Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Another one bites the dust.

Staples and Office Depot nuked their $6 billion merger after a U.S. judge agreed with the Federal Trade Commission that a combination would reduce competition for business customers. It's the latest in a string of failed deals this year, with at least seven major U.S. takeover proposals and investments now having gone bust because of one form of regulatory pushback or another. But while the Staples-Office Depot merger has officially earned a gravestone in the M&A cemetery, that doesn't mean its death sentence was warranted.  

Held Together By Paper Clips
Both Staples and Office Depot plunged on the news of their merger's collapse. The declines were more significant than those of Baker Hughes or Allergan when their takeovers collapsed.
Source: Bloomberg
Intraday times are displayed in ET.

Buyers from Pfizer to Halliburton and Canadian Pacific all arguably should have been more prepared for the regulatory uproar that their respective deals caused. Tax inversions were a known target for the Treasury Department, falling oil prices made a major combination of services providers even less palatable to customers, and regulators have made their dislike of major train deals pretty darn clear for years. But Staples and Office Depot have a right to be a little bewildered.  

There's a reason there are only two major brick-and-mortar office supply retailers left in this country: they're a dying breed. Staples hasn't increased revenue in years, while Office Depot is mired in what would be an eight-year slump if not for its 2013 purchase of OfficeMax. The great irony is that combining the two wouldn't necessarily stop the downward spiral. It would just make it less painful -- maybe. It's hard to raise prices and gain market share when you're eager for whatever business you can get in the face of competition from Amazon, which can do everything cheaper and more efficiently.

The FTC argued that Amazon wasn't a strong enough competitor in the sale of office supplies to businesses, even as it has eroded Staples and Office Depot's more consumer-facing sales. That's a little hard to believe considering Amazon's business-supply unit has passed $1 billion in sales in less than a year with revenue climbing by 20 percent each month. 

Yes, Amazon's revenue from office supplies still represents just a fraction of the roughly $34 billion analysts were projecting in combined revenue for Office Depot and Staples. But if history is any guide, underestimating the e-commerce giant is a bad move. Office Depot and Staples know this, and yet they were willing to divest $1.25 billion of commercial contracts to get a deal done. That's how desperate they were.

Going Nowhere Fast
The sales outlook for Staples and Office Depot over the next few years isn't pretty.
Source: Bloomberg

Now Staples and Office Depot are left to navigate the afterlife on their own. It's not going to be pretty. Here's how analysts' described their standalone outlooks on Wednesday: "Downward trajectory," "race to the bottom," "vulnerable," "difficult situation," "challenged." With the collapse of the Office Depot merger, Staples will now explore a sale of its European operations, close at least 50 stores in North America and cut another $300 million of costs (i.e. jobs). Those aren't the responses of a healthy company, nor is it exactly the most pro-competition outcome.

Protecting customers against the effects of mergers is a hard job that's becoming even harder in the face of a flurry of super-sized deals. The FTC's heart may have been in the right place, but should Staples and Office Depot continue their march toward irrelevance, businesses are going to be left with one choice for office supplies anyway: Amazon.

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

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

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