Anti-Trust Risks and Merger and Acquisition Strategies

There are three levels of the supply chain in the office products and supplies industry. Firstly, the manufacturer; secondly, the distributor; and then, the final link in the chain, the dealer or reseller, from whom the customer buys its desired product.

Overall the office products industry is mature and advanced in terms of its consolidation cycle and approaching its merger endgame. Consequently, future mergers and acquisitions are more likely to be scrutinized by government authorities, who will be increasingly concerned about reduced competition, and the potential for merged entities to exert market and pricing power and adversely affect consumers.

How Office Products get to Market Graphic.png

The Herfindahl-Hirschman Index (HHI)

The most common tool anti-trust organizations use worldwide for evaluating proposed acquisitions is the Herfindahl-Hirschman Index (HHI). This measures the market concentration of an industry's 50 most prominent firms to determine if the drive is competitive.

The Herfindahl Index formula is calculated by squaring the market share for each firm and then summing the squares. The lowest Index score is 1, representing perfect competition, and the highest is 10,000, meaning a single-player monopoly.

A market with an HHI under 1,000 is considered competitive. However, either the FTC or the Justice Department in the United States (and similar government authorities around the world) will scrutinize a proposed merger in an industry that results in a projected post-merger HHI of between 1,000 and 1,800 and will be almost certain to reject outright approval for mergers that result in a post-merger HHI exceeding 1,800.

Below are three tables, one for each of the three categories that make up the Office Products and Supplies industry in manufacturing and distribution, along with the primary market shares and HHI Index calculations.

Original Equipment Manufacturers:

Once Hewlett Packard completes its acquisition of Samsung's printer business, only eleven original equipment manufacturers will remain around the globe, manufacturing office printing hardware and the associated supplies. These eleven enterprises have total annual sales of just over $170 billion and form a moderately concentrated global industry, with the top 3 OEMs having a 60% market share and the defined (global) market having an HHI score of 1,568.

TABLE 1: The Eleven Global Original Equipment Manufacturers
OEMSales ($M)Market ShareCum. Mkt. ShareHI
HP / Samsung$49,30029%29%825
Konica Minolta$8,5005%88%25
Seiko Epson$8,5005%93%25
Lexmark *

* The acquisition of Lexmark by the Chinese consortium did not materially affect the HHI Index

Distributors (USA):

In the United States, fifteen distributors remain, but the market (as I've defined it) is highly concentrated, with the top 3 participants having an 85% share and creating an HHI score of 3,110. Ingram Micro, the most significant player, was recently sold for $6 billion to the Chinese HNA investor group. This transaction would not have affected the HHI or market shares as it was just a change of ownership. Based on the market definition I've used, it's difficult to see the FTC allowing further consolidation among the more prominent players, as the market is already significantly beyond the 2,500-point threshold, defining it as monopolistic.

TABLE 2: The Fifteen U.S. Distributors
DistributorSales ($M)Market ShareCum. Mkt. ShareHI
Ingram Micro 1$29,41847%47%2,187
Tech Data 1$16,60226%73%697
Synnex 1$7,20011%85%131
SP Richards *
Supplies Network *$6001%99%1
Arlington *$3000%99%0
Ninestar *$2500%100%0
Supplies Wholesale *$800%100%0
XSE Group *$500%100%0
ACM *$500%100%0
Neutron *$200%100%0
Copy Technologies *$200%100%0
Aster Graphics *$100%100%0
Print-Rite *$50%100%0

1 Assumes 60% of total reported sales are in the United States

* Estimated Sales

Resellers (USA):

There are as many as 7,500 U.S. resellers of office products and supplies, so, on the face of it, you may think this would make for a highly competitive market. However, the top 3 resellers have a 62% market share, making future deals between the more prominent players difficult because anti-trust authorities will likely scrutinize them and their potentially harmful impact on competition closely. The HHI for this broadly defined market is 1,518, approaching the border (1,800), representing a highly concentrated oligopolistic market. Any deals between the more prominent players will likely take the Index above the 1,800-point threshold and almost certainly not be permitted.

TABLE 3: The Top Fifteen U.S. Resellers
ResellerSales ($M)Market ShareCum. Mkt. ShareHI
Staples 1$17,99228%28%769
DepotMax 1$11,60018%46%320
CDW 1$10,32016%62%253
Walmart *$5,0008%69%59
Insight 1$4,4487%76%47
New Egg *$2,7004%80%17
OEM-Direct *$2,0003%83%10
Target *$2,0003%86%10
Amazon *$2,0003%89%10
eBay *$1,8002%92%8
Costco *$1,5002%95%5
Sams *$1,5002%97%5
WB Mason *$1,5002%99%5
My Office Products *$4001%100%0
L.D. Products *$1250%100%0

1 Assumes 80% of reported sales are in the United States

* Estimated sales on Office Products


Each of the three segments forming the Office Products and Supplies industry is significantly concentrated based on my simple market definitions. The FTC or Justice Department may look at proposed mergers using different meanings of the market. Therefore, favorable outcomes to proposed mergers could still occur. However, based on the current concentration levels, it's pretty challenging to see any significant merger activity permitted between the more prominent players in either the distribution or reseller components.

Because most of the remaining OEMs (eight of the eleven) are Japanese enterprises, it could mean the Japanese Fair Trade Commission considers the Japanese market quite competitive. I.e., eight companies are competing. They might allow additional mergers if this were to be how they viewed their domestic market. For this reason, I think it may be more likely that unions may be permitted within the Japanese OEM component of the industry. This, in turn, may put the remaining non-Japanese players (i.e., Hewlett Packard and Xerox) at a competitive disadvantage.

However, what I see as a more likely area of activity over the next few years is the continued acquisition of U.S. distribution and reseller assets by Chinese companies. This activity has the potential to completely change the landscape of the office products and supplies industry and is unlikely to attract the attention of the FTC or Justice Department. Chinese products currently prevented from entering Tier-1 distribution channels may face fewer barriers if the distributors and resellers are all owned by Chinese investors!

Should this scenario continue to play out, it's difficult to see a positive outcome for the aftermarket players currently dominating the Tier-1 distribution channels. However, they're not likely to give up without a fight, so it will be interesting to see what defensive measures they (Clover, Turbon, and, to a lesser extent, LMI) deploy to counter this threat.

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