Who would have guessed that a chemical used in the bleaching of paper products, sodium chlorate, would upset the Federal Trade Commission? But recently, the Federal Trade Commission announced a preliminary injunction and restraining order to stop the merger of Canadian chemical suppliers Superior Plus and Canexus, pending an administrative trial. Due to the costly and uncertain legal battle they would face, the companies dropped the merger three days after the FTC released the complaint.
The merger, valued at $982 million, would have given the merged firms 56 percent of the North American market for sodium chlorate.
No matter that the companies are based in Canada, with only two U.S. plants, and that the Canadian Competition Bureau had already approved the merger. The CCB recognized that the merger would create gains in efficiency which outweighed their fear that a reduced number of competitors could cause prices to increase. Though the Canadian agency found the merger beneficial, American regulators denied it.
The United States and Canada have several formal and informal agreements to coordinate antitrust enforcement efforts, and strive to reach compatible decisions. Most joint merger review does not involve antagonism. For example, the merger between U.S.-based Office Depot and Staples was did not win approval in either country. But in this case, the FTC contradicted Canada’s decisions about the fate of their own industry, and did so with little justification.
In order to file the complaint that led to the end of the merger, the FTC only needed “reason to believe” that the merger would substantially lessen competition. To fulfill this subjective requirement, the FTC claimed that creating a company with 56 percent market share was likely to increase prices and the threat of market coordination. It also claimed that a lack of substitutes, imports, and new market entry increases the power of sodium chlorate manufacturers. Armed with little evidence and much speculation, the FTC has decreed federal control over the actions of two foreign companies.
Broader analysis suggests, as Canada found, that the merger would have likely benefited consumers. Sodium chlorate is a true commodity and cannot be differentiated based on quality, so the primary way to compete is to increase efficiency and reduce prices. This is exactly what the merger was intended to do. Superior Plus predicted that the merger would combine the technical expertise of both companies, improve logistics, and optimize plants. These synergies would result in an estimated annual cost savings of $35 million. Both companies had every incentive to ensure that the merger would result in cheaper products.
Further, Superior Plus offered to divest assets to shrink its post-merger market share to 35 percent of U.S. sodium chlorate sales. But even if it had not, three other large North American manufacturers would compete with the new entity, limiting the merged companies from raising prices. Since everyone is selling the same sodium chlorate, competitors could easily undercut the higher prices, gain market share, and expand. If the merger increased prices, Superior Plus and Conexus would lose the most from their decision.
Not much sodium chlorate is imported to the United States, but U.S. imports of products produced by this chemical are high, adding up to $16.6 billion just for paper and paperboard in 2015. If the merger increased prices, it would raise prices for paper products, pushing more production overseas and further diminishing the merged company’s future revenue. Similarly, higher prices would invite entry into the sodium chlorate market from other chemical manufacturers and increase the use of paper-dyeing substitutes (currently used to dye five percent of paper products), further reducing revenues.
Contrary to the FTC’s ruling, the merger was a strategic action to improve efficiency, which is the essence of true competition. It would have allowed Superior Plus and Canexus to better serve customers and thereby surpass their competitors. This competition improves the lives of consumers by providing better or cheaper products. But competition cannot flourish if the FTC is able to prevent competitive action by merely threatening a trial.
Freezing a foreign merger with a simple administrative complaint harms both American and Canadian industry and consumers.
Nick Archer is an E21 contributor.
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