This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.
Based on all the drama that has unfolded over the last couple of weeks, a made for TV movie about the Office Depot (ODP)/Staples (SPLS) merger trial would be must-see television.
In December, the FTC sued to halt the $6.3 billion merger between the two office supplies retailers, a move designed to block the tie-up ahead of the FTC's scheduled administrative hearing in May.
After hearing arguments for about two weeks, the fate of the case is now in the hands of U.S. District Judge Emmet Sullivan after lawyers for Staples unexpectedly concluded their defense, declining to call any witnesses to the stand. Instead Staples attorney Diane Sullivan (no relation to the judge) declared that the Federal Trade Commission has "fallen woefully short" of proving its case against its merger with Office Depot.
The judge responded to Staples resting its case by imploring the FTC to reach a settlement with the retailers. Sullivan has grown increasingly leery of the FTC's case over the course of the last couple of weeks, even going as far to reprimand the agency for attempting to alter the testimony of a key witness.
With the trial portion concluded, Judge Sullivan must now decide on the level of competitiveness in the office supplies sector. The FTC has previously said that the two companies would need to divest assets large enough to stand on its own as a business in order for it to consider approving the merger.
The government's view is that the two companies are the top two office supply retailers in the country and that a tie-up between the two would hurt competition in the corporate contract market. Meanwhile the companies argued that the government's definition of the market is crafted to exclude smaller businesses as well as rule out "beyond office supply" items -- such as furniture, break room supplies, janitorial products -- in order to present a more consolidated competitive landscape.
"The government sees this as a 2 to1 merger, and it is hard for the government not to challenge a 2 to1 merger," said David Marcus, senior writer at The Deal who has followed the trial.
Central to the FTC's case has been the definition of the office supplies sector as well as the nature of the disruption caused by Amazon's (AMZN) office supply arm. Office Depot and Staples argued that Amazon Business, while not able to compete in the corporate contract sector yet, has the infrastructure and distribution network already in place to enter that segment with little resistance.
Falling revenue and increasing debt necessitates this merger for distressed Office Depot. Sullivan has said that he expects to make his decision on whether to block the merger by May. The very survival of Office Depot may hinge his decision.
Meanwhile, Real Money's Brian Sozzi has expressed confidence that the merger will go through, and the market seems to agree. Office Depot shares were up nearly 2% on heavy volume while Staples was climbing over 2% midday Wednesday.
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