The Antitrust Issues Raised by the Bowne / Donnelley Merger

by: Miles P. Jennings

Note to the Antitrust Division of the DOJ: 'Hold separate' Bowne's XBRL filings business in proposed merger with RR Donnelley.

Tuesday's announcement proposing to create a $10+ billion printing company [with the RR Donnelley (NASDAQ:RRD)- Bowne (BNE) acquisition] may well raise DOJ issues regarding market share and its influence on printing prices. Donnelley and Bowne are the two largest U.S. financial printers followed closely by Merrill Corp. (private). Not insignificantly, the proposed merger would consolidate under one roof a super-majority of XBRL filings business. XBRL is the new SEC-mandated reporting standard for companies with U.S. investors. It is not clear whether the parties plan to shed in-house XBRL filing services, thereby de-linking the XBRL issue from regular non-exclusive printing contracts.

SEC Form 10-Ks are now being filed with the SEC, and companies with non-calendar years are also reporting their Form 10-Qs. Here is a summary of the XBRL filings made in 2010 through Feb. 24th.

75 - Donnelley/EDGAR Online (NASDAQ:EDGR)
50 - Bowne

28 - Thomson Reuters (NYSE:TRI) (EDGARfilings)
25 - Fujitsu (OTCPK:FJTSY)
23 - Rivet Software
4 - Clarity Systems
3 - Other

(Note: The list is based on which software solution was used to file, not the actual printer or filer. For instance, Merrill Corp. and Vintage Filings are not listed here since they use software solutions provided by outside companies. Source)

Due to the extreme dominance of Donnelley and Bowne in the U.S. financial printing industry, their in-house XBRL solutions may well allow them to further increase their financial printing market shares. Donnelley's is the "Xcelerate" solution from EDGAR Online, and Bowne uses its own and that of Rivet Software.

Is the 60.1% XBRL filings market share too high for one printer to have?

Considerations include:

1. Companies not using the Bowne/Donnelley company will have to outsource the XBRL filing task whereas Bowne/Donnelley customers will likely have those services in their regular printing contract. To the extent that Bowne/Donnelley can use XBRL as a wedge for higher market share and/or prices, I suppose it might be an issue for the DOJ to contemplate. If neither Bowne nor Donnelley had in-house XBRL services, the XBRL wedge would be non-existent. Bowne/Donnelley (or their clients independently) would have to negotiate XBRL filing services just like other printers or filing companies. It seems that smaller or regional printers are already competing in a highly competitive market.

2. Although presumably the U.S. SEC has no say on issues of competitive prices and markets, they probably are interested in having a healthy balance of XBRL service providers. The issue of transparency in financial statements has become a top priority of government agencies. The XBRL filing format is now under a phased-in SEC mandate and has been about a decade in the making.

3. In rough numbers, it appears that the 2011 annual market for U.S. XBRL SEC-filing services is in the $250-300 million range. This may be too small for the SEC or DOJ to care about due to the size of the proposed merger. However, new XBRL requirements will be added over time so that the market is large for a software-based, compliance-heavy SEC solution. It is a service that weighs heavily on corporate officers, and the one-stop shopping for both printing and XBRL services is an important competitive factor in deciding which printer to use.

One possible solution seems workable, since Donnelley already has a non-exclusive outsourcing agreement with EDGAR Online:

Mandate the sale or "hold separate" Bowne's XBRL solution from the Proposed Merger - The effect would be that Bowne/Donnelley would have to outsource the XBRL filing service for their printing customers---like other printers---or such client companies would outsource that service themselves. Such agreements would be non-exclusive---the way they are now with EDGAR Online. This alternative would tend to have competitive market prices formulated by the new owner of the Bowne XBRL solution, EDGAR Online, and others.

In fact, if you examine the companies' Plan of Merger released Tuesday, you will note that as part of the agreement the parties agree to "divest or hold separate" a total businesses no more than 5% of the companies' total 2009 revenue. Who knows, perhaps the sale or divestment of Bowne's XBRL division is contemplated. Revenue from XBRL filing services is only now starting since only about 450 companies must comply vs. a total of 10,300 companies in 2011. By not holding separate the Bowne XBRL filings service, the combined Bowne/Donnelley could have a major competitive advantage in pricing due to bundling such services with their regular printing services.

Given the high demand for XBRL services, I would guess that there would be active bidding for Bowne's division. Or maybe the talented leaders of that operation could form an independent XBRL filings company.

It is probably a fair assumption that over the last few years both Bowne and Donnelley wanted to have XBRL competencies since the other one offered such services. Now that their rivalry is being put aside in favor of collaboration, their need to have the XBRL service in-house has been dramatically lessened. Let the XBRL vendors compete vigorously rather than having one printing company set the market practice and prices (and the latter undisclosed and/or bundled).

Disclosure: Long EDGR