The proposed merger between Staples and Office Depot just hit a major roadblock. The Federal Trade Commission (FTC) wants the deal dead and voted unanimously to pursue an injunction to stop it.
A merger between the two office supply juggernauts was first announced in February. As reported by the Inquisitr, Staples intends to buy Office Depot in a proposed deal worth $6.3 billion. The new company would generate an estimated $39 billion in annual sales.
However, antitrust regulators are uncomfortable with the intended agreement.
The FTC filed a lawsuit on Monday to stop the Staples and Office Depot merger from happening. The federal watchdog says the combined company would control too much market share, about 70 percent. Dominating that much, a completed deal between the two companies would lead to substantial price increases for office supplies.
Edith Ramirez, an FTC chairwoman, clarified the government’s position in a written statement.
“The Commission has reason to believe that the proposed merger between Staples and Office Depot is likely to eliminate beneficial competition that large companies rely on to reduce the costs of office supplies.”
Wall Street reacted to the FTC lawsuit by sending both Office Depot (ODP) and Staples (SPLS) stock lower during Monday’s trading session. Shares of Staples fell almost 14 percent to $10.66 a share, while Office Depot stock tumbled to $5.59 or 16 percent.
In a joint letter written by Staples and Office Depot, executives expressed disappointment in the commission’s reasoning.
“FTC’s decision is based on a flawed analysis and misunderstanding of the intensely competitive landscape in which Staples and Office Depot operate. The FTC underestimates the disruptive effect of new competitors in the digital economy.”
For years, both Staples and Office Depot intensely fought one another to gain an edge in the office supply market. Individually, they have been struggling for years to compete against online retailers as well as giants like Walmart and Costco. As such, market share and revenue have been steadily declining.
Specifically, Staples’ revenue was down three percent overall last year, while net income declined $135 million. At one time, Staples employed about 91,000 people but has since reduced its staff to approximately 79,000.
Shortly after the proposed merger was announced, there were rumblings that two of the FTC commissioners would oppose the deal. So, to add a little sugar, Staples offered to give $500 million worth of contracts to office supply wholesaler Essendant Inc.
The FTC didn’t like the taste, saying a combined Staples and Office Depot would still be too powerful against smaller, less influential office supply companies. Moving the contracts to Essendant would not benefit the end consumer, according to antitrust regulators.
Staples Chief Executive Ron Sargent struck back, arguing the combination of Staples and Office Depot would allow for greater savings and lower prices for customers. Now, however, both office supply chains have to convince a judge by demonstrating that the market will still be big enough for everybody.
The FTC will also have to explain why they allowed a previous merger between two office supply behemoths. In 2013, regulators didn’t have a problem with the marriage of Office Depot and OfficeMax. Back then, the government barely said a word and allowed the $1.2 billion deal between the No. 2 and No. 3 office supply titans.
A Staples and Office Depot merger has been tried before. In 1997, the two made a deal to combine, but the FTC stopped them that time too. The government used the same argument then as they are now, saying the merger would not leave enough competition in the marketplace.
Even if the merger of Staples and Office Depot is approved by U.S. courts, it still needs to contend with antitrust regulators in Europe. Meanwhile, the deal has already been struck down by officials in Canada.
As investors are nervous about the final outcome, stock prices of both Staples and Office Depot will most likely continue to remain unstable.
The Staples and Office Depot merger has hit a stumbling block, but both companies intend to fight the FTC lawsuit. With a continually shrinking marketplace and stiff competition from other retailers, the office giants contend they need to work together to remain strong as well as profitable.
[Photo by Justin Sullivan/Joe Raedle/Getty Images]