FTC blocks Staples and Office Depot merger

It’s like it is 1997 all over again with the Federal Trade Commission stepping in to block a merger between Staples and Office Depot on grounds that the deal would diminish competition.



The FTC on Dec. 7 said it had filed an administrative complaint charging that Staples’ proposed $6.3 billion acquisition of Office Depot would violate the antitrust laws by significantly reducing competition nationwide in the market for “consumable” office supplies sold to large business customers for their own use. Staples and Office Depot are each other’s closest competitors in the sale of consumable office supplies to large business customers, according to the complaint.



“The commission has reason to believe that 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. “The FTC’s complaint alleges that Staples and Office Depot are often the top two bidders for large business customers.”



Nearly two decades earlier, The FTC also blocked Staples efforts to merge with Office Depot, but at that time the rationale was focused more on the overlap of the company’s retail footprint and how the combination would diminish choice for consumers.



Staples and Office Depot executives naturally took exception to the unanimous ruling which now means the deal will be further delayed with an administrative trial scheduled to begin on May 10, 2016.



Staples and Office Depot said they will demonstrate that 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 fact, the FTC's decision to contest the merger contradicts its own unanimous ruling in the Office Depot - OfficeMax merger in 2013, in which the commission declared the market highly competitive, according to a statement from the companies. At the time, the FTC ruled that Staples and Office Depot face "strong competition" from "a host" of competitors. The office products landscape has grown even more competitive since then, according to the statement.



"This merger creates an unparalleled opportunity to better serve customers of Staples and Office Depot," said Ron Sargent, Staples chairman and CEO. "The combined company would generate significant savings, and we're committed to investing savings in lower prices for all customers. We'll also use the savings to continue to invest in our people, technology and customer service."



Roland Smith, chairman and CEO of Office Depot, added that, “the combination of Staples and Office Depot is based on creating an organization able to compete in a vibrant market with strong regional players and powerful new national entrants. We are confident that this transaction is consistent with the 2013 FTC statement in the Office Depot-Office Max merger and intend to pursue legal options in order to complete this transaction."



According to the FT complaint, many large business customers buy consumable office supplies for their own use under a contract. In addition to a wide range of office supplies at competitive prices, the vendor provides them with fast and reliable nationwide delivery, dedicated customer service, customized online catalogs, integration of procurement systems, and detailed utilization reports. That business-to-business market is distinct from the more competitive retail markets for office supplies sold to consumers. The complaint further alleges that, in competing for contracts, both Staples and Office Depot can provide the low prices, nationwide distribution and combination of services and features that many large business customers require. By eliminating the competition between Staples and Office Depot, the transaction would lead to higher prices and reduced quality. The complaint also asserts that entry or expansion into the market – by other office supplies vendors, manufacturers, wholesalers, or online retailers – would not be timely, likely, or sufficient to counteract the anticompetitive effects of the merger. Finally, the complaint asserts that purported efficiencies would not offset the likely competitive harm.



Staples and Office Depot said they intend to show that the FTC underestimates the disruptive effect of new competitors in the digital economy and ignores the vigorous competition Staples faces from numerous competitors, including office products dealers, manufacturers selling office supplies direct to business customers, dealers in adjacent categories, cooperatives of regional players, Internet resellers, big-box chains and club stores. Even though Staples and Office Depot disagree with the FTC's interpretation of the competitive landscape, the companies proposed divesting more than $500 million in commercial business in an effort to complete the transaction.



However, the FTC rejected this solution, even though it would strengthen a national competitor, further enable a host of independent office products dealers, and help minority and woman-owned businesses compete for national commercial customers, according to the companies.



"This combination is good for customers. It's good for shareholders, and it's good for both companies," Sargent said. "We intend to complete this transaction and to provide our customers with the lower prices and better service that they deserve."