Can Staples Fight the FTC Office Depot Deal Blockage?

Sometimes mergers get blocked by regulators. It happens. Once the Federal Trade Commission (FTC) moves to block a merger, the decision to unblock a deal is not very easy. Just don’t tell that to Staples Inc. (NASDAQ: SPLS) and Office Depot Inc. (NASDAQ: ODP).

It turns out that the news of an FTC suit to block the merger whereby Staples wants to acquire Office Depot is not going to go without a fight. These two office supply giants plan to fight. How hard that fight will be is not yet known.

What we do know as of Monday, December 7, is that Staples and Office Depot issued an open letter to customers after the FTC decision to challenge the merger of the two companies.

The first point made is that the government’s challenge will hurt customers of both companies and jeopardize their ability to compete in a rapidly evolving marketplace, if the blockage is successful.

The combined company (Office Depot rolling up into Staples) is projected by the companies to generate significant cost savings from synergies that would bring lower prices. Staples said that it has proposed divesting more than $500 million in commercial contracts to an established competitor, but the FTC rejected the solution. Additional commentary was as follows:

We strongly believe in a robust and competitive marketplace. Unfortunately, the FTC’s decision is based on a flawed analysis and misunderstanding of the intensely competitive landscape in which Staples and Office Depot operate. The FTC underestimates the disruptive effect of new competitors in the digital economy. It also ignores the vigorous existing and expanding competition Staples and Office Depot face from numerous strong competitors, including office products dealers supported by large national wholesalers, manufacturers selling office supplies directly to business customers, dealers in adjacent categories, cooperatives of regional players, Internet resellers, big-box chains, and club stores.

In the words of the unanimous FTC ruling in the Office Depot – OfficeMax merger in 2013, Staples and Office Depot face “strong competition” from “a host” of competitors. The FTC now contradicts its prior ruling, even though competition has materially intensified in the two years since the commission declared this market highly competitive. This contradiction is not only unfair; it flies in the face of marketplace realities.

While this may contain some tongue-in-cheek commentary, the companies also said:

The FTC also ignores the millions of products beyond office supplies that customers purchase, everything from cleaning supplies to breakroom snacks to furniture and technology. Instead, the FTC is focused on the prices that a few dozen of the largest, most powerful companies in the world pay for paperclips and rubber bands.

Staples shares hit a 52-week low on Monday and closed down 13.75% at $10.66, based on the deal being blocked. The new 52-week range is $10.55 to $19.40. Office Depot closed down 15.8% at $5.59, also hitting a new 52-week low, for a new range over the past year of $5.46 to $9.77.
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What investors might want to brace for now is more disconnect in the market on how to interpret these businesses. It is very possible that the lack of an approval, coupled with an attempt to get the deal approved, could distract both companies going forward.

The deal blockage was already at least somewhat expected, but the reaction to the blockage in the shares seems above and beyond what would be normal, considering how much the shares were both already off of their highs. Maybe the investment community is now trying to brace for even more business disruptions ahead — which may mean lower earnings and may mean less chances for cost cutting until the companies know if they can merge or if they will have to go back to fighting for the same dollar spent.