FTC Opposes Staples-Office Depot Merger

Asserting that consumers would pay excessively high prices if Staples Inc. is allowed to buy Office Depot Inc., U.S. regulators said Monday that they plan to block the $4-billion merger of the office supplies giants on antitrust grounds.

The move by the Federal Trade Commission signaled that the agency’s trust-busting teeth are still sharp, even though the FTC and the Justice Department have permitted a record number of other mergers to proceed and reshape corporate America in recent years.

In this case, the FTC noted that Staples and Office Depot are two of the three major office-supplies chains (the other is OfficeMax Inc.) and that their marriage would mean that in many cities, “competition will be reduced or eliminated and consumers will pay higher prices.”

The decision jolted Wall Street, where Office Depot’s stock plunged by more than 20%, erasing nearly $900 million from the company’s stock market value in a matter of hours.

But consumer advocates hailed the news.

“It’s a positive sign to see the FTC aggressively promoting competition in the marketplace,” said Gene Kimmelman, co-director of Consumer Union’s Washington office.

The FTC’s move also was an ironic blow to Staples and Office Depot, which have thrived since their starts a decade ago in large part by heavily discounting prices on paper, pens, furniture, computers and other office goods.

Staples and Office Depot angrily responded that they will fight the FTC in court, and they rejected the notion that the deal would result in unfair competition and therefore harm consumers.

“Staples and Office Depot are two of the best friends American small businesses and home offices have ever had” because of their cost-cutting efforts, said Staples Chairman Thomas G. Stemberg.

Citing the myriad stationery stores and other outlets that make up the $185-billion office supplies market, Office Depot Chairman David Fuente said the pair together would have only 5% to 6% of the business and “with thousands of competitors, we are shocked by the FTC’s decision.”

But the FTC focused on the relatively new market for office supply superstores and concluded that a combined Staples-Office Depot would be too dominant. The agency said it would ask a federal court for an injunction blocking the merger, pending an administrative hearing and other legal motions that could go on for months.

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Higher prices would occur in 17 states--including California, where the chains have nearly 200 stores--and the District of Columbia, the agency said. Staples, based in Westborough, Mass., operates 577 stores in the United States and Canada, while Delray Beach, Fla.-based Office Depot has 572 outlets.

The California markets include Los Angeles, Anaheim-Riverside, Sacramento, San Diego, San Francisco-Oakland-San Jose, Salinas-Seaside-Monterey, Santa Barbara-Santa Maria-Lompoc and Visalia-Tulare-Porterville, the FTC said.

The FTC typically approves mergers after negotiating with the companies and striking an agreement by which they divest some assets or otherwise make changes to keep markets competitive.

But when the agency confronts what it sees as a severe threat to competition, it takes an even tougher stance in those talks. Last April, for example, it torpedoed the plans of Rite Aid Corp. to acquire rival drug-store chain Revco DS Inc. when the companies couldn’t agree to shed enough stores to satisfy the FTC.

The same impasse occurred in the Staples-Office Depot case, even though solutions were proposed that involved shedding stores.

“We had some discussions about settlement, but we really didn’t get to the point where we had a deal we were comfortable recommending to the commission,” William Baer, director of the FTC’s Bureau of Competition, said Monday.

Office Depot and Staples see each other as their most significant rival and “price against each other,” Baer said. In markets where both chains compete, prices are 5% to 15% lower than in markets where only one firm is active, Baer said.

The merger would have “declared a cease-fire in the competitive war,” Baer said.

The FTC found the merger would produce a “killer company,” and markets where “few could enter,” said Ed Rothschild, a spokesman for Citizen Action, a consumer organization.

“It sets a limit for other industries, with the FTC saying we will not let everything go through,” he said.

After the announcement, Office Depot’s stock plunged $5.50 a share to close at $17.125 on the New York Stock Exchange as more than 11 million shares changed hands. Staples’s stock fell $1.31 a share, to close at $23.25 on Nasdaq.

William Julian, who follows retailers for the investment firm Lehman Bros. in New York, had predicted that the FTC would approve the merger after Staples and Office Depot agreed to sell 70 to 90 stores to avoid antitrust problems.

“I’m shocked” that no agreement was reached, Julian said. “Does this kill the deal? I don’t know yet.”

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Regardless, former Ohio Sen. Howard Metzenbaum, now chairman of the Consumer Federation of America, said he hopes the decision indicates “a more activist FTC.”

“Too often, the FTC and the antitrust division of the Justice Department permit mergers to go forward, allowing companies to sell off certain stores and claiming this maintains competition,” he said.

Peltz reported from Los Angeles and Rosenblatt from Washington.