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Hello and welcome you are 
listening to Patrick Boyle on 

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Finance, a podcast exploring 
ideas from quantitative finance,

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examining events occurring in 
markets right now and financial 

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history to see what lessons can 
be taken away, including 

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interviews with some of the most
interesting people in the world 

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of finance. 
To learn more about the podcast,

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visit on finance.org. 
American consumers are at risk 

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of being deprived of the 
competition for affordable 

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handbags. 
Yes, you heard me right. 

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Lina Khan, Joe Biden's FTC 
Commissioner who took office 

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after saying that federal 
agencies have failed to do 

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enough proper policing, filed a 
lawsuit this week to block the 

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accessible luxury fashion 
conglomerate Tapestry from 

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buying AUK based competitor 
Capri Holdings. 

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Now look, I can tell you guys 
are already about to click away 

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from the video, and I'm aware 
that my audience is 98% male. 

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And yes, I do agree with you 
guys that all handbags are the 

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same. 
But you know the way crypto Bros

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think that all crypto currencies
are different from each other 

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and that they have different 
utility? 

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Well, according to this FTC 
lawsuit, that's how some women 

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feel about handbags. 
They don't necessarily recognize

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that all handbags are exactly 
the same. 

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The FTC has been a hive of 
activity since Biden nominated 

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the then 32 year old Lena Khan 
to chair the federal agency in 

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2021. 
Khan, who rose to prominence 

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after writing a viral law 
article in 2017 about Amazon's 

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economic dominance when she 
worked for the think tank New 

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America Foundation, has lost two
of her most significant 

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courtroom cases so far and has 
attracted a Blizzard of 

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criticism for her broader agenda
from both the left and the 

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right. 
This new lawsuit alleges that 

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Tapestry's purchase of Capri 
would eliminate head to head 

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competition between the group's 
brands like Michael Kors, Kate 

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Spade and Coach, giving Tapestry
A dominant slice of the 

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accessible luxury handbag 
market. 

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The lawsuit spends a lot of time
defining what accessible luxury 

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is, saying that the term was 
first coined by Coach, a 

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Tapestry brand, at the time of 
its IPO over 20 years ago. 

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The suit carefully distinguishes
accessible luxury from mass 

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market products and from high 
end luxury, focusing in 

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particularly on handbags. 
It's worth noting that all of 

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these brands appear to produce 
other products like clothing, 

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shoes, eyeglasses, watches, 
perfumes, and other accessories.

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They even make menswear, which I
did look at online, and they 

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appear to mostly sell the kind 
of shoes worn by American 

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politicians. 
The reason that the lawsuit is 

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so focused on accessible luxury 
handbags, which they carefully 

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define, is that the case relies 
on the HHIR Herffendal Hirschman

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Index, a commonly used measure 
of market concentration, in 

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order to claim that this 
acquisition is anti competitive.

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Obviously, if you widen the 
definition of the industry to 

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women's wear, handbags in 
general, or accessible luxury 

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goods or even leather wear, the 
acquisition does not really seem

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significant from a market 
concentration perspective. 

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The New York Times writes that 
the lawsuit is a rare move by 

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the agency to block a fashion 
deal, given that the industry 

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does not suffer from a lack of 
competition. 

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The lawsuit argues that the 
acquisition would likely lead to

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higher prices, decreased 
innovation, and reduced wages. 

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Now, I won't lie to you. 
Until I read the lawsuit, I 

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wasn't aware that the accessible
luxury handbag industry was such

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a hotspot of innovation. 
Anyhow, why are the FTC getting 

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involved in a deal like this? 
And more importantly, are they 

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just trying to block every 
merger? 

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Jeffrey Sonnenfeld of the Yale 
School of Management wrote a 

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piece a few months ago saying 
the 2 1/2 years into Khan's 

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tenure, the FTC has lost every 
single merger challenge. 

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It is brought through litigation
across both federal and 

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administrative courts without 
even a single win, in cases as 

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varied as Microsoft's 
acquisition of Activision 

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Blizzard, Meta's acquisition of 
Within, and Illuminous 

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acquisition of Grail, to name 
just a few. 

