Staples Office Depot merger off

FTC and judge make mistake in ending Office Depot/Staples merger

It’s a fairly common view within retailing circles that merging two struggling companies gets you one larger, still struggling business. That, I must admit, was my view on the proposed merger between Office Depot and Staples. Even so, the decision by a federal judge to uphold the Federal Trade Commission’s (FTC) case to scuttle the merger was a mistake.

The FTC case was based largely on the sale of office supplies to large corporate accounts. The agency argued that combining the top office supply chains into one would reduce competition in the marketplace, resulting in higher prices and other negative aspects associated with monopolies.

The FTC was able to produce business customers that testified a merger could hurt their negotiating positions. It also put Amazon.com on the stand which testified that its B2B business is still in the early stages and therefore not a significant immediate threat to either Office Depot or Staples.

Staples, which attempted to acquire Office Depot, argued that the FTC’s objection was based on too narrow a definition of the competitive market. The company argued that both its and Office Depot’s consumer businesses were under assault from a whole host of competitors, ranging from Amazon to Walmart.

In Amazon, Office Depot and Staples had a great example of the quickly changing nature of the office supplies market.

A few years back, the two chains were mostly concerned with each other, OfficeMax (later acquired by Office Depot) and regional businesses such as W.B. Mason, which are more focused on the business market. Today, Amazon is viewed as a major source of lost consumer business for both Office Depot and Staples. Is there much doubt Amazon, Jet.com or other emerging entities could soon serve as similar threats in the B2B market? I don’t think so. I’m just not sure why the FTC and the federal judge that stopped the merger didn’t think so, as well.

BrainTrust

"Totally disagree. There are no barriers to entry. Amazon can spin up its B2B site as quickly as it wants to."

Paula Rosenblum

Co-founder, RSR Research


"This decision will put one of these two companies out of business in the next five years."

J. Peter Deeb

Managing Partner, Deeb MacDonald & Associates, L.L.C.


"More concentration in any business leads to less bargaining power by suppliers and buyers and, perhaps even more importantly, to less innovation."

Gene Detroyer

Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.


Discussion Questions

DISCUSSION QUESTIONS:
Do you agree or disagree with the court’s ruling to stop the merger between Office Depot and Staples? Is the rationale used by the Federal Trade Commission in opposing deals such as the merger between the two chains out of touch with current market conditions?

Poll

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Paula Rosenblum
Paula Rosenblum
7 years ago

Totally disagree. There are no barriers to entry. Amazon can spin up its B2B site as quickly as it wants to.

As a friend said yesterday, “In 1997 the ruling made sense. Today, not so much.”

David Livingston
David Livingston
7 years ago

I disagree. I don’t know anything about the two company’s market share. What I do know is that I would not use either company for my office supplies. That’s what Walmart, Target and Amazon are for. From what I see, the two companies need to merge in order stay in business. Just driving around I see the skeletal remains of various Office Max, Office Depot, or Staples stores. A lot of them are getting recycled into new retail formats, but it’s obviously a dying retail segment. Regardless of if the two companies merge or not, it’s going to turn out badly for both of them. Merging just buys them more time.

Mark Heckman
Mark Heckman
7 years ago

With the merger of the two, a stronger company would have emerged to better to compete against the undeniable formidable competition that will continue to come from Amazon. Separately, both companies are in trouble.

I would love to see the resumes of the folks that make these bone-headed decisions. My bet is that they have little understanding of today’s business environment and what will ultimately be best for not just the consumer, but the health and vitality of the marketplace.

Not surprised that once again the Feds make the wrong decision. I see a pattern developing …

Peter J. Charness
Peter J. Charness
7 years ago

I think the marketplace should decide. My one concern though is that as industries consolidate (books, pet foods, sporting goods stores) the “new young innovative companies” don’t seem to be springing up to provide competitive new alternatives. Seems that small chains get bought out, big chains consolidate with enormous cost and pricing advantages and the choices for consumers remains narrow. (yes Amazon is an alternative, but there’s only one of them as well.)

Ross Ely
Ross Ely
7 years ago

Yes, the FTC used flawed reasoning to oppose this merger, which would have given Office Depot and Staples at least a chance to benefit from their larger scale as a combined entity. There is no doubt that the commercial market for office supplies will move to online just as the consumer market for office supplies has already done.

If Amazon hesitates to address this market, another online retailer like Alibaba or Jet will go after it. Businesses will see the benefits in convenience and cost savings and migrate away from traditional suppliers like Staples and Office Depot.

J. Peter Deeb
J. Peter Deeb
7 years ago

This decision will put one of these two companies out of business in the next five years. The speed at which online ordering of products is advancing will lead to a weakened retail store need and this merger may be attempted again in 2020.

Gene Detroyer
Gene Detroyer
7 years ago

More concentration in any business leads to less bargaining power by suppliers and buyers and, perhaps even more importantly, to less innovation.

In this case, the FTC did the shareholders of both companies a favor. Horizontal mergers are notoriously unsuccessful. Their failure rate (failure means the loss of shareholder value) exceeds 80 percent.

The better case is one of these companies trying to innovate, like Staples converting some of their retail space to office sharing space. Let the weak ones die. Let the innovators live. In this case, if there is no reason to exist for the these two retailers alone, there is no reason to exist for the combined companies.

David Schulz
David Schulz
7 years ago

There is contraction all over retailing. Apparently the FTC doesn’t consider e-commerce competition for brick-and-mortar stores. The myopia has only gotten worse in the current anti-business Obama administration.

Gary Doyle
Gary Doyle
7 years ago

Disagree, yet the defense chose not to put on a case. Both CEOs appeared in court and sat in the second row and did not testify. The decision was the result of arrogance (or they had something to hide) of the defense based on the assumption that the FTC’s case was so flawed that the judge would rule in their favor.

