Several weeks prior to the start of Outdoor Retailer Summer Market, SNEWSÂ® became aware of the fact that serious questions were being raised by at least one individual over the recent Confluence/WaterMark merger. It didn't take us long to find out who, and to get our hands on a 20-plus page document, authored by Bill Parks, founder of Northwest River Supplies, titled, "Why the merger of Confluence and WaterMark Violates Section 7 of the Clayton Act."
While at the time we agreed to keep quiet, during Summer Market, word began to leak out and soon the buzz became one of misinformation and rumor, leading Parks to ask SNEWSÂ® to take the story public and clear up the misconceptions.
What follows then, is an explanation, in brief, of what is really happening, and what it may, or may not mean to Confluence and the industry:
Wasn't this merger approved already by the Feds?
No. The size of the merger fell under the $54 million threshold which would have required pre-merger approvals.
This is NOT a lawsuit!
No legal papers have been filed with any court, no class action lawsuit exists as has been rumored, and no lawyers are under retainer preparing legal briefs.
Is Confluence currently being investigated by the Department of Justice and the Federal Trade Commission?
This may or may not be true. We checked with our contacts at the FTC who informed us that at no time would the FTC or the DOJ ever confirm that either had received complaints or documents or that either is conducting an investigation. The only time an investigation is made public is when either the FTC or the DOJ renders a judgment.
Have complaints been filed with the DOJ or the FTC regarding Confluence?
When Parks was first floating the idea of a possible violation of Section 7 of the Clayton Act around, he shared, but not before asking for strict confidence (obviously that didn't work), his document with a number of close friends and key retailers. We can confirm that more than one copy of the document, "Why the Merger of Confluence and WaterMark violates Section 7 of the Clayton Act," has been shared with the DOJ and the FTC.
Could Confluence be slapped by both the FTC and the DOJ?
No. One or the other would conduct the investigation. Most likely, it would be the FTC.
If an investigation is launched, what are the possible outcomes for Confluence?
Our FTC contact told us, "If the consummated transaction was found to be illegally anticompetitive, various actions could be taken, including: 1) requiring the companies to divest certain overlapping assets; 2) suing in court to break apart the entire transaction; and 3) suing to seize ill-gotten gains that resulted from the alleged anticompetitive conduct."
What is Section 7 of the Clayton Act?
The Clayton Anti-Trust Act of 1914 was enacted by Congress to address weaknesses in the antitrust law already in place under the Sherman Anti-Trust Act of 1890. Section 7 specifically addresses conditions where mergers and acquisitions may substantially lessen competition.
One formula used to gauge market influence is the HHI (Herfindahl Herschman Index). The HHI of a company is calculated by totaling the square of the overall industry market share percentage held by each company. The index is used as a guideline to measure industry concentration. An HHI of less than 1,000 is not concentrated. HHI from 1,000 to 1,800 is considered moderately concentrated, and an HHI of over 1,800 is considered highly concentrated.
In the document Parks wrote, pulling from data obtained by industry trade groups, publications and interviews, WaterMark's market share (of the paddlesports industry) is placed at 27 percent prior to the merger with an HHI of 729. Confluence's market share is placed at 24 percent prior to the merger with an HHI of 576. Prior to the merger, the combined HHI was 1,305. However, after the merger, Confluence now appears to have a 51 percent market share, and an HHI of 2,601 -- an increase of 1,296.
Our legal insiders confirmed that if the above was true, it represented a significant HHI increase that was well beyond what the DOJ outlines as acceptable and that alone may be sufficient to garner DOJ or FTC interest in the merger.
Aren't retailers who speak out or forward this document to the FTC or DOJ, or Bill Parks for being the author of this document, worried about what Confluence might do?
We doubt it, because if Confluence tried to do anything that might be perceived as punitive in nature, or take actions that might be considered as retribution for being involved, it would be one more very good reason, we have been told by legal experts, for the FTC or the DOJ to get very serious about an investigation in a hurry. So, we believe everyone will play nice as attempts to throw sand in the sandbox will be viewed as simply stupid.
Isn't this going to be bad for the paddlesport industry?
That depends on your perspective. Certainly, if you are employed by Confluence or are an investor with Confluence, this kind of news is not going to make you happy. (SNEWSÂ® Note: And yes, we are getting tired of writing stories about Confluence, WaterMark or Johnson Outdoors that are, well, of a less than positive nature.)
Retailers we spoke with during Summer Market told us that Confluence was being supremely accommodating and very flexible with them, not trying to leverage the loyalty of a retailer for one Confluence brand into buying products of another Confluence brand at the expense of a non-Confluence brand, and that is good.
To be clear, another of our FTC contacts confirmed that it would look unfavorably on any attempt by any company to leverage its size and market position by requiring a retailer to buy products or brands it doesn't want in order to buy the products it does want at a favorable price or terms. Meaning, if a retailer wanted to buy a Dagger Crazy 88 for its whitewater customer, and a Current Designs Kestrel for its touring customers, but was forced to also buy the Dagger Catalyst to meet minimum ordering requirements even though it didn't want to, Section 7 of the Clayton Act might come into play.
Many retailers at Summer Market also told us they were remaining loyal to Confluence not because of its new size, influence or promises of industry leadership and the like. Loyalty to Confluence for many remains, we keep being told, because Kelley Woolsey stayed with the company in a position of leadership and influence, and to quote one retailer, "He's never screwed me, and always been a man of his word."
If the FTC or the DOJ does decide to try to break up the happy merger, its goal, we are told, will not be to eviscerate any brands, as the idea is to make business more competitive and level the playing field for retailers and competitors, not put a brand out of business. It is also important to remember that there are so many strong and growing smaller brands in the industry that if anything, the innovators and guerrilla marketers of the paddlesports world, like Jackson Kayaks, will become the go-to brands should any of the Confluence brands hiccup or stall as a result of an FTC or DOJ-mandated breakup.
Of course, in the meantime, if the FTC or DOJ brings suit, and that is still very much an IF, it will be one more thing that diverts money from promoting paddlesports as we doubt Confluence would go down without a fight. And we just HATE seeing lawyers making lots of money at the expense of the industry -- seems to be happening all too much these days.
Bottom line here, though, is that until the FTC or DOJ decides to make anything official, it is business as usual.
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