Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

Staples and Office Depot on Wednesday said their boards voted to extend a deadline to approve a merger pact that has so far been thwarted by U.S. antitrust regulators. Investors shouldn't hold their breath for a deal to go through -- all the three-month postponement amounts to is a bunch of wishful thinking. 

Sure, extending the deadline will give the office supply chains time to fight the Federal Trade Commission's lawsuit to block the transaction and go through a trial set to begin March 21. But it's a matter of going through the motions, so to speak, for management -- many of whom stand to come out on the losing end of any tie-up.

Shares of Staples and Office Depot fell by as much as 6 percent and 4 percent, respectively, on Wednesday. Since the merger agreement was announced last February, both companies' stock prices have dropped by roughly 50 percent. 

Office Supply Shares Fall To Shreds
Source: Bloomberg

That's because the merger has been met by fierce opposition from antitrust regulators, who argue that joining the retailers will hurt competition and increase prices for commercial clients.

It's important to note that one of the biggest commercial clients of Staples and Office Depot is government -- namely hundreds of federal, state and local entities, along with public schools and charities, that buy pens, paper and printer cartridges from the two retailers. 

In 2013, for instance, Staples went so far to win a contract to become New York State's official office supplies vendor that it offered more than 200 items at a price of one cent per product -- a decision that ended up costing the retailer a pretty penny. 

Regulators approved the 2013 Office Depot/Office Max merger because Amazon and other Internet retailers had altered the retail industry enough to provide for more national price competition.

That argument doesn't pass muster this time around, because online retailers have much less of a presence in the commercial business. Ironically, Staples and Office Depot took on more commercial business partly to avoid the online competition on the consumer side. They each derive more than a third of their annual revenue from commercial contracts, according to Bloomberg data.

Staples' Commercial Business Buildup
Annual revenue by segment
Source: Bloomberg

 

As Gadfly's Gillian Tan pointed out last year, Staples and Office Depot could have tried harder from the start to address regulators' concerns. But even ratcheting up concessions later in the year didn't win over the FTC

Anyway, it's hard to imagine a world where Staples and Office Depot executives are really cheering for a merger that could result in more store closures and lost jobs -- particularly for Office Depot executives and the 2,000 employees that work in its Boca Raton headquarters. Office Depot already plans to close 400 stores by the end of 2016. More than 1,000 store closures are expected to come as a result of the merger. And if the deal flops, Office Depot could collect $250 million from Staples, based on the merger agreement.

It seems the only folks who stand to benefit are the activist investors that pushed for the move in the first place. More than 10 percent of Staples' shares and more than 26 percent of Office Depot's shares are owned by hedge funds like Paul Singer's Elliott Management and Daniel Och's Oz Management, according to data compiled by Bloomberg.

Starboard Out
Starboard's stake in Office Depot has shrunk dramatically.
Source: Bloomberg

But even Starboard, the activist investors that helped orchestrate the Office Depot-Office Max tie-up and vocally pushed the Staples deal, has pulled back. At the end of last year, it reduced its stake  in Office Depot and exited its entire position in Staples.

As painstaking as this merger process has become, extending the time frame isn't going to change the outcome. 

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

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net