Hello and welcome you are listening to Patrick Boyle on
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of finance. To learn more about the podcast,
visit on finance.org. American consumers are at risk
of being deprived of the competition for affordable
handbags. Yes, you heard me right.
Lina Khan, Joe Biden's FTC Commissioner who took office
after saying that federal agencies have failed to do
enough proper policing, filed a lawsuit this week to block the
accessible luxury fashion conglomerate Tapestry from
buying AUK based competitor Capri Holdings.
Now look, I can tell you guys are already about to click away
from the video, and I'm aware that my audience is 98% male.
And yes, I do agree with you guys that all handbags are the
same. But you know the way crypto Bros
think that all crypto currencies are different from each other
and that they have different utility?
Well, according to this FTC lawsuit, that's how some women
feel about handbags. They don't necessarily recognize
that all handbags are exactly the same.
The FTC has been a hive of activity since Biden nominated
the then 32 year old Lena Khan to chair the federal agency in
2021. Khan, who rose to prominence
after writing a viral law article in 2017 about Amazon's
economic dominance when she worked for the think tank New
America Foundation, has lost two of her most significant
courtroom cases so far and has attracted a Blizzard of
criticism for her broader agenda from both the left and the
right. This new lawsuit alleges that
Tapestry's purchase of Capri would eliminate head to head
competition between the group's brands like Michael Kors, Kate
Spade and Coach, giving Tapestry A dominant slice of the
accessible luxury handbag market.
The lawsuit spends a lot of time defining what accessible luxury
is, saying that the term was first coined by Coach, a
Tapestry brand, at the time of its IPO over 20 years ago.
The suit carefully distinguishes accessible luxury from mass
market products and from high end luxury, focusing in
particularly on handbags. It's worth noting that all of
these brands appear to produce other products like clothing,
shoes, eyeglasses, watches, perfumes, and other accessories.
They even make menswear, which I did look at online, and they
appear to mostly sell the kind of shoes worn by American
politicians. The reason that the lawsuit is
so focused on accessible luxury handbags, which they carefully
define, is that the case relies on the HHIR Herffendal Hirschman
Index, a commonly used measure of market concentration, in
order to claim that this acquisition is anti competitive.
Obviously, if you widen the definition of the industry to
women's wear, handbags in general, or accessible luxury
goods or even leather wear, the acquisition does not really seem
significant from a market concentration perspective.
The New York Times writes that the lawsuit is a rare move by
the agency to block a fashion deal, given that the industry
does not suffer from a lack of competition.
The lawsuit argues that the acquisition would likely lead to
higher prices, decreased innovation, and reduced wages.
Now, I won't lie to you. Until I read the lawsuit, I
wasn't aware that the accessible luxury handbag industry was such
a hotspot of innovation. Anyhow, why are the FTC getting
involved in a deal like this? And more importantly, are they
just trying to block every merger?
Jeffrey Sonnenfeld of the Yale School of Management wrote a
piece a few months ago saying the 2 1/2 years into Khan's
tenure, the FTC has lost every single merger challenge.
It is brought through litigation across both federal and
administrative courts without even a single win, in cases as
varied as Microsoft's acquisition of Activision
Blizzard, Meta's acquisition of Within, and Illuminous
acquisition of Grail, to name just a few.
Up until recently, the consumer welfare standard has been the
guiding principle for regulators and for courts under that
standard, regulators have generally recognized that there
are usually economic benefits associated with business
combinations. After all, that's why they're
being done. They can lead to greater
operational efficiencies within businesses.
Regulators have focused mainly on preventing mergers that are
anti competitive and might harm consumers with higher prices,
reduced output or diminished quality.
Under Lina Khan, the focus of the FTC has changed.
Antitrust laws are in place in almost every country to prevent
certain types of business practices that are deemed anti
competitive. Courts in the US have applied
these laws from 1890, true to the present day, with the
objective of protecting competition for the benefit of
consumers, ensuring strong incentives for business
efficiency, keeping prices down, keeping quality up, and
fostering innovation. People on both sides of the
political divide would usually agree that vigorous competition
is essential in any free market economy.
The first US antitrust law, the Sherman Act, was passed by
Congress in 1890 as a charter of economic liberty aimed at
preserving free and unfettered competition.