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Up until recently, the consumer 
welfare standard has been the 

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guiding principle for regulators
and for courts under that 

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standard, regulators have 
generally recognized that there 

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are usually economic benefits 
associated with business 

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combinations. 
After all, that's why they're 

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being done. 
They can lead to greater 

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operational efficiencies within 
businesses. 

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Regulators have focused mainly 
on preventing mergers that are 

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anti competitive and might harm 
consumers with higher prices, 

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reduced output or diminished 
quality. 

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Under Lina Khan, the focus of 
the FTC has changed. 

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Antitrust laws are in place in 
almost every country to prevent 

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certain types of business 
practices that are deemed anti 

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competitive. 
Courts in the US have applied 

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these laws from 1890, true to 
the present day, with the 

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objective of protecting 
competition for the benefit of 

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consumers, ensuring strong 
incentives for business 

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efficiency, keeping prices down,
keeping quality up, and 

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fostering innovation. 
People on both sides of the 

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political divide would usually 
agree that vigorous competition 

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is essential in any free market 
economy. 

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The first US antitrust law, the 
Sherman Act, was passed by 

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Congress in 1890 as a charter of
economic liberty aimed at 

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preserving free and unfettered 
competition. 

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In 1914, Congress passed two 
additional antitrust laws, the 

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Federal Trade Commission Act, 
which created the FTC, and the 

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Clayton Act, with some 
revisions. 

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These are the three main federal
antitrust laws still in effect 

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today. 
The first really big antitrust 

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case came in nineteen 1121 years
after the passing of the Sherman

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Act against John D Rockefeller 
Standard Oil Company, which at 

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the time controlled almost all 
oil production, processing, 

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marketing, and transportation in
the United States. 

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The courts ordered the company 
to be broken up by divesting 

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itself of its major holdings. 33
companies in all Chevron, Exxon 

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Mobil, BP, and Marathon Oil can 
all be traced back to 

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Rockefeller. 
Standard Oil anti competition 

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law has always been both broad 
and vague. 

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Thus, how and if antitrust laws 
are enforced has varied 

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significantly over time, and 
enforcement depends heavily on 

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political will. 
Enforcement fell significantly 

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during both World Wars, as 
government needed to rely on big

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business during that time for 
war production. 

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The 1974 breakup of AT&T marked 
the end of the really aggressive

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antitrust enforcement era. 
Since the Reagan presidency, 

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there's been a move to only 
bring antitrust cases if it can 

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be demonstrated that consumers 
are being harmed by a large 

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business. 
This is the consumer welfare 

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standard. 
Before Lena Khan, the most 

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recent big antitrust case was 
the United States versus 

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Microsoft. 
The issue central to that case 

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was whether Microsoft was 
allowed to bundle its web 

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browser software with the 
Windows operating system. 

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The court ordered a breakup of 
Microsoft in June 2000, but then

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in 2001, the Department of 
Justice reached an agreement 

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with Microsoft to settle the 
case. 

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The settlement required 
Microsoft to share its API with 

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third party companies and 
appoint a panel of three people 

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who would have full access to 
Microsoft systems, records and 

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source code for five years in 
order to ensure compliance. 

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From the 1990s to the 20 Tens, 
the average number of mergers 

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investigated by the Department 
of Justice fell from 180 per 

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year to 70 per year. 
Corporate concentration has 

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risen across the decades in both
America and Europe as antitrust 

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enforcement declined. 
But according to The Economist, 

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this expansion appears to have 
been caused mainly by growing 

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economies of scale from 
technology, not market power. 

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The big ideas behind the decades
long retreat from antitrust 

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enforcement in the United States
are The three Firms are usually 

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enough to keep any market 
competitive, monopolies are 

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often only temporary, and 
mergers often create 

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efficiencies that are reliably 
passed on to consumers in the 

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form of lower prices. 
In deciding whether to block a 

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merger or outlaw business 
practices, judges in recent 

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years have mostly relied on an 
economic analysis of how much 

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prices would likely go up or 
down if the deal gets done. 

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In December 2023, the FTC and 
the Antitrust Division of the 

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Department of Justice released 
new merger guidelines, which 

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describe how the agencies review
proposed mergers and 

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acquisitions under federal 
antitrust laws. 

