Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Staples and Office Depot should've tried harder.

The U.S. Federal Trade Commission followed through on its decision Monday and filed a lawsuit to block a combination of the world's biggest office-supply chains, sending Staples to a 13-year low.

In an open letter to customers on Monday, the companies defended their case, stating that before the regulator's decision:

"...to help address FTC concerns, Staples has proposed divesting more than $500 million in commercial contracts to an established competitor. The FTC rejected this solution, even though it would strengthen a national competitor; enable independent dealers and support minority and woman-owned businesses in competing for national commercial customers."

Therein lies the problem. "More than $500 million" isn't even close to the maximum $1.25 billion in revenue the companies were willing to give up, as outlined in the merger agreement

Sure, no company wants to give up more than it has to, but offering the maximum concessions could have gone a long way to prove their union wouldn't be anticompetitive, especially for corporate customers. Although the FTC acknowledged in its 2013 approval of the Office Depot and OfficeMax merger that office supply superstores "have lost, and continue to lose, substantial in-store sales to online competitors," corporate customers such as the Fortune 500 don't send staff to stores to stock up on pens, notepads and staplers. Rather, they accept bids for their business from the industry's two biggest heavyweights -- Staples and Office Depot -- and others. It's still an area where online peers such as Amazon.com aren't full-fledged competitors. 

Even so, the duo likely thought they wouldn't have to stretch to get the deal done given that in 2013, the FTC said office-supply superstores faced significant competition from a host of competitors that "have demonstrated the ability to win large multi-regional and national customer contracts." 

But it would have been wiser to be prudent: Other recent deals have seen companies shedding assets, some more than expected. Dollar Tree, which projected it would need to divest "no more than roughly 300 stores" to obtain the FTC's approval for its acquisition of Dollar General, had to sell 330 stores. In "an effort to enhance the receipt of antitrust clearance," Reynolds American was ready to divest its Winston, Salem, Kool and Lorillard's Maverick cigarette brands to Imperial, a move that proved successful. And US Foods and Sysco, a deal thwarted by the FTC, had planned to sell 11 distribution centers that generated $4.6 billion, or roughly 21 percent of Sysco's annual revenue.

Have Nots
Will Staples-Office Depot add to the list of scrapped deals?
Source: Bloomberg

By comparison, Staples' $1.25 billion figure makes up barely 8 percent of Office Depot's calendar 2014 revenue, making the "more than $500 million" that's been offered less than 4 percent. 

Unless Staples and Office Depot convince a federal judge that the FTC's claims are based on "a flawed analysis and misunderstanding of the intense competitive landscape," they may have to relive 1997 all over again, when a judge blocked a deal between the then much-smaller companies on antitrust grounds. 

Even if they finally get more aggressive and cough up further divestitures, it could be too little, too late.

Deal or No Deal
Shares of both companies have fallen since the deal was announced.
Source: Bloomberg

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Bloomberg News reported last Thursday that in negotiations with the FTC, Staples had offered to divest contracts to Essendant, another distributor of office supplies. 

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net