A member of Congress and a hedge fund manager are among those who believe that Amazon's growth will be capped by enforcement of antitrust laws. While this threat might boost the coffers of antitrust lawyers, the legal basis for such fears is weak.
And those who bet on Amazon's decline are likely in for a world of hurt. (I have no financial interest in Amazon securities.)
Before getting into that, I think that shorting a company's stock -- e.g., borrowing shares from a broker, selling them, and hoping to use the cash so-generated to repay the stock loan by buying back the shares at a lower price -- should be done only in a very specific situation: when the investor is convinced that a heavily indebted company is highly likely to violate the terms of its loan contract with the lender. In such cases, the short seller can be pretty sure that the company will file for bankruptcy.
If you sell shares of a company short for other reasons, there is a better chance that the stock will go up -- which will likely lead the broker to force you to repay the stock loan by buying back the shares in the market at a higher price -- thus causing you to lose money on the bet.
I was surprised to see that a well-known hedge fund manager had concluded that potential antitrust problems were reason enough to sell short the shares of Amazon. I don't know how many share he shorted but given the views of a Stanford Law School professor, I am questioning the wisdom of that hedge fund manager.
This seems to have been precipitated by a member of the House who raised questions about how Amazon's proposed acquisition of Whole Foods would hurt one of his constituents -- CVS Health.
According to Bloomberg, U.S. Representative David Cicilline, a Democrat from Rhode Island, wrote a letter July 13 to the chairman of the House Judiciary Committee requesting hearings about Amazon’s proposed $14.7 billion acquisition of Whole Foods acquisition, saying the deal was part of a wave of consolidation that has “decreased wages and resulted in gross inequality in the workplace.”
Bloomberg noted that Rhode Island-based CVS could be threatened should Amazon decide to launch a pharmacy in Whole Foods locations. Bloomberg quoted Cicilline as follows: “Amazon’s proposed acquisition of Whole Foods raises important questions concerning competition policy, such as how the transaction will affect the future of retail grocery stores, whether platform dominance impedes innovation, and if the antitrust laws are working effectively to ensure economic opportunity, choice and low prices for American families.”
Antitrust concerns prompted Doug Kass of Seabreeze Partners Management to sell Amazon short. As Kass wrote on July 13, “My understanding is that certain Democrats in the Senate have instituted the very recent and preliminary investigation of Amazon’s possible adverse impact on competition.”
Sadly for Kass, investors did not run away from Amazon stock in response to his short call. Instead, shares were poised to rise to hit a record $1,006.51 on pre-market July 17 trade.
What would be the basis for an antitrust case against Amazon in its Whole Foods acquisition? Whole Foods controlled a miniscule 1.6% of the U.S. grocery market -- bsadly lagging Wal-Mart's more than 26% and Kroger's 10% noted Bloomberg. Michael Pachter of Wedbush Securities told Bloomberg that "antitrust issues typically surface when a retailer controls [at least] 30% of a particular geographic market."
I think it's safe to bet that Kass is wrong. In a July 15 interview with Stanford Law School professor Doug Melamed, argued that Amazon is not vulnerable to antitrust challenges from its Whole Foods acquisition. "The antitrust issue raised by the proposed acquisition is whether it will significantly reduce competition in an economic or antitrust market. As I understand the facts, while Amazon does sell some grocery products, it is not an important competitor of Whole Foods, so it is very hard to see how the acquisition might reduce existing or reasonably foreseeable competition between them," said Melamed.
Melamed thinks that this deal is good for competition in the grocery business. As he said, "To my knowledge, Amazon is not a needed supplier of inputs to Whole Foods’ competitors, nor Whole Foods to Amazon’s competitors, so it is hard to see how the acquisition might reduce competition between either Amazon or Whole Foods and third parties. Instead, it appears that the acquisition would facilitate Amazon’s entry into a new business or cost-effectively add to its distribution capabilities and, in those ways, enhance competition."
Those seeking to argue against the merger would need to prove that it would so limit competition that the combined company could raise prices. As Melamed explained, "A market is defined based on the alternatives available to buyers. The enforcement agencies ask this question: What is the smallest group of products that, if combined in the hands of a single firm, would enable that firm profitably to charge prices higher than competitive prices?"
He kindly offered a line of argument to help those who hope to pin an antitrust rap on Amazon. "If there is substantial reason to believe that Amazon would enter the natural foods grocery business by some other means if it could not acquire Whole Foods, or that Whole Foods would otherwise expand its presence in online grocery sales, the lack of significant competition between the two firms at present would be replaced by concerns as to whether the acquisition would harm more substantial competition that would otherwise take place in the future," he noted.
Melamed does not put it past Donald Trump to use the antitrust threat to punish criticism from Bezos's Washington Post. As Melamed said, "With this Administration, there is always the concern that the White House will use antitrust enforcement for ulterior and improper purposes, such as in this case punishing Amazon because of news reporting by the Washington Post."
