Nearly 20 years ago, Staples tried to acquire Office Depot to find the deal rejected by regulators. Fast forward to today and we see the two largest office supply stores again seeking to combine. What has changed and will the deal still be anti-competitive in the eyes of regulators? How does the market see the prospects of the deal? What are the lessons to be learned?
To answer the last question first, there are many elements that make this an interesting story. First is the role of activists (hedge fund Starboard Value). Second, we have noted that a wave of consolidation in an industry is often sparked by some catalyst. Note the Office Depot and Office Max combination of two years ago reduced the number of main stream office suppliers to two. This merger would reduce that number to one. Ironically, although the catalysts here are multifaceted, they led by a string of new competitors with competition for Staples and Office Depot ranging from the big box stores (Walmart and Target) to online behemoth Amazon.
So will the deal be seen as anti-competitive? That depends on how regulators view the market for Staples and Office Depot. To be sure, there is considerable overlap in the geographic location of stores and the closing of duplicate stores is undoubtedly a central factor in any synergies from the deal. But the question of market is much more complex. For example a sizable component of the sales of the two firms comes from large quantity orders from businesses. In addition, we have the big box and online competitors to consider.
Regulators measure anti-competitive behavior by a number of factors, including the 4-firm concentration ratio and the Hirfindahl index. As we have noted before, the key to determining concentration is defining the market and in today's landscape, that market is widespread but the jury is out on how the regulators will view the world.
As for the market, it seems to be expressing skepticism over completion of the deal. Office Depot closed yesterday at $9.49 a significant gap below the deal value of $10.91. That is a quite sizable speculation spread.
(See also Comcast, Time Warner and the Myth of the Cable Industry, Concentration Ratios, the Case of Anheuser Busch and Modelo, and Speculation Spreads and the Market Pricing of Proposed Acquisitions)
All the best,
Ralph
Showing posts with label Hirfindahl Index. Show all posts
Showing posts with label Hirfindahl Index. Show all posts
Thursday, February 5, 2015
Thursday, February 20, 2014
Comcast, Time Warner and the Myth of the Cable Industry
Last week Comcast (CMCSA) announced a $45 million dollar acquisition of Time Warner Cable (TWC). The announcement sent shock waves through financial markets and raised numerous questions.
For companies that compete in the same market, there are obvious concerns about future strategies. Charter Communications (CHTR) for example, wanted to buy Time Warner and bid low. There is some speculation that they would attempt to revise their bid, but it is not clear that Charter could (or would choose to) handle the increased debt that would come with such a revision.
Other companies that compete in the same space (note I didn't say 'Cable Industry') have to wonder if further consolidations help them achieve their own potential. Some have suggested CableVision could be a target or even that privately held firms like Cox Communications would be involved in acquisitions.
As investors, we also wonder about the market reactions to rivals of targeted companies and what it means for future acquisitions. In our research, when a bid like this occurs, the prices of target firms react in direct proportion to the probability that they will become targets themselves. (See Abnormal Returns to Rivals of Acquisition Targets.)
There has also been much talk about the regulatory issues such a combination would raise. For regulators the concerns will be whether the merger is a restraint of competition resulting in predatory pricing of consumers. We have noted in a previous post that one of the main tools for such an analysis is the Hirfindahl Index or the related Concentration Ratio. (See Concentration Ratios: The Case of Anheuser Busch and Modelo.)
But in that post, we also note that to create a measure of concentration in an industry, one must first define the industry. And that brings us to the myth of the cable industry. In a very interesting article entitled, The Comcast-Time Warner Merger Is Not a Sign of Strength, Larry Downes makes a convincing argument that fears of market dominance here are overrated. To quote,
"There is no cable industry. Cable is just a technology, increasingly one of many, for transmitting information, whether video, voice or data.
Where cable was once the only technology used to distribute television programming—a vast improvement in speed, quality, and quantity over antennas—it now competes with fiber, copper, satellite, and mobile broadband, each with their own pluses and minuses, and each promoted by companies large and small, who together continue to spend heavily to upgrade their assets."
Indeed, the story is so much more than a merger of cable companies, even well known companies. It is another event in the evolving battle for the vast market for entertainment.
Stay tuned.
Ralph
For companies that compete in the same market, there are obvious concerns about future strategies. Charter Communications (CHTR) for example, wanted to buy Time Warner and bid low. There is some speculation that they would attempt to revise their bid, but it is not clear that Charter could (or would choose to) handle the increased debt that would come with such a revision.
Other companies that compete in the same space (note I didn't say 'Cable Industry') have to wonder if further consolidations help them achieve their own potential. Some have suggested CableVision could be a target or even that privately held firms like Cox Communications would be involved in acquisitions.
As investors, we also wonder about the market reactions to rivals of targeted companies and what it means for future acquisitions. In our research, when a bid like this occurs, the prices of target firms react in direct proportion to the probability that they will become targets themselves. (See Abnormal Returns to Rivals of Acquisition Targets.)
There has also been much talk about the regulatory issues such a combination would raise. For regulators the concerns will be whether the merger is a restraint of competition resulting in predatory pricing of consumers. We have noted in a previous post that one of the main tools for such an analysis is the Hirfindahl Index or the related Concentration Ratio. (See Concentration Ratios: The Case of Anheuser Busch and Modelo.)
But in that post, we also note that to create a measure of concentration in an industry, one must first define the industry. And that brings us to the myth of the cable industry. In a very interesting article entitled, The Comcast-Time Warner Merger Is Not a Sign of Strength, Larry Downes makes a convincing argument that fears of market dominance here are overrated. To quote,
"There is no cable industry. Cable is just a technology, increasingly one of many, for transmitting information, whether video, voice or data.
Where cable was once the only technology used to distribute television programming—a vast improvement in speed, quality, and quantity over antennas—it now competes with fiber, copper, satellite, and mobile broadband, each with their own pluses and minuses, and each promoted by companies large and small, who together continue to spend heavily to upgrade their assets."
Indeed, the story is so much more than a merger of cable companies, even well known companies. It is another event in the evolving battle for the vast market for entertainment.
Stay tuned.
Ralph
Subscribe to:
Posts (Atom)