Judge Just Says No To Staples-Office Depot Merger — Why Every Retailer Should Pay Attention

The merger between Staples and Home Depot is over — and not in the ways either party were hoping for when the possibility of the two office supply chains merging first hit the headlines a year ago. Because it seems this particular corporate marriage will forever live in the annals of things that might have been, but never were, as Federal Judge Emmet Sullivan has officially agreed with the FTC and struck down the deal.

Facing issues both firms found to be unsolvable, Staples and Office Depot have said they are giving up the ship and abandoning the $6 billion deal.

The case first went to court shortly before Christmas of last year after the FTC filed a complaint that alleged the combination of the two office superstores constituted an anti-trust violation that would likely lead to higher prices for large corporate buyers.

Sullivan sided with the Federal Trade Commission.

So what happened exactly — and why should everyone in physical retail care? Well, on the narrow issues of the case, the lessons are probably somewhat limited. But the broader picture — particularly of the how regulators and judges view and understand eCommerce — is a bit more eye-catching, and perhaps a bit more worrisome if one is in the physical retail game.

Why The Judge Just Said No

“There is a reasonable probability that the proposed merger will substantially impair competition,” Sullivan wrote in a three-page order that didn’t include his full reasoning. The rest of the decision will be released next week, but the broadstokes summary indicates that at base Sullivan bought the FTC’s central argument.

As one might expect, there was plenty of disappointment to go around among the executive teams at Staples and Office Depot.

Staples Chief Executive Ronald Sargent noted his particular confusion with the ruling siding with the FTC “despite the fact that it failed to define the relevant market correctly, and fell woefully short of proving its case.”

Despite the perceived injustice, however, Sargent also noted that the two firms will not appeal.

This represents the second time the FTC has blocked a Staples Office Depot team-up; a different proposed merger in 1997 was also shot down by the FTC. This time around, the two firms argued that despite that prior ruling, the retail market was no longer the same place as it was 20 years ago — and that market conditions have dramatically changed in the interim time period — particularly as online commerce has risen astronomically to compete with both firms.

Competition both firms are feeling rather acutely, but more on that in a second.

This time around, among the more unusual features of the case was that Staples and Office Depot, according to Wall Street Journal reports, chose not to present any defense at all on the grounds that the FTC’s case was entirely inadequate and thus a defense was unnecessary.

The judge, it seems, did not agree with that assessment — and it is likely many gallons of ink will be spilled over the next several weeks attempting to determine if perhaps that was a miscalculation.

Also unusual — and somewhat disturbing — were allegations that that the FTC had improperly influenced Amazon.com witnesses to downplay the online mega retailer’s plans to compete with Staples and Office Depot.

The FTC denied it did anything wrong, and apparently it did not stop them from winning the case.

But the Amazon part of the argument remains interesting — apart from whatever shady antics may or may not have gone on — because it highlights a tension and problem that Office Depot and Staples are far from alone in facing.

The Understudied Amazon Problem

The essential case Staples and Office Depot have always made for the merger is that they need it; both firms have seen their sales and revenue figures plummet over recent years. Staples’ end of the year performance in 2015 more or less underlined that fact. Sales dropped 6.4 percent to $21.1 billion. Office Depot’s sales for the same period dropped 10 percent, to $14.5 billion.

In short,  the two firms are merging to stay big and competitive, lest the Internet eat their lunch.

The FTC did note that the merger did not effect competition levels enough on the retail office-supply side of the equation for individual or SMB consumers. The problem, the FTC says, is with large corporate clients, who Staples and Office Depot would essentially have a monopoly on serving if the deal went through. The issue, according to the FTC, is scale.

Staples and Office Depot’s response (other than blinking in stunned confusion) was to point out that Amazon’s regional and local suppliers and incredibly developed logistics network make them plenty competitive. Amazon last week noted that in fact it’s very new to the market. In its first year, Amazon’s B2B sales of office supplies and other products came in at $1 billion.

The two office supply firms also noted it might be a bit fanciful to imagine they as a combined entity could somehow leverage the largest corporations into America into drastically marked-up pricing on paper clips.

The FTC, of course, was very happy with the result.

“Today’s court ruling is great news for business customers in the office supply market,” FTC competition chief Debbie Feinstein said in a statement. “This deal would eliminate head-to-head competition between Staples and Office Depot and likely lead to higher prices and lower quality service for large businesses that buy office supplies.”

The question is, was the FTC or Sullivan really looking at the right competitors, since it seems Office Depot and Staples are trying hard to catch up to the market — not dominate it. It also seems to fit in with an alarming pattern of federal authorities rather grossly underestimating the power and prominence of eCommerce .

As for immediate outcomes, both Staples and Home Depot saw their shares fall sharply. Office Depot took the bigger hit, with a 36 percent bleeding, while Staples took an unenviable 14 percent.

But the hits may just keep on coming, especially if it turns out that physical retailers being tagged by Amazon don’t even have the power to tag team the problem to strike back.