Coverage: Staples-Office Depot merger collapses

The $6.3 billion merger between Staples Inc. and Office Depot Inc. collapsed after a federal judge sided with Federal Trade Commission officials, who argued the deal would hurt consumers.

David McLaughlin and Andrew M Harris of Bloomberg had the day’s news:

Staples Inc. and Office Depot Inc. abandoned their merger after a federal judge sided with U.S. antitrust officials who challenged the combination of the two largest office suppliers, saying it would create an unrivaled giant.

U.S. District Judge Emmet Sullivan in Washington blocked the $6.3 billion deal late Tuesday, a victory for the Federal Trade Commission, which argued that uniting the national suppliers of pens and printer paper would harm buyers.

The FTC met its “burden of showing that there is a reasonable probability that the proposed merger will substantially impair competition in the sale and distribution of consumable office supplies to large business-to-business customers,” Sullivan wrote in a three-page order.

Staples fell as much as 16 percent to $8.69 in early trading in New York on Wednesday, while Office Depot tumbled as much as 38 percent to $3.75. Before the ruling, which the judge had said would come after the market closed, shares of the retailers rose in after-hours trading on an unverified Twitter message that the companies had prevailed.

Renae Merle of The Washington Post had details on the companies’ breakup:

The companies were quick to call off their deal.

“We are extremely disappointed that the FTC’s request for preliminary injunction was granted despite the fact that it failed to define the relevant market correctly, and fell woefully short of proving its case,” Ron Sargent, Staples’ chairman and chief executive officer, said in a statement.

Staples must pay Office Depot a $250 million “break-up fee” with the deal’s collapse. It also said it would call off a separate $550 million transaction to sell some assets it had offered to shed to satisfy regulators.

The collapse of the deal will force both companies to develop new strategies. Office Depot’s revenue fell 11 percent last year, while Staples saw sales tumble 7 percent.

“As the Staples merger process comes to an end, we look forward to re-energizing our business,” said Office Depot chairman and chief executive Roland Smith.

Office Depot’s stock price plummet in after-market trading when the decision was announced. It fell about 27 percent. Staples’ stock fell about 10 percent.

Perhaps to soothe investors, Staples said it would continue “to return excess cash to shareholders” by resuming its repurchase of company stock to the tune of $100 million in 2016 and continue paying dividends.

Angelo Young of the International Business Times explained how this is the second time the companies have unsuccessfully attempted to merge together:

The two companies’ defense lawyers challenged the FTC’s stance, arguing that Amazon.com’s year-old unit targeting business customers was making it increasingly difficult for the country’s top two brick-and-mortar to compete. By combining forces, they argued, Staples could become more efficient and offer lower prices against the online behemoth.

But the argument might have lost some weight because the companies had attempted to merge in 1997, years before Amazon.com Inc. rose to become a major online threat to traditional retail.

At the time, the arguments were markedly different, but led to the same results: a judge ruling in favor of the FTC before the FTC could rule on its own. At the time, there were many small office supply outlets, and Amazon.com was barely on the radar of booksellers who were just beginning heed the online threat. Also, the two companies had a third rival, OfficeMax, which Office Depot gobbled up in 2013 in an all-stock deal worth nearly $1.2 billion.

In 1997, the FTC took a stance that was novel at the time, called the unilateral effect. The FTC said that even if the major companies have plenty of competition from smaller rivals, merging them would lead to an overall increase in prices to consumers.

Today, the argument against the merger is much different. With virtually all small office supply retailers wiped out of the marketplace with the growth of e-commerce, the FTC is now arguing that Office Depot and Staples should remain rivals, facing off against each other as well as Amazon.com.