5 Reasons Why The Staples Office Depot Merger Is DOA

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5 Reasons Why The Staples Office Depot Merger Is DOA

 news 2015-02-19 at 11:04:48 am Views: 274
  • #42017

    5 Reasons Why The Staples Office Depot Merger Is DOA
    The FTC will kill this deal on antitrust grounds … again

    By John Divine

    On February 4, Staples, Inc.  announced a deal to acquire Office Depot Inc  in a merger, effectively consolidating the office supplies industry from a duopoly to a monopoly.

    Though the terms were announced, investors need to remember that the SPLS-ODP acquisition isn’t set in stone yet.

    The merger still requires regulatory approval, which means the Federal Trade Commission must agree that this corporate combination doesn’t violate antitrust rules.

    While SPLS is clearly confident about the deal going through, investors shouldn’t be quite so optimistic.

    Prior Rulings: This deal has been attempted before. That’s right, Staples tried to buy Office Depot in 1996[5], but the FTC shot it down on the grounds that product prices would rise as a result. In 1997 the deal was dead. But history repeats itself, and 19 years later, SPLS is at it again.

    Some argue that things are different this time around, as the emergence of e-commerce and Amazon.com, Inc.  — as well as the growth of Wal-Mart Stores, Inc. — makes the industry much more competitive. But, as I’ll show in a minute, the industry isn’t nearly as competitive as it sounds.

    ODP Stock Price:While the fact that the FTC already rejected a Staples-Office Depot deal once before is damning in and of itself, what’s even more telling is what the current ODP stock price is telling us. The day after the Wall Street Journal broke the news[8] that the two companies were in advanced negotiations, ODP stock rocketed 21% higher, closing at $9.28[9]. The next day, when the deal became official, ODP stock rose just 2.3%, closing at $9.49. As of this writing, ODP was sitting at just $9.62.

    In a world where Wall Street thought this deal would go through, that ODP stock price simply wouldn’t make sense. The Staples acquisition valued ODP stock at $11 per share.

    Staples Has Beef With the President: After reports that Staples threatened to fire employees[10] for working more than 25 hours in an effort to skirt insurance expenses required by the Affordable Care Act, Obama called out Staples[11], saying

    “I haven't looked at Staples stock lately or what the compensation of the CEO is, but I suspect that they could well afford to treat their workers favorably and give them some basic financial security.”

    Unfortunately, the company actually fired back, accusing Obama[12] of “not having all the facts,” and claiming their part-time policy actually predated Obamacare. Not a wise move, especially since Obama nominated all five current FTC commissioners reviewing the deal.

    Mergers Increase Prices: decades-long, academic study of corporate mergers, culminating in a recent book, found that prices rose by 10%or more[13] in about 20% of the mergers. The author, John Kwoka, called this a “serious policy mistake.” If the FTC, whose motto is “Protecting America’s Consumers,”[14] finds that the price of office supplies will rise by 5% or more in the wake of a SPLS-ODP deal, the merger will be deemed anticompetitive.

    The average price increase seen in the merged companies in the 30-year study was 5.1%, just above the target level.

    While consumers can indeed shop online for pens, paper, ink and the like, high-volume customers like businesses and governments have far fewer options. If Staples expects the FTC to pass a merger that could raise prices on consumers, businesses, and the government itself, SPLS is downright foolish.

    No More Competition: This is not like when Office Depot acquired Office Max. That deal, which was approved by the FTC in November 2013, effectively reduced the number of office supply superstores from three to two. But a core point in the FTC’s approval of the Office Depot-Office Max deal was the heavy competition the new entity would still face[15] from — you guessed it — SPLS itself.

    In other words, the FTC said the industry was still competitive, and to a large extent was still competitive because of Staples. It would have to seriously backtrack from those remarks, made less than 16 months ago, for the Staples and Office Depot merger to go through in its current form.

    If you’re holding onto ODP stock waiting for the deal to go through smoothly, holding your breath could be hazardous. The regulators are gonna strike this one down.