In 1914, Congress passed two additional antitrust laws, the
Federal Trade Commission Act, which created the FTC, and the
Clayton Act, with some revisions.
These are the three main federal antitrust laws still in effect
today. The first really big antitrust
case came in nineteen 1121 years after the passing of the Sherman
Act against John D Rockefeller Standard Oil Company, which at
the time controlled almost all oil production, processing,
marketing, and transportation in the United States.
The courts ordered the company to be broken up by divesting
itself of its major holdings. 33 companies in all Chevron, Exxon
Mobil, BP, and Marathon Oil can all be traced back to
Rockefeller. Standard Oil anti competition
law has always been both broad and vague.
Thus, how and if antitrust laws are enforced has varied
significantly over time, and enforcement depends heavily on
political will. Enforcement fell significantly
during both World Wars, as government needed to rely on big
business during that time for war production.
The 1974 breakup of AT&T marked the end of the really aggressive
antitrust enforcement era. Since the Reagan presidency,
there's been a move to only bring antitrust cases if it can
be demonstrated that consumers are being harmed by a large
business. This is the consumer welfare
standard. Before Lena Khan, the most
recent big antitrust case was the United States versus
Microsoft. The issue central to that case
was whether Microsoft was allowed to bundle its web
browser software with the Windows operating system.
The court ordered a breakup of Microsoft in June 2000, but then
in 2001, the Department of Justice reached an agreement
with Microsoft to settle the case.
The settlement required Microsoft to share its API with
third party companies and appoint a panel of three people
who would have full access to Microsoft systems, records and
source code for five years in order to ensure compliance.
From the 1990s to the 20 Tens, the average number of mergers
investigated by the Department of Justice fell from 180 per
year to 70 per year. Corporate concentration has
risen across the decades in both America and Europe as antitrust
enforcement declined. But according to The Economist,
this expansion appears to have been caused mainly by growing
economies of scale from technology, not market power.
The big ideas behind the decades long retreat from antitrust
enforcement in the United States are The three Firms are usually
enough to keep any market competitive, monopolies are
often only temporary, and mergers often create
efficiencies that are reliably passed on to consumers in the
form of lower prices. In deciding whether to block a
merger or outlaw business practices, judges in recent
years have mostly relied on an economic analysis of how much
prices would likely go up or down if the deal gets done.
In December 2023, the FTC and the Antitrust Division of the
Department of Justice released new merger guidelines, which
describe how the agencies review proposed mergers and
acquisitions under federal antitrust laws.
These merger guidelines have existed in varying forms for
more than 50 years. The new guidelines were
described by Ankush Kaduri, an attorney and former federal
prosecutor, as a bid to will into existence an expansive and
enforcement friendly legal framework that modern courts
have not endorsed, either in the particulars or in broad strokes,
and whose wisdom, as a matter of domestic economic policy, is
open to serious question. The merger guidelines layout
frameworks that the agencies then use to assess whether a
merger violates the antitrust laws.
These new frameworks differ from the past 40 years of antitrust
enforcement in two key manners. Firstly, the new guidelines
substantially lowered the threshold at which a merger is
considered anti competitive, meaning that more mergers can be
challenged or scrutinized than in the past.
Most notably, they lower the Herffendal Hirschmann Index and
market share thresholds that the agencies use to assess whether a
merger of competitors is considered to be
anticompetitive. Secondly, a number of the
guidelines are based on novel or less proven legal theories,
including prohibiting transactions that enable a firm
dominant in one market from extending its position into
other markets even if one of the merging firms has no presence in
the other market. Finding that a firm may violate
the law by engaging in an anti competitive pattern of multiple
small acquisitions. This is something that Tapestry
is accused of. In this case, even if no
individual acquisition would violate the antitrust laws,
relevant evidence for an anti competitive pattern can include
failed deals that did not close and future potential acquisition
strategies by the acquiring firm or others in the industry.
Additionally, the guidelines allow for blocking a merger
that's not necessarily anti competitive, but might result in
lower wages, slower wage growth, or other degradations of
workplace quality in the industry.
