A Department of Justice lawsuit filed June 20 in U.S. District Court in northern Illinois, which seeks to block the sale of LSC Communications to Wisconsin-based Quad Graphics, cites alleged …
A Department of Justice lawsuit filed June 20 in U.S. District Court in northern Illinois, which seeks to block the sale of LSC Communications to Wisconsin-based Quad Graphics, cites alleged antitrust violations pertaining to the Clayton Act.
In a complaint submitted Thursday in the Eastern Division of the U.S. District Court’s Northern District of Illinois, litigation and antitrust lawyers for the U.S. Attorney General’s Office noted, “The combination of Quad and LSC— the two most significant magazine, catalog, and book printers in the United States — threatens to increase prices, reduce quality, and limit availability of printed material that millions of Americans rely on to receive and disseminate information and ideas.”
In the 18-page complaint, DOJ authorities also noted, “Although Defendants allege that the proposed acquisition will generate synergies by combining the operations of the two largest printers in the country, those may actually harm competition by reducing available capacity, most are unlikely to be passed through to customers, and collectively they are far outweighed by the proposed acquisition’s likely anti-competitive effects.”
And, the allegation continued, “Among other things, the transaction would: (a) eliminate significant head-to-head competition between Quad and LSC in the markets for magazine, catalog, and education and one-color trade book printing services; (b) likely cause prices of magazine, catalog, and education and one-color trade book printing services to be higher than they would be otherwise; (c) likely cause the quality of magazine, catalog, and education and one-color trade book printing services to decrease; and (d) likely reduce capacity for and output of printed magazines, catalogs, and education and one-color trade books” in violation of the Clayton Act.
“American publishers and retailers rely on Quad and LSC to print and distribute billions of magazines, catalogs, and books each year,” said Assistant Attorney General Makan Delrahim of the Justice Department’s Antitrust Division in a statement release Thursday afternoon. “LSC is Quad’s primary competitor. 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.”
According to the DOJ complaint, Quad and LSC view each other as their “No. 1 competitor,” and intense head-to-head competition between them has directly benefitted their customers through lower prices and better-quality services. The complaint quotes internal presentations and emails from both firms describing this competition.
The DOJ complaint cites numerous internal documents which describe the “two-horse race between LSC and Quad” in bidding out multimillion dollar printing contracts.
Among those are a Quad internal presentation which explained, “we are the only printer other than LSC that can offer the largest publishers a complete solution,” according to a release from the DOJ.
The report released the day the court complaint was filed noted executives observed a publisher “exploiting the fact that LSC and Quad[’s] CEO’s want to beat each other into oblivion.”
A senior Quad executive remarked of LSC, “We’ve been in a price war with them for some time. Don’t see that changing.”
After hearing news of the merger, one Quad executive reflected on a recent battle between it and LSC and remarked, “I admit, in the case of [a large customer] I’m taking significant satisfaction in the news…I’m sure it’s a bitter pill for them to swallow.”
The complaint alleges that Quad’s proposed acquisition of LSC would put an end to the “price war” between the two and allow it to dominate the magazine, catalog, and book printing markets.
The complaint noted an LSC official in the magazine division, in response to successfully undercutting Quad on a bid, warned about altering freight or co-mailing arrangements to “avoid get[ting] into a blood bath with Quad.”
In another instances, DOJ lawyers cited an LSC official’s comment about a competitor ranked third behind LSC and Quad in size as a “niche firm that merely ‘lives off our scraps.’”
Quad/Graphics, Inc., which is headquartered in Sussex, Wisc., does magazine, catalog, and book printing and in 2018 had revenues of approximately $4.2 billion. LSC Communications, Inc., a Delaware corporation headquartered in Chicago, was spun off in 2016 from printing firm RR Donnelley. LSC offers similar printing services for magazine, catalog, and book customers. LSC had revenue of approximately $3.8 billion in 2018.
DOJ lawyers contend, “The Supreme Court had held that mergers that significantly increase concentrated markets are presumptively anti-competitive and therefore presumptively unlawful.”
Joel Quadracci was quoted extensively in the Market Screener trade publication saying Quad Graphics would defend itself to protect their proposed purchase of LSC.
“We believe the acquisition of LSC will result in time- and cost-saving opportunities for clients while protecting jobs for employees,” said Quadracci, chairman, president and CEO of the family firm. “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. We are fully committed to defending the DOJ’s lawsuit in court. We believe the combination of Quad and LSC is the best outcome for all stakeholders and that the DOJ’s attempt to stop the transaction will unfavorably impact our clients, our employees, and the print industry.”
He went on to note that other factors in the digit media group are not being watched as closely as the print media outlet are.
“The DOJ’s position ignores the dynamic conditions in the U.S. commercial printing industry, which consists of nearly 50,000 companies, generates an estimated $76 billion in aggregate annual revenues and provides ample competition for the supply of printed products, especially in the face of decreasing demand,” Quadracci told Market Screener. “Neither Quad nor LSC accounts for more than 5 percent of that total print industry revenue. By comparison, two digital media companies, Google and Facebook alone, have worldwide digital ad sale revenues totaling more than $75 billion — nearly the same amount as the entire printing industry. This underscores a key point: Our competition is not only other printers, but also other forms of media. Quad is in the business of manufacturing advertising and, therefore, is a direct competitor to digital channels. Given the continued migration of advertising dollars to digital channels, the printing industry has pursued platform consolidations as a key way to eliminate inefficient and expensive overcapacity, streamline operations and create the efficiencies. This will help ensure print remains an economically feasible alternative to digital channels for publishers and retailers. Our goal is to make print a more effective and affordable media option to that of digital giants such as Google and Facebook. The DOJ does not appear to recognize the competitive effect of digital media on the print industry.”
Quadracci concluded: “In the end, we believe the completion of the transaction would enable Quad to more effectively compete with ongoing media disruption and meet future demand for print as part of a robust integrated marketing solutions offering dedicated to creating connected experiences for consumers. Regardless of the outcome of the DOJ’s challenge to the transaction, Quad will continue to take a disciplined build-partner-acquire approach to solve more of our clients’ most complex marketing problems and process challenges. We remain unwavering in our commitment to perform well for our clients and will continue our disciplined focus to enhance EBITDA, including the acceleration of our transformation as a marketing solutions partner in growing vertical markets like direct-to-consumer.”
Managers at the Owensville plant owned by LSC Communications were not authorized to speak about the lawsuit or, previously, about the announcement of the pending sale of the printing firm.