FTC rejects office-supply deal citing corporate-sales market
Companies say agency decision based on `flawed analysis'
Staples Inc. and Office Depot Inc. vowed to fight a U.S. challenge to their proposed merger, a move that will enmesh the companies in a protracted legal battle with no guarantee of success.
The U.S. Federal Trade Commission said Monday it would seek to stop the combination of the two biggest U.S. office suppliers, sending shares of Staples down as much 15 percent, the most since March last year, while Office Depot fell as much as 18 percent.
The tie-up, which would leave just one national retailer of office supplies, threatens to raise prices for corporate customers who buy under contract, the FTC said in a statement.
The commission voted unanimously, four to zero, to block the transaction. The FTC will now ask a federal judge to stop the deal from closing so that it can hold an administrative trial in its in-house court, which is slated for May 10. In the past, a judge’s approval for such injunctions has spelled the end of deals, with companies abandoning transactions rather than face a drawn-out administrative proceeding.
"Anytime the FTC goes into court it’s an uphill climb for the parties," said Tom Lang, an antitrust lawyer at Haynes and Boone LLP in Washington. Government lawyers "walk in with a lot of credibility. They’ve had months and months to pull together the evidence they’re going to use, and they have a good head start on the parties."
Judging by the timing of past deals, a federal court hearing might not be scheduled until around mid-February, said Lang, a former FTC lawyer. The U.S. challenge to the Staples-Office Depot deal came on the same day another big proposed merger fell apart after U.S. antitrust opposition. General Electric Co. said Monday it was abandoning the sale of its appliance business to Electrolux AB in the midst of a Justice Department lawsuit seeking to block the sale.
U.S. antitrust officials at the FTC and the Justice Department are challenging deals as anticompetitive amid a wave of corporate dealmaking sweeping across industries from beer to drug stores to pharmaceuticals. Earlier this year, Comcast Corp. abandoned its bid for Time Warner Cable Inc. after opposition from the Justice Department and the Federal Communications Commission. In June, the FTC successfully stopped Sysco Corp.’s takeover of rival US Foods Inc.
During its investigation of the office supply merger, the FTC zeroed in on the market for corporate customers that buy office products in large quantities through contracts. The companies are each other’s closest competitors in selling to large businesses and can offer low prices and nationwide distribution, the agency said. By combining and eliminating that competition, customers would see higher prices and lower quality, according to the FTC.
“The proposed merger between Staples and Office Depot is likely to eliminate beneficial competition that large companies rely on to reduce the costs of office supplies,” said FTC Chairwoman Edith Ramirez.
Staples fell 14 percent to $10.66 at the close of trading in New York, while Office Depot dropped 16 percent to $5.59. BB&T Corp. analysts Anthony Chukumba and Daniel Cannata cut the rating on the shares to hold from buy, saying the legal process is likely to be protracted, with no assurance of success.
“While we think the FTC’s decision is nonsensical and Staples has a decent court case,
we believe the most prudent course of action is to move to the sidelines,” Chukumba and Cannata wrote.
The market for corporate sales is a separate from the retail market, the FTC said. Two years ago, when the agency approved Office Depot’s merger with OfficeMax, it found that retail consumers have numerous options due to competition from Amazon.com Inc. and big-box retailers like Wal-Mart Stores Inc.
Staples and Office Depot argued the deal would benefit customers and said the FTC’s decision is based on "a flawed analysis and misunderstanding of the intense competitive landscape in which Staples and Office Depot compete."
In an attempt to resolve the FTC’s concerns, Staples and Office Depot offered to divest more than $500 million "in commercial business" to a national competitor they didn’t identify. That proposal was rejected by the commission, the companies said.
The deal is also facing opposition from Canada’s Competition Bureau, which on Monday filed an application with the competition tribunal to block the tie-up. The Office Depot takeover is still facing an in-depth review in the European Union after regulators there said in September that the deal may reduce choice and raise prices.
The $6.3 billion merger, announced in February, would create a retail chain with about $39 billion in revenue and thousands of stores. The two companies agreed to the transaction following pressure from activist investor Starboard Value, which owns about 8 percent of Office Depot. Starboard had pressed the companies to combine to better weather competition from retailers including Target Corp.
Ron Sargent, chief executive officer of Framingham, Massachusetts-based Staples, said when the merger was announced it would allow the company to cut costs and reap at least $1 billion in synergies.
The FTC’s decision is the second time it has weighed in on a combination of Staples and Office Depot. In 1997, the commission successfully sued to block their proposed merger, saying the tie-up would have hurt competition. But in 2013, the agency opened the door to a second attempt by Staples when it approved the combination of Office Depot and OfficeMax. In that case, the FTC said the market for office supplies had changed significantly.
“Our decision highlights that yesterday’s market dynamics may be very different from the market dynamics of today,” the FTC wrote about the approval. “In this case, significant developments in the market for consumable office supplies have led us to approve a merger when we had blocked a similar merger sixteen years ago.”