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These merger guidelines have 
existed in varying forms for 

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more than 50 years. 
The new guidelines were 

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described by Ankush Kaduri, an 
attorney and former federal 

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prosecutor, as a bid to will 
into existence an expansive and 

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enforcement friendly legal 
framework that modern courts 

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have not endorsed, either in the
particulars or in broad strokes,

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and whose wisdom, as a matter of
domestic economic policy, is 

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open to serious question. 
The merger guidelines layout 

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frameworks that the agencies 
then use to assess whether a 

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merger violates the antitrust 
laws. 

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These new frameworks differ from
the past 40 years of antitrust 

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enforcement in two key manners. 
Firstly, the new guidelines 

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substantially lowered the 
threshold at which a merger is 

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considered anti competitive, 
meaning that more mergers can be

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challenged or scrutinized than 
in the past. 

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Most notably, they lower the 
Herffendal Hirschmann Index and 

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market share thresholds that the
agencies use to assess whether a

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merger of competitors is 
considered to be 

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anticompetitive. 
Secondly, a number of the 

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guidelines are based on novel or
less proven legal theories, 

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including prohibiting 
transactions that enable a firm 

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dominant in one market from 
extending its position into 

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other markets even if one of the
merging firms has no presence in

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the other market. 
Finding that a firm may violate 

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the law by engaging in an anti 
competitive pattern of multiple 

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small acquisitions. 
This is something that Tapestry 

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is accused of. 
In this case, even if no 

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individual acquisition would 
violate the antitrust laws, 

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relevant evidence for an anti 
competitive pattern can include 

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failed deals that did not close 
and future potential acquisition

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strategies by the acquiring firm
or others in the industry. 

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Additionally, the guidelines 
allow for blocking a merger 

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that's not necessarily anti 
competitive, but might result in

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lower wages, slower wage growth,
or other degradations of 

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workplace quality in the 
industry. 

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While the new guidelines are 
likely to result in increased 

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agency scrutiny of proposed 
deals, it's important to note 

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that they are just guidelines 
and that they don't have the 

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force of law. 
The agencies still need to 

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convince federal courts to apply
these guidelines, and so far 

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that's not going too well. 
Under the Biden administration, 

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the agencies have suffered a 
number of high profile losses in

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federal court, suggesting that 
courts are reluctant to go along

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with the novel or less tested 
theories of harm reflected in 

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the new guidelines. 
Since Lena Khan has headed up 

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the FTC, she has lost a number 
of high profile cases, and some 

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argue that she's taking these 
cases more to send a message to 

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big business than to necessarily
win the cases. 

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In an interview with CNN, Khan 
said that she was quite happy 

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with her progress at the FTC, 
citing feedback she's received 

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from business leaders about the 
agency's deterrent effect. 

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She went on to say we've heard 
that executives are taking much 

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more seriously the potential 
antitrust risk of deals on the 

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front end, adding that deals are
not being pursued because 

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they're recognized on the front 
end as being legally suspect. 

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Although the overall number of 
M&A deals has only fallen 

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slightly since Connors led the 
FTC, the average deal size has 

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fallen by about 40%, suggesting 
that larger deals are being 

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deterred. 
Since Joe Biden took office in 

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2020, the share of deals 
involving the largest tech 

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giants has been cut in half. 
It's not just pro business 

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conservatives who are concerned 
with the new direction of the 

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FTC either. 
The Chamber of Progress, 

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Democratic founded Centre Left 
Tech Policy Industry Coalition 

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has warned that the Khan FTCS 
defeat made the FTC less 

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credible, saying all these court
losses are making their threats 

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look more like a paper tiger. 
Khan has had some successes at 

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the FTC. 
In 2022, a federal judge blocked

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a bid by the publisher Penguin 
Random House, to buy out one of 

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its main rivals, Simon and 
Schuster. 

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The assistant attorney general 
on that case, argued that the 

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proposed merger would have 
reduced competition, decreased 

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author compensation, diminished 
the breadth, depth and diversity

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of our stories and ideas, and 
ultimately impoverished our 

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democracy. 
That case focused on author 

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earnings rather than harm to 
consumers, which was a 

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significant shift in how 
antitrust law is applied. 

