Tuesday evening, the Federal Trade Commission did what I and many others expected it to, effectively putting the nails in the coffin of the proposed merger between Staples (SPLS) and Office Depot (ODP). Staples announced it was terminating the merger agreement as the FTC was granted a preliminary injunction to block the deal. I'm not sure why it took this long. The merger seemed doomed to me when I wrote about it back in early December.
Interestingly, or perhaps sadly based on your perspective, this is the second time that the FTC has blocked a merger of these companies. While the two have soldiered on since the last deal was blocked, I highly doubt one or both will even be around in another nineteen years.
Some damage had already been done to both stocks. Since early December, Staples shares are down about 30%, while Office Depot is down about 45%. Much of the damage in ODP's case actually happened Wednesday, when the shares fell 40%, while SPLS declined 18%. Office Depot will walk away with a $250 million break-up fee.
The crux of the FTC's arguments against the deal was that large companies would be harmed due to a lack of competition if the companies merged. When the merger was rejected in 1997, it was more about the consumer being harmed, evidenced by one of my all-time favorite quotes by William J. Baer, then Director of the FTC's Bureau of Competition:
"The FTC's decision to ask a court to block the merger is about lower prices for consumers. If the merger is allowed to proceed, consumers will pay millions of dollars more for their copy paper, envelopes, pens and file folders."
This time around, the FTC's reasoning seems equally ridiculous, especially given the rise of Amazon (AMZN), and that company's growing presence in the office-supply market and overall dominance. However, the judge in the case, Emmet Sullivan wrote that the FTC had 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."
Right or wrong, and whether you agree with the end result here, there's little doubt that there are changes coming to the bricks-and-mortar world of the office-supply business. Stores will close, potential efficiencies from the merger have been lost, and the longer-term viability of these chains is in question. Who is to say that the merger would not have actually lowered costs to large businesses, and created a more competitive environment?
The FTC, that's who, but lawyers for the companies involved were unable to convince the courts otherwise.
Meanwhile, it was likely a happy day at Amazon.