Wednesday, June 20, 2007

Ay! Whatta Ya, Stoopid?

Much to the delight of acquisitive corporations, strategic buyers in private equity sheep's clothing (also known as portfolio companies), and M&A intermediaries everywhere, the official guardian of economic competition in this country, the Federal Trade Commission, has officially been on vacation for much of the current administration's tenure. You would be hard put to find a more merger-friendly FTC in recent memory, based on its smiling acquiescence to virtually every takeover deal put before it. If ever there was a time for Microsoft to have tried to buy Apple Computer, and consolidate its share of the computer software market to over 137%, the past seven years would have been it.

Accordingly, market observers have been mystified by the fact that the FTC has blocked the $700 million merger of Whole Foods Market with its fellow purveyor of tasteless, overly crunchy comestibles to the Birkenstock set, Wild Oats Markets. I mean, sure, Whole Foods and Wild Oats are a couple of the biggest chains of natural foods markets out there, but saying that together they would comprise a meaningful portion of the eleventy-trillion dollar US grocery market is like saying Goya's line of ethnic Mexican foods comprises more than fifty percent of the gross revenues of Bob's White Supremacist Food Mart in Cedar Rapids, Iowa. I don't think so.

So we learned with interest this morning from The Wall Street Journal that the culprit in this surprising drama is none other than Whole Foods' CEO John Mackey. Apparently, this idiot had the temerity, the stupidity, or the sheer knuckleheadedness (all related ailments) to make the government's case against his proposed acquisition of Wild Oats for them. I quote from the introductory paragraph of the FTC's request for injunction (courtesy of the WSJ):
Whole Foods' Chief Executive Officer John Mackey bluntly advised his Board of Directors of the purpose of this acquisition: "By buying [Wild Oats] we will ... avoid nasty price wars in Portland (both Oregon and Maine), Boulder, Nashville, and several other cities which will harm [Whole Foods'] gross margins and profitability. By buying [Wild Oats] ... we eliminate forever the possibility of Kroger, Super Value, or Safeway using their brand equity to launch a competing national natural/organic food chain rival to us ... [Wild Oats] may not be able to defeat us but they can still hurt us ... [Wild Oats] is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space. Eliminating them means eliminating this threat forever, or almost forever."

*** We will now take a brief intermission to allow the corporate lawyers in the audience to wipe down their keyboards and go change their shirts, after they spit their morning coffee all over themselves in reaction to the preceding paragraph. Thanks to the rest of you for your patience. ***

What a moron. (Perhaps Carl Icahn was right about corporate CEOs. This one certainly appears to be a prime specimen.)

Never mind the blustery self-delusion of Mr. Mackey's assertion that taking out Wild Oats will fix Whole Foods' competitive situation "forever." (After all, what are the real barriers to entry to flogging granola and wheat germ?) Who let this fool put this shit down on paper?

Now, in all fairness, Mr. Mackey's rationale is not an uncommon one in M&A land. In addition to revenue and cost synergies, increased market share, and getting a much bigger corporate jet in the fleet, eliminating a competitor in your industry can be one of the chief reasons any company decides to buy another. It is a time-tested business practice: if you can't beat 'em, buy 'em.

Normally, however, even the most insulated CEO is sensitive to the fact that the government has taken a dim view—since, say, the turn of the last century—to the creation of unregulated monopolies, and they do their best to put forward a case that persuades the regulators that such is not the projected outcome, intended or otherwise, of their merger. Usually this consists of an elaborate exercise in persuading the FTC to define the relevant market as one in which the combined entity will remain beset on all sides by fierce and unrelenting competitors, who will make sure, through the mechanism of the invisible hand, that Aunt Millie can buy her goats milk tofu as cheaply as possible.

In contrast, however, this doofus seems to have gone out of his way to leave a paper trail the size of the wake from an aircraft carrier showing exactly the opposite. Among other things, Mr. Mackey characterized markets where Whole Foods or Wild Oats operated alone as "monopolies" and documented Whole Foods' strategy to enter Wild Oats' monopoly markets as increasing competition and lowering prices to consumers. Furthermore, he broadly dismissed other purveyors of natural and organic foods—including WalMart, Trader Joe's, and mainline supermarket chains—as dabblers who did not pose effective competition to dedicated natural foods sellers like Whole Foods. Dismissing WalMart as an effective competitor? What was this guy thinking? Now, he may be right, for all I know, but I can tell you that my filing to the FTC would have consisted of a single word: WalMart. Nuff said.

Of course, the real villains in this piece are the lawyers who were supposedly advising Whole Foods. Even a lowly investment banking associate knows not to put the phrase "market dominance" or any of its variants in the Merger Rationale section of a preliminary pitch book to a corporate client, for fear it will be found in the legal discovery process of a merger application or its litigious aftermath. Failure to comply with this rule usually leads to a surgical strike by a Skadden Arps associate, who swoops in and chops the offending banker's pecker off with a rusty Bowie knife. Whole Foods' lawyers, whoever they are, had better be on a plane to some vacation spot far away, because letting their client put pen to paper appears to be one of those "sins for which," as a Managing Director I used to know loved to say, "even your death will not atone." I suggest Zimbabwe.

In the meantime, I think the only way the Whole Foods/Wild Oats merger is going to revive would be for Rush Limbaugh to become President. He might think imposing higher prices on a bunch of rich, hemp-wearing ex-hippies in Boulder, CO and Portland, ME would be a public service.

And, if any one of you runs across Mr. Mackey, please give him a big dope slap from me. I suggest you deliver what those dope-slap experts the Magliozzi brothers (who so kindly provided the instructive diagram at the top of this post) have called a "scupalona:"

If the infringement is not too serious, start just below shoulder level. For a serious infraction, begin your dope slap far down, near the waist. We refer to this latter dope slap as a "scupalona." The scupalona is a massive dope slap--the mother of all dope slaps, as it were.


© 2007 The Epicurean Dealmaker. All rights reserved.