggressive competition between the two and harm customers in the magazine, catalog and book markets.
Quad issued a statement Thursday afternoon pledging to “vigorously defend” the acquisition. The company faces the possibility of having to pay LSC $45 million if their deal is successfully blocked by regulators. Thomas Quinlan III, LSC chairman, president and CEO, said 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.”
“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,” said Assistant Attorney General Makan Delrahim of the Justice Department’s Antitrust Division.
Quad and LSC, the legacy printing business of longtime Quad competitor R.R. Donnelley, announced the $1.4 billion deal in October of last year. The all-stock transaction was expected to close by the middle of this year and has already been approved by shareholders of both companies.
The deal would combine Chicago-based LSC’s 59 manufacturing and distribution facilities with the 55 Quad has in a printing industry that has seen volumes decline sharply in recent years. Quad estimated it could reach $135 million in synergies and cost savings from the deal from capacity rationalization, administrative efficiencies and supply chain management.
“Those (synergies) may actually harm competition by reducing available capacity,” the DOJ complaint says. “Most are unlikely to be passed through to customers, and collectively they are far outweighed by the proposed acquisition’s likely anticompetitive effect.”
Joel Quadracci, Quad/Graphics chairman, president and CEO, said the deal will result in time- and cost-saving opportunities for customers while also protecting the jobs of 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,” Quadracci said.
He noted the U.S. printing industry has nearly 50,000 companies with a combined $76 billion in revenue. While neither Quad or LSC account for more than 5% of the industry, Google and Facebook have more than $75 billion in digital ad revenue.
“This underscores a key point: Our competition is not only other printers, but also other forms of media,” Quadracci said.
The government’s complaint, filed in the U.S. District Court for Northern Illinois, repeatedly points to pricing battles between the two companies, quoting one Quad senior executive as saying “we’ve been in a price war with them for some time. Don’t see that changing.”
In one case, LSC tried to win a magazine account from Quad, but Quad CEO Joel Quadracci responded by dropping his company’s price by 25%. LSC responded by offering $6.5 million in immediate benefits for the publisher and won the account.
The atmosphere between the two has prompted the companies to refrain from negative changes to accounts for fear of getting into a blood bath, according to the complaint.
In another example, LSC won a catalog publishing account that Quad had for more than 20 years after several rounds of business that ultimately included a $1.4 million signing bonus.
On a book publishing account, Quad’s aggressive offer prompted an LSC executive to say, “Quad is on fire, promising everything,” according to the complaint. Quad’s final offer ended up saving the publisher $37 million over its current arraignment.
“Quad and LSC executives have lamented the ease with which publishers play the two firms off one another, commenting in one such instance that a publisher was ‘exploiting the fact that LSC [and] Quad[’s] CEO’s want to beat each other into oblivion,’” the complaint says.
The DOJ also argues that barriers to entry make it unlikely expansion by any existing competitors would be able to counteract anti-competitive effects of the deal.
“Other firms seeking to enter the market or expand would need to spend a significant amount of time and money to acquire expensive printing equipment from one of a limited number of remaining sources for such equipment, build new facilities and accompanying infrastructure, and hire skilled workers from a limited employment pool,” the complaint says. “Even after taking on this costly and time-consuming investment, without the scale of orders needed to operate efficiently, the firm would not be able offer the same cost-effective postal distribution and other solutions as Quad and LSC do today.”