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Antitrust policy has mostly been
guided by an effort to prevent 

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large corporations from imposing
higher costs on consumers, 

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rather than focusing on the 
impact on workers, suppliers, or

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competitors. 
The accessible luxury handbag 

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lawsuit seems rather 
questionable in terms of its 

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claim that it would reduce 
competition in the apparel 

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industry, which is highly 
fragmented and competitive. 

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But it is a test of the new 
guidelines in that one of its 

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key arguments is that the merger
would directly affect hourly 

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workers, who may lose out on 
higher wages due to reduced 

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competition for employees. 
The complaint does, however, 

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highlight that accessible luxury
handbags are typically 

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manufactured in Asia. 
So it would seem that the hourly

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00:16:39,240 --> 00:16:43,600
workers the FTC is discussing 
are possibly people who work in 

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retail stores selling the 
handbags. 

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The complaint also highlights 
that a wide variety of retail 

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outlets sell these bags, from 
company owned stores to big 

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chains like TJ Maxx and Macy's 
to online sellers. 

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So it's not clear to me which 
workers wages specifically they 

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00:17:03,760 --> 00:17:07,240
expect to fall if this merger 
were to go ahead. 

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It's possibly worth questioning 
if this lawsuit is a case of 

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regulatory overreach and if the 
FTC have narrowly defined a 

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category of handbags such that 
Coach and Michael Kors seem to 

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be more dominant in this 
carefully selected category than

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they actually are in the real 
world of women's fashion. 

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00:17:29,240 --> 00:17:33,280
It could be argued that if the 
prices of these brands were to 

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go up, another brand would 
quickly take their place on the 

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00:17:37,080 --> 00:17:41,960
shelves of TJ Maxx and Macy's. 
It strikes me as unlikely that 

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an entire price category of 
handbags would disappear from 

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store shelves. 
Lena Kahn's argument that it's 

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reasonable to launch a series of
lawsuits that fail in the court 

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00:17:53,800 --> 00:17:58,320
but have a deterrent effect on 
businesses doesn't strike me as 

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00:17:58,320 --> 00:18:00,600
being appropriate government 
action. 

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00:18:00,800 --> 00:18:04,520
If federal agencies are to 
launch nuisance lawsuits to 

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deter business combinations that
are legal but distasteful to the

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00:18:09,200 --> 00:18:13,880
head of the FTC, it's imposing 
unreasonable legal costs on 

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00:18:13,880 --> 00:18:18,120
businesses for no good reason. 
It could even be argued that 

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imposing these costs on 
businesses effects consumers, as

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the businesses would have to 
raise prices to remain 

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00:18:25,840 --> 00:18:29,160
profitable. 
A lot of the evidence cited in 

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00:18:29,160 --> 00:18:33,400
the lawsuit, much of which is 
redacted in the public document,

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00:18:33,680 --> 00:18:37,640
is commentary from the 
management of Tapestry and the 

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00:18:37,640 --> 00:18:40,920
investment bankers who are 
pitching the deal to investors 

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00:18:41,120 --> 00:18:45,200
stating that the merged entity 
will be more profitable than it 

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00:18:45,200 --> 00:18:48,960
was before due to synergies 
between the two firms. 

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00:18:49,360 --> 00:18:54,000
Every deal that gets done or is 
even pitched is of course done 

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in the expectation of profits. 
If the FTC is only willing to 

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allow mergers that can be 
demonstrated to be bad for the 

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00:19:02,720 --> 00:19:06,680
businesses in question, this 
might set a difficult standard 

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00:19:06,680 --> 00:19:09,760
to meet. 
It's not obvious that under the 

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new merger guidelines, the two 
children's lemonade stands could

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00:19:14,040 --> 00:19:17,920
be merged without attracting an 
FTC lawsuit. 

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Thanks for tuning into this 
week's podcast. 

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00:19:20,920 --> 00:19:24,280
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00:19:24,480 --> 00:19:28,040
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00:19:30,760 --> 00:19:33,360
Have a great week and talk to 
you again soon. 

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00:19:33,480 --> 00:19:36,520
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