Quick! What’s the difference between Family Dollar, Dollar Tree, and Dollar General? Upwards of $8 billion currently rides on the distinction.
If you aren’t a regular customer, you might assume all three sell everything on their shelves for a dollar or less. But that’s only true of Dollar Tree, which features knick-knacks like the art supplies kids use in school. Family Dollar and Dollar General both have many items that cost more than a dollar. Family Dollar caters to the urban and suburban poor, while Dollar Tree and Dollar General have slightly more upscale clienteles.
In late July, Family Dollar agreed to merge with Dollar Tree, with Dollar Tree agreeing to pay $8.2 billion, or $74.50 for each share of Family Dollar’s stock. Almost as soon as proposed nuptials were announced (subject to the approval of both companies’ shareholders), Dollar General swooped in with a $78.50 per share offer for Family Dollar, saying it was “prepared to get this deal done as quickly as possible.”
Corporate mergers are often compared to weddings, as in a recent New Yorker cartoon showing a man wiping a tear from his eye and saying, “I always cry at mergers.” But ordinary men and women are supposed to stop considering other suitors when they get engaged. When a corporation like Family Dollar agrees to be acquired by one suitor, corporate law principles often require it to consider any other offers as well.
There are very good reasons for this. The managers of a company are sometimes more interested in protecting their own jobs than in doing what’s best for their company. Chief Executive Howard Levine of Family Dollar, which has so far rejected the Dollar General bid, is more likely to retain a prominent position if Family Dollar merges with Dollar Tree. Dollar General, though, has 8,000 stores and is by far the most robust of the three companies.
Dollar General’s leadership status is precisely what Family Dollar hopes to use against it. To justify rejecting the Dollar General bid, Levine and Family Dollar insist the government would strike down a Dollar General–Family Dollar merger as an antitrust violation, since the combined store would control the vast majority of the dollar store market. A Dollar Tree–Family Dollar merger, by contrast, would leave two major competitors in the dollar store business (Dollar Tree–Family Dollar would have 13,000 stores, to Dollar General’s 8,000).
This isn’t a crazy argument. Although the dollar stores increasingly compete with Walmart and Target, they operate in slightly different markets. The dollar stores are smaller and often easier to get to for customers who live in inner cities or one stoplight rural towns. (On a recent 50-mile drive through small towns in the Florida panhandle, I quite unscientifically confirmed this, counting five Dollar General stores, one Family Dollar, and two Dollar Trees, as compared to only two Walmarts.) If a merger between Family Dollar and Dollar General would reduce customers’ choices or invite higher prices, this would be a legitimate reason for the Obama administration’s antitrust regulators to intervene.
But government intervention always has costs. The problem here is that it could punish a successful company like Dollar General and prop up inefficient competitors.
Here’s hoping that Family Dollar is forced to pick the best of the offers. If it’s Dollar General, regulators should allow the deal to go through, since Walmart can be expected to open more small stores if the dollar store business stays lucrative. In a more perfect world, the Obama administration might even point to Dollar General’s success as an opportunity to confess that private equity sometimes works quite well.