All of that said, the definition of “the market” was more narrow than the market that exists today. As such these two companies should have been granted clearance to merge. This is but another example of administrative incompetence.

Steve Sommers
Steve Sommers
7 years ago

I disagree with the FTC and partially disagree with the “common view” that “merging two struggling companies gets you one larger, still struggling business.” It depends on the reason. In this case you have online customers and in-store customers and in today’s market and probably moreso in the office supply industry, the two types of customers mostly stay in their own camps. It’s no wonder Amazon testified for the FTC. Destroy all the physical store competition and customers won’t have a choice but to buy online. Does anyone believe that Amazon testified out of the goodness of their heart to promote fair competition?

Jan Kniffen
Jan Kniffen
7 years ago

If Office Depot merging with Staples raises the cost of office supplies for large corporate purchasers, I will run naked down Wall Street at high noon. And anyway, since when has anti-trust law been used to protect large corporate purchasers? The law was designed to protect the consumer from big bad business, not to protect big bad business from little failing businesses.

Larry Negrich
Larry Negrich
7 years ago

The judge in this case did not understand the speed of change occurring in the retail business model for office products — and every other commoditized product. Even if Amazon’s B2B business is in its infancy, it will take only a matter of months for them to go heavily into the industry, while it would take years for Staples/Office Depot to respond to changing market conditions, including streamlining brick-and-mortar or attempting another acquisition process.

Stephen Baker
Stephen Baker
7 years ago

While this is a terrible decision for the two companies what is more interesting is the totally flawed reasoning behind it. And if Staples and Office Depot had been more honest about why they were merging maybe the government would have been more lenient. Their biggest problem is not Amazon, it is not online purchasing, it is not Walmart, Target or Costco. All those things have existed for the past 15 or 20 years and both these chains had done pretty well. Staples has been online forever and is an enormous retailer online with private sites for all their big companies. And they have an enormous distribution network optimized to do small delivery for multiple customers same- or next-day. So technology and channel are not an issue for them, despite the conventional wisdom that it is.

They actually have two problems. Their biggest problem is that the whole concept of office supplies is an anachronism. I mean seriously how often do you buy file folders or copy paper today compared to 10 or 20 years ago? Their business is drying up and they need to find new adjacent areas to expand into. Not sure how merging helps that but it clearly allows them to be a little better in retail, but of course the government was concerned about an extra nickel that McDonald’s might pay for pencil, ignoring the fact that their alternative is just not buying any, which is mostly what they are doing.

The second problem is the one everyone competing with Amazon faces, which is a tilted playing field. As I said, Staples technology and warehousing and delivery is competitive with Amazon, but they are required by Wall Street to deliver real profits with real profit margins and grow their sales, whereas Amazon gets a pass in that regard. So they can under-price and wreck margins, and gain share and grow sales by being cheaper without the ugly specter of Wall Street’s perfidy hanging over them.

Those twin problems will make it very hard for Staples or Office Depot to go it alone despite their actual strengths. Very sad and a symptom of how distorted the markets are in these days of a tech bubble.

Michael Buege
Michael Buege
7 years ago

As someone who has been very close to both of these companies, let me offer another perspective based on my understanding of how these companies view their own future.

The FTC and the court’s decision was never about their declining “Bricks and Mortar” business or their traditional online “.com” businesses that compete directly with Amazon. This was about each company’s “largest and most profitable” businesses — their rapidly growing B2B “direct” not “online” selling business model — both companies have invested heavily in new software, content management platforms and training to support over 7,000 full time sales people servicing well over 250,000 large and small accounts. This sophisticated technology driven “go to market” model is both Staples’s and Office Depot’s future. This is how most of the corporate office products “non commodity” volume is sold today. Combining both of these companies would really have severely limited choice and competition in the marketplace.

I am not a supporter of government controls and intervention in the private markets, however in today’s “cheap” and leveraged money environment, most mergers or acquisitions have resulted in restricting or limiting competition and simply buying top line revenue, not investing to create or grow it. In an effort to “create shareholder value” the ultimate, far-to-often downside is good people losing jobs and careers to make the “deal” work. This time, the FTC and the courts did the right thing.

Lee Peterson
Lee Peterson
7 years ago

Disagree with the court. Amazon (and others) is eating their lunch and a “circle the wagons” strategy would’ve helped, although the writing is on the wall for both of them regardless — many stores will close.

I just have to say, they both deserve it. In terms of things they could’ve done to innovate, like showroom stores, the “we-work” idea or even modern updating of the physical experience … they have been SO laggard, it’s as if they have been waiting to merge to do anything other than lose.

So now what? Time for the inevitable: Staples will crush OD/OM. I just hope it’s innovation that leads the way for them. If nothing else, it’d be quicker.

James Tenser
James Tenser
7 years ago

Like many other “category killer” formats, the office supply superstore business model has declined in relevance with the rise of online B2C model and the “contract direct” B2B model (like Staples Business Advantage). Store counts are plummeting because there isn’t enough traffic.

Consumers would retain a reasonable number of options for purchasing paper, folders and printer cartridges after an Office Depot — Staples merger: Costco, Amazon, Walmart, even CVS. Businesses might find their full-service options more limited. Can anybody name the #3 player in that sector? Quill? Uline?

So, alas, I may actually side with the FTC on its decision. Maybe top management at OD and Staples knew it was coming.

Robert DiPietro
Robert DiPietro
7 years ago

Totally disagree with the FTC decision and it is going to cost thousands of jobs as the companies now must cut costs. Amazon has been and will continue to be a significant player in this space. The last time this merger tried to happen Walmart sold more office supplies than all of the office supply superstores combined. The FTC just put ODP out of business.

Full disclosure: I worked for Staples for a number of years.