While the new guidelines are likely to result in increased
agency scrutiny of proposed deals, it's important to note
that they are just guidelines and that they don't have the
force of law. The agencies still need to
convince federal courts to apply these guidelines, and so far
that's not going too well. Under the Biden administration,
the agencies have suffered a number of high profile losses in
federal court, suggesting that courts are reluctant to go along
with the novel or less tested theories of harm reflected in
the new guidelines. Since Lena Khan has headed up
the FTC, she has lost a number of high profile cases, and some
argue that she's taking these cases more to send a message to
big business than to necessarily win the cases.
In an interview with CNN, Khan said that she was quite happy
with her progress at the FTC, citing feedback she's received
from business leaders about the agency's deterrent effect.
She went on to say we've heard that executives are taking much
more seriously the potential antitrust risk of deals on the
front end, adding that deals are not being pursued because
they're recognized on the front end as being legally suspect.
Although the overall number of M&A deals has only fallen
slightly since Connors led the FTC, the average deal size has
fallen by about 40%, suggesting that larger deals are being
deterred. Since Joe Biden took office in
2020, the share of deals involving the largest tech
giants has been cut in half. It's not just pro business
conservatives who are concerned with the new direction of the
FTC either. The Chamber of Progress,
Democratic founded Centre Left Tech Policy Industry Coalition
has warned that the Khan FTCS defeat made the FTC less
credible, saying all these court losses are making their threats
look more like a paper tiger. Khan has had some successes at
the FTC. In 2022, a federal judge blocked
a bid by the publisher Penguin Random House, to buy out one of
its main rivals, Simon and Schuster.
The assistant attorney general on that case, argued that the
proposed merger would have reduced competition, decreased
author compensation, diminished the breadth, depth and diversity
of our stories and ideas, and ultimately impoverished our
democracy. That case focused on author
earnings rather than harm to consumers, which was a
significant shift in how antitrust law is applied.
Antitrust policy has mostly been guided by an effort to prevent
large corporations from imposing higher costs on consumers,
rather than focusing on the impact on workers, suppliers, or
competitors. The accessible luxury handbag
lawsuit seems rather questionable in terms of its
claim that it would reduce competition in the apparel
industry, which is highly fragmented and competitive.
But it is a test of the new guidelines in that one of its
key arguments is that the merger would directly affect hourly
workers, who may lose out on higher wages due to reduced
competition for employees. The complaint does, however,
highlight that accessible luxury handbags are typically
manufactured in Asia. So it would seem that the hourly
workers the FTC is discussing are possibly people who work in
retail stores selling the handbags.
The complaint also highlights that a wide variety of retail
outlets sell these bags, from company owned stores to big
chains like TJ Maxx and Macy's to online sellers.
So it's not clear to me which workers wages specifically they
expect to fall if this merger were to go ahead.
It's possibly worth questioning if this lawsuit is a case of
regulatory overreach and if the FTC have narrowly defined a
category of handbags such that Coach and Michael Kors seem to
be more dominant in this carefully selected category than
they actually are in the real world of women's fashion.
It could be argued that if the prices of these brands were to
go up, another brand would quickly take their place on the
shelves of TJ Maxx and Macy's. It strikes me as unlikely that
an entire price category of handbags would disappear from
store shelves. Lena Kahn's argument that it's
reasonable to launch a series of lawsuits that fail in the court
but have a deterrent effect on businesses doesn't strike me as
being appropriate government action.
If federal agencies are to launch nuisance lawsuits to
deter business combinations that are legal but distasteful to the
head of the FTC, it's imposing unreasonable legal costs on
businesses for no good reason. It could even be argued that
imposing these costs on businesses effects consumers, as
the businesses would have to raise prices to remain
profitable. A lot of the evidence cited in
the lawsuit, much of which is redacted in the public document,
is commentary from the management of Tapestry and the
investment bankers who are pitching the deal to investors
stating that the merged entity will be more profitable than it
was before due to synergies between the two firms.
Every deal that gets done or is even pitched is of course done
in the expectation of profits. If the FTC is only willing to
allow mergers that can be demonstrated to be bad for the
businesses in question, this might set a difficult standard
to meet. It's not obvious that under the
new merger guidelines, the two children's lemonade stands could
be merged without attracting an FTC lawsuit.
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