MERGERS AND ACQUISITIONS

Methods by which corporations legally unify ownership of assets formerly subject to separate controls.

Whole Foods CEO Trashes Competitor Prior to Take-over

In July 2007, Whole Foods Market Inc. acquired Wild Oats Markets, a leading organic and natural foods retailer, for $565 million. This might not have been particularly noteworthy in legal circles but for strong opposition to the merger (on antitrust grounds) by the U.S. Federal Trade Commission (FTC). The last retail merger opposed by the FTC was more than ten years prior, in 1997, when it successfully blocked the takeover (for $4 billion) of Office Depot Inc. by competitor Staples Inc., citing the harm to competition in the growing market of office supplies.

Prior to filing suit in U.S. District Court for theDISTRICT OF COLUMBIA, the FTC internally voted 5–0 to authorize staff to seek a temporary restraining order. Because of its scant history of objecting to such mergers, the FTC's filing signaled to the court that it considered the transaction serious enough to warrant injunction.

In Federal Trade Commission v. Whole Foods Market, Inc., 502 F. Supp. 2d 1 (D.D.C. 2007), the FTC first argued for a preliminary injunction staying the merger between the largest and second-largest natural foods grocers. As grounds for its request, it argued that the resulting merged company (successor) would control too great a share of the U.S. natural foods and organic market, leading to increased prices and fewer choices for consumers. FTC also cited Whole Foods' alleged bad-faith attempts to devalue Wild Oats stock to facilitate a cheap buy-out.

Commanding equal press coverage was the release to the media of court documents in the case, allegedly showing Whole Foods CEO John Mackey “trashing” Wild Oats on the Internet, under an assumed pseudonym and persona to conceal his true identity. Critics and the FTC alleged that Mackey was attempting to discredit Wild Oats and devalue its stock in order to then purchase the company at the lowest

possible price. Using the alias “rahodeb,” Mackey advised browsers visiting Internet financial forums that Wild Oats stock was grossly overpriced. He further predicted that the company would fall into bankruptcy and be sold after its stock spiraled to less than $5 a share.

For its part, Whole Foods acknowledged that the postings by “rahodeb” were indeed written by its CEO, John Mackey, but disassociated its company from his statements. Nonetheless, Whole Foods defended Mackey, saying his comments were taken out of context and were made between 1999 and 2006. It further defended that the FTC should not focus on just the two merging companies, but rather, should consider the merger's broader effect on the overall supermarket and grocery industry, many components of which were expanding their lines to include natural and organic food departments.

But the FTC countered by entering into evidence several internal Whole Foods memoranda that described Wild Oats as a critical competitor. That, in combination with the conflicting testimony and alleged motives of CEO Mackey in his Internet rantings, were substantively damaging to Whole Foods' defense.

Notwithstanding, on August 16, 2007, the district court denied FTC's motion for a preliminary injunction. The court's decision was not premised on a failure of FTC to present convincing evidence of foul play on the part of Whole Foods. Rather, the decision was premised on the court's definition of the applicable relevant “market” that might be negatively impacted by the proposed merger. Was it a product market to be defined narrowly as one involving only organic and natural food products, or was it to be defined as the broader grocery food market in general? The court expressly noted that “[a]s with many antitrust cases, the definition of the relevant product market in this case is crucial. In fact, to a great extent, this case hinges on the proper definition of the relevant product market.”

In pursuing its case, the FTC had relied on its earlier success in FTC v. Staples, 970 F. Supp.1066 (D.D.C. 1997). In that case, the same court had accepted the FTC's position that the merger of Staples Inc. and Office Depot Inc. likely would have anti-competitive effects.

The FTC's arguments in Whole Foods were closely analogous to its previous arguments in Staples. However, dissimilar facts resulted in the court coming to a different conclusion. For example, in Staples FTC produced pricing data demonstrating that in cities where Staples was the only office superstore, its prices were 13 percent higher than in cities where it competed with another office superstore (Office Depot), and viceversa. But those price differences were not affected by the presence of other retailers (such as Wal-Mart Stores Inc. and Best Buy Co.) that carried some of the same products. Other evidence showed that Staples, Office Depot, Office Max,etc., considered each other competitors, but did not consider the general retailers as such.

Conversely, in Whole Foods, the court found no significant economic proof that prices were lower in cities where both Whole Foods and Wild Oats were present. The court also concluded there was no strong evidence that entry of a second premium natural and organic supermarket into an area had any effect on the incumbent firm's prices. Therefore, the court did not find the facts compelling enough to warrant such a narrowly defined product market as it had in Staples.

The U.S. Circuit Court of Appeals for the District of Columbia subsequent denied FTC's request to stay the merger pending appeal of the district court's decision, but the FTC signaled that it intended to pursue the appeal. The matter received significant press coverage, including editorials criticizing the FTC for bringing a case based on a narrow product market that was limited to premium natural and organic supermarkets.

In the interim, Whole Foods went forward with the merger, despite the fact that a favorable decision for FTC could void everything, even years down the road. By February 2008, Whole Foods' stock saw a rocky first quarter, with profits down 27 percent. Mackey, remaining CEO of the successor company, blamed “a slowing economy.”