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Federal judge blocks Staples merger with Office Depot

Federal judge blocks Staples merger with Office Depot

A federal judge on Tuesday blocked Staples $6.3 billion acquisition of Office Depot, siding with the
Federal judge blocks Staples merger with Office Depot
Staples store in Danbury, Connecticut August 2014.

A federal judge has granted a request by regulators to stop the $6.3 billion merger of office supply chains Staples and Office Depot, potentially saving hundreds of jobs at Office Depot's Boca Raton headquarters but leaving the company in a weakened position.

U.S. District Court Judge Emmet G. Sullivan said Tuesday that he was granting the preliminary injunction requested by the Federal Trade Commission. Staples has said it would walk away from the merger if the injunction was granted.

Less than 30 minutes after the ruling, Office Depot's chairman and CEO Roland Smith issued a statement saying the two companies would terminate the merger agreement effective May 16.

"As the Staples merger process comes to an end, we look forward to re-energizing our business. We remain committed to delivering our 2016 Critical Priorities and realizing the remaining synergies and efficiencies that come from the integration of Office Depot and OfficeMax. Once the Staples merger agreement is formally terminated, we plan to host an investor conference call on May 16 to discuss next steps in our go-forward strategy," the statement said.

The ruling marked the second time the FTC successfully blocked a merger between the rival companies. A similar challenge in 1997 ended with the deal being blocked in federal court.

"The Court finds that Plaintiffs have met their 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," says the ruling.

In addition to wanting to keep 2,000 people employed, paying taxes and living in the community, Palm Beach County and the city of Boca Raton also have a financial stake in retaining Office Depot's headquarters.

The county already has paid Office Depot $3.5 million in economic incentives, based on job creation. Office Depot also has a pending payment of $595,000, based on the retaining 1,750 jobs and 200 new jobs from its 2009 contract. The company has met that criteria, said Shannon LaRocque, assistant county administrator.

The FTC challenged the merger on Dec. 7, saying it would hurt competition and raise prices for large corporate customers that buy in bulk.

While the merger has received regulatory approval by New Zealand, Australia and China. The European Union approved the merger under the condition that Office Depot's European holdings would be divested.

Canada is still reviewing the merger. Canada's Competition Tribunal is scheduled to hear the Bureau of Competition's challenge in February 2017, according to a spokeswoman for the Bureau.

During three weeks of hearings in April, Judge Sullivan was critical of FTC's handling of the case. The FTC presented evidence to rebut Staples and Office Depot's claim that Amazon was scaling up its corporate supply business at a rapid pace. The agency continued to focus on its contention that a combined Staples and Office Depot would dominate the market for large office-supply customers, and while the judge was urging a compromise, the FTC said the companies' proposed remedy didn't go far enough.

Staples and Office Depot offered to sell $550 million in large company contracts to Illinois wholesaler Essendant, but the FTC rejected the deal as not being sufficient to create a third competitor that could rival the office-supply giants.

After presenting testimony from customers and competitors, Staples on April 4 said it wouldn't present a defense, with its lead lawyer Diane Sullivan saying the government failed to make a convincing case that the deal would harm competition.

Kantar retail analyst David Marcotte didn't support the merger but also doesn't think Office Depot can survive. Marcotte has said Office Depot is going to have to get "very creative" to turn itself around. He said Staples has been "intelligently shrinking" its store locations and reinventing itself as a broader supplier of goods.

Office Depot's sales declined 10 percent to $14.49 billion in 2015. Sales in 2014 were $16.1 billion following the acquisition of OfficeMax, then the third-largest office supplier, in 2013.

Office Depot ended its first quarter in March with 1,555 retail stores in the North American Retail Division. Both retailers have been aggressive in closing stores across the country to reduce expenses and become more profitable.

In a press release on April 26, Smith, Office Depot's CEO, blamed the long regulatory review of the deal on the company's failure to meet its sales and profit expectations for the first quarter.

Office Depot's board agreed to the acquisition by Staples in Feburary 2015. Shareholders voted in May to accept the deal, which called for a payout of $7.25 in cash per share and 0.2188 of a share in common stock upon the merger's closing.

Share prices for Office Depot and Staples stock were driven higher during the trial as investors turned optimistic about the merger prospects, particularly as the judge criticized the FTC's pursuit of testimony from Amazon.

But compared to a year ago, the Nasdaq-traded stocks are both down: Office Depot stock has declined over the year 1.76 percent or 11 cents a share to $6.15 a share, as of midmorning Tuesday; Staples was down over the year .24 percent or 3 cents to $10.29 a share.

The American Antitrust Institute and the American Postal Union were among the organizations that wrote to the FTC to oppose the merger.

South Florida economist Ken Thomas also penned letters to the FTC to oppose the combination, which he said would hurt consumers. He said the merger would even have been considered if it had not been for activist investor Starboard Value. The New York hedge fund took stakes in Office Depot and then Staples, to urge the mergers of OfficeMax in 2013 and then Office Depot in 2015. Starboard bowed out of Office Depot stock, except for some options, late last year.

"This case was totally driven by Wall Street's activist investors," Thomas said.

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