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Did Staples Get Screwed?

May 13, 2016, 5:51 PM UTC

It’s been three days since a federal judge effectively killed the proposed merger between office supplies retailers Staples (SPLS) and Office Depot (ODP), siding with regulators who felt the deal violated antitrust laws. And I still can’t shake the feeling that Staples got screwed.

Before continuing, let me admit to some biases. First, Staples global headquarters is just a five-minute drive from my home, which means that I’m personal friends with some company employees, and its overall success (or failure) will have some impact on my property value. Second, I’ve been harshly critical of how Staples has handled itself since announcing the merger, whether it be needlessly antagonizing President Obama, being cagey about divestitures or refusing to acknowledge a massive round of layoffs, as you can read here:

It’s basically been like watching someone you care about make a series of inexplicably bad decisions.

But through it all, I still felt that Staples should be allowed to purchase Office Depot. The two companies previously tried to merge in 1996, but were blocked by the Federal Trade Commission due to concerns about what the merger would mean for consumers. While Staples executives at the time felt the decision was unjust, the reality was that there weren’t many alternatives at the time for people who wanted office supplies. Only 20 million Americans had Internet access at the time (via dial-up), and even the nascent e-commerce players had difficulties convincing anyone to part with their credit card information. In terms of physical big box retailers, Wal-Mart (WMT) had 36% fewer stores than it has today; Target (TGT) had 56% fewer locations.

Today, however, it’s a very different retail marketplace for office supplies. Both online—think Amazon (AMZN)—and off, including the growth of certain regional suppliers.

So the FTC this time didn’t focus on Joe Consumer. Instead, it argued that the Staples-Office Depot merger would unfairly harm big businesses by eliminating competition for large office “consumables” accounts. Or, more specifically, large standing orders for things like pens and paper (albeit not for office furniture, computers or other electronic devices) ― with the FTC arguing that the vast majority of Fortune 100 companies relied on either Staples or Office Depot for such items.

So late last year Staples and Office Depot told the FTC that they’d sell off $1.25 billion of commercial contracts. Regulators not only didn’t accept the proposal, but they didn’t even put forth a counteroffer. And when Staples later pushed forward anyway by agreeing to sell a smaller chunk of corporate contracts to a Illinois vendor Essendant for $550 million (25% of which was from Fortune 100 companies), the FTC said the move “would not fix anything.” In short, no olive branch was long enough.

All of which led us to the recent court hearings, where Staples felt its case was so strong ― and the judge’s questioning so critical of the FTC ―that it didn’t even mount a defense.

Yet the judge ruled in favor of the FTC, prompting Staples to terminate its agreement and pay Office Depot a $250 million breakup fee (which represents around 30% of the cash on Staples’s balance sheet).

The trouble, however, is that we still don’t know the judge’s reasoning, as his formal opinion won’t be released until next week.

Was there something vital to the FTC’s case that outsiders like me overlooked? Did the judge properly understand the value of B2B consumables to the Staples-Office Depot business (particularly post-divestitures), or the relative lack thereof? Did the legal strategy backfire, by making it look like Staples was trying to shield its CEO from being asked tough questions under oath?

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As of right now, I think the court erred. But none of us will really know for sure until we see its explanation.