Staples Drops After U.S. Moves to Challenge Office Depot Deal

Staples-Office Depot Deal in Doubt as FTC Moves to Block
  • FTC rejects office-supply deal for second time in 20 years
  • Agency says combination would hurt corporate customers

Staples Inc. fell the most in over a year after the U.S. said it would challenge the office supply chain’s proposed takeover of Office Depot Inc., the second time in 20 years that antitrust officials said the tie-up would squelch competition and should be blocked.

Staples shares fell as much 14 percent, the most since May 2014, and Office Depot plunged as much as 18 percent after the U.S. Federal Trade Commission said Monday it is seeking to block the combination, which would leave just one national retailer of office supplies and raise prices for corporate customers who buy under contract.

“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.”

Staples was down 9.4 percent $11.20 at 1:26 p.m. in New York, while Office Depot dropped 17 percent to $5.51.

The commission voted unanimously, four to zero, to block the transaction. During its investigation, the FTC zeroed in on the market for corporate customers that buy office products in large quantities through contracts that ensure steady deliveries and discounted prices. Two years ago, when the agency approved Office Depot’s merger with Office Max, 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 said in a statement that they would fight the FTC’s case, arguing the deal would benefit customers and saying that the FTC’s decision was “based on a flawed analysis and misunderstanding of the intense competitive landscape in which Staples and Office Depot compete. ”

The $6.3 billion deal, announced in February, would combine the two biggest office-supply retailers in the U.S., reducing the industry to a single major chain. The tie-up is part of a merger wave sweeping across industries from beer to drug stores to pharmaceuticals that’s under scrutiny from antitrust officials at the FTC and the Justice Department.

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 merger 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.”

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