What’s Next for the Whole Foods Merger?

It’s been nearly two years since this deal was inked and it is still in flux.

ByAdam Ismail

It is hard to believe that 22 months have passed since Whole Foods agreed to acquire Wild Oats, and the fate of the deal is still in flux, even though the two companies have been integrated under the Whole Foods corporate banner. FTC lost the early battles to block the merger, but won an appeals court ruling last July to reinstate its case. Now a hearing is scheduled for February to revisit the merger, almost two years to the day that it was first announced.

This long legal battle has actually benefited Whole Foods because it has been able to mount a vigorous defense and simultaneously focus on integrating the two companies. The latest wrinkle, though, is that FTC is proposing new rules to overhaul how it assesses mergers and acquisitions, which would dramatically shorten the timeframe uniformly for all deals.

The new rules would give companies five months to prepare a defense from the time FTC raises its initial complaint before the matter would go to an evidentiary hearing. For most mergers this would not be an issue, but problems arise when there are complex industry dynamics that make competitive issues difficult to assess. With the Whole Foods-Wild Oats merger, the difficulty in interpreting the rules comes in defining the market in which they compete. Antitrust rules are set up so that a company cannot obtain monopoly status through acquisition and abuse the position by passing higher prices on to customers. FTC has taken the position that Whole Foods and Wild Oats compete within the natural food supermarket industry—a narrow interpretation—rather than the broader nutrition or food retailing markets. This issue alone requires its own vigorous defense, as well as separate defenses and strategies for each market definition. All of this, of course, takes extra time.

The second issue in the new FTC rules may be even more important. The agency is proposing that there be a shift in power of the legal processes for contesting deals from the courts to FTC. They essentially want to put into place rules that would allow FTC’s own staff to rule on pre-trial motions, instead of the judges that currently hear such motions. FTC no doubt sees this as improving an inefficiency in the process, but for companies going through the process it has the potential to create a conflict of interest. Because cases only go to trial if FTC objects to the deal, Whole Foods is arguing that allowing FTC to rule on a pre-trial motion would not allow for impartial decisions on such motions. However, some legal observers also believe it could restrict how judges actually run the hearings once they do get them, and would compromise the whole process.

Little of this, if anything, will affect the Whole Foods deal, but the company is taking a stand against what it sees as FTC overstepping its bounds. It has made the same arguments in its defense of the merger, and many legal experts agree, saying the courts are allowing outdated legal cases and ignoring modern antitrust case history in agreeing with FTC’s assertion that the merger be prevented on the grounds that it would result in a market that is too concentrated. Even former Solicitor General of the United States, Ted Olson, believes the case is without merit. He filed a brief with the court saying the Appeals Court ruling that is leading to February’s hearing essentially sets the clock back 40 years on antitrust and acquisition cases.

The implications of the Whole Foods merger are much larger than the nutrition industry, which is why so many observers are watching the case so closely. If what legal observers are saying is true, it is likely the Whole Foods-Wild Oats merger will finally be put to rest next year. Perhaps more important, the changes FTC wants to implement may be blocked, all because of Whole Foods’ unwillingness to back down in this fight.NW