Staples Likely to End Deal for Office Depot
Staples Inc. said it will probably scrap its proposed $4-billion purchase of office supply rival Office Depot Inc. after a federal judge ruled Monday that the deal violates antitrust laws and cannot immediately proceed.
“While we ardently disagree with the judge’s decision, we respect the judicial process, and it is likely we will discontinue our merger plans with Office Depot,” Staples Chairman Thomas G. Stemberg said in a statement.
In siding with federal regulators, U.S. District Judge Thomas Hogan issued a preliminary injunction that stops the merger pending a full-scale antitrust hearing. The companies could appeal, but that step is seldom taken, because changing market conditions during the interim usually render useless the original merger plans.
Indeed, Stemberg said the additional time and cost of fighting the government “doesn’t seem to be in the best interest of our shareholders, employees or customers.”
Hogan’s ruling was a major victory for the Federal Trade Commission, which had argued that the merger--first announced in September--would mean consumers would pay excessively high prices because of reduced competition in the burgeoning market for high-volume office superstores. The only other major chain in that field is OfficeMax Inc.
“Consumers have won today, and competition has been preserved,” FTC competition director William J. Baer said.
The agency had contended that higher prices would be particularly evident in California, where the chains operate nearly 200 stores.
Westborough, Mass.-based Staples and Office Depot, of Delray Beach, Fla., had argued just as vehemently that consumers would benefit from their marriage, because the combined buying and marketing power of the new, larger Staples would enable the chain to offer lower prices on more goods.
“This is a sad day for small businesses and consumers, who would have reaped the greatest benefit of all in the form of even lower prices,” Stemberg said.
Staples and Office Depot had also argued that even though they would have owned 1,086 outlets and recorded annual revenue of $10 billion after the merger, they still would have had less than 7% of the entire $185-billion U.S. market for office supplies.
But Judge Hogan, in agreeing with the FTC, said the office supply superstores are a market unto themselves.
Evidence in the case “suggests that office superstore prices are affected primarily by other office superstores and not by non-superstore competitors” such as mass merchandisers, wholesale shopping clubs, computer and electronic retailers, mail-order firms and independent office supply outlets, Hogan wrote in his decision.
Hogan’s decision could make it difficult for other high-volume specialty retailers to win approval if they decide to merge, said Mary Lou Steptoe, former director of the FTC’s Bureau of Competition.
“The opinion doesn’t go so far as to say these stores can never merge,” she said. “But it cautions them to pay more attention than they did in the past to how they define the market.”
Stores that sell drugs, books, pets, linens, games and home improvement supplies are among those likely to feel the impact of Hogan’s ruling, lawyers said.
“It’s going to make [the FTC] significantly more aggressive,” said Joe Sims, a lawyer who used to work for the Justice Department’s antitrust division.
Staples and Office Depot had tried to cut a separate deal to allay regulators’ antitrust concerns, to no avail. In March, the companies agreed to sell 63 stores to OfficeMax--a third of them in Southern California--for $109 million.
Hogan’s ruling, and Staples’ comment, came at the close of financial markets. Staples’ common stock closed at $23.25 a share, down 25 cents on Nasdaq; Office Depot edged up 12.5 cents to close at $19.44 a share on the New York Stock Exchange.
Options to buy Office Depot’s stock for $20 a share were the most actively traded options Monday, no doubt reflecting intense speculation among traders betting on which way Hogan would rule.
