Staples-Office Depot merger collapses after block by judge

Staples-Office Depot merger collapses after block by judge

Washington: Staples Inc. and Office Depot Inc. abandoned their merger after a federal judge sided with US antitrust officials who challenged the combination of the two largest office suppliers, saying it would create an unrivalled giant.

US district judge Emmet Sullivan in Washington blocked the $6.3 billion deal late on Tuesday, a victory for the Federal Trade Commission (FTC), which argued that uniting the national suppliers of pens and printer paper would harm buyers.

FTC met its “burden of showing that there is a reasonable probability that the proposed merger will substantially impair competition in the sale and distribution of consumable office supplies to large business-to-business customers”, Sullivan wrote in a three-page order.

Staples fell as much as 16% to $8.69 in early trading in New York on Wednesday, while Office Depot tumbled as much as 38% to $3.75. Before the ruling, which the judge had said would come after the market closed, shares of the retailers rose in after-hours trading on an unverified Twitter message that the companies had prevailed.

Killed merger

Sullivan’s ruling—an injunction putting the deal on ice while FTC challenges the tie-up in its administrative court—killed the planned merger. Office Depot chief executive officer (CEO) Roland Smith said in a statement after the decision that it would not appeal and that the companies would terminate the agreement effective 16 May.

The ruling is a win for antitrust officials who are grappling with a record wave of mergers that are marrying some of the biggest companies across industries. Sullivan’s decision marks the second time FTC has blocked a combination between the two companies. In 1997, the commission successfully sued to halt their proposed merger.

“Today’s court ruling is great news for business customers in the office supply market,” Debbie Feinstein, head of FTC’s bureau of competition, said in an emailed 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.”

Contentious proceeding

The decision caps Sullivan’s role in an often contentious proceeding during which the judge criticized FTC’s handling of the case and frequently interrupted the questioning of witnesses for his own queries. That led some investors to become optimistic that he would allow the deal to proceed.

“Given some of the judge’s rulings during the trial, it was somewhat surprising,” said Seth Bloom, an antitrust lawyer at Bloom Strategic Counsel. “This is another example of how one can’t make a judgement based on a judge’s comments from the bench.”

Staples CEO Ron Sargent said in a statement that the company was “disappointed” by the decision and that it won’t appeal the ruling. The company will instead focus on a strategic plan that includes trying to win mid-market business customers, exploring alternatives for its European operations, cutting costs and returning cash to shareholders.

FTC sued Staples and Office Depot late last year, contending a single national office-supply seller with no obvious rival would undermine the ability of large corporate clients to bargain for better prices by playing the two firms off one another in negotiations.

Sealed opinion

Sullivan said blocking the merger was “in the public interest”. He also said he would issue a sealed opinion on Wednesday explaining his rationale. That document will remain under seal until at least 16 May, when it will be redacted to remove competitively sensitive information, the judge wrote.

Defence lawyers argued that the companies needed to combine to contend with looming competition from Amazon.com Inc. and its year-old Amazon Business unit. They claimed the merger would make the enlarged Staples more efficient and allow it to pass on lower prices to consumers. The companies attacked the government’s case as contrived to make the deal appear unfairly anticompetitive.

After FTC presented its case to Sullivan, Staples told the judge the agency hadn’t met its burden for blocking the deal and declined to present its own evidence in support of the merger.

Too much attention was paid during the trial to the judge’s courtroom comments, which were often critical of FTC, according to Ira Gorsky, an analyst with Jersey City, New Jersey-based Elevation Llc, who followed the case.

“Since Staples didn’t put on a defense, Staples witnesses weren’t cross-examined in the same way as the government’s witnesses were,” Gorsky said. Bloomberg

Tom Schoenberg contributed to this story.