Analysis: Federal Court Blocks Staples’ Acquisition of Office Depot
Retail mergers have long been subject to scrutiny by the antitrust authorities at the Federal Trade Commission (FTC). But perhaps no two retail chains have found themselves more often in the FTC’s cross-hairs than the two largest office supply providers in the United States, Staples and Office Depot.
Duplicating the fate of their proposed 1997 transaction, following a lawsuit filed by the FTC, last week Judge Emmet Sullivan of the United States District Court for the District of Columbia, issued an order prohibiting them from moving ahead with the latest iteration of their merger. Judge Sullivan found that the FTC had met its statutory burden of showing that there was a reasonable probability that the proposed merger would substantially lessen competition in the sale and distribution of consumable office supplies to large Business-to-Business (B2B) customers.
Upon learning that the Court had agreed with the FTC and would issue an injunction preventing them from closing the transaction pending further legal proceedings, Staples and Office Depot abandoned the transaction. Below is a brief summary of the Court’s opinion.
Background & Opinion
Staples and Office Depot announced their intent to merge in February 2015. Consequently, the FTC began a nearly year-long investigation into the $6.3b merger. In December 2015, the FTC filed suit seeking a preliminary injunction pursuant to Section 13(b) of the FTC Act to pause the deal. The Court presided over a roughly three-week evidentiary hearing and heard extensive testimony, as well as reviewed countless documents.
In order to convince the Court to issue the injunction and allow the FTC to continue to a deeper trial in its own administrative tribunal, the FTC essentially was required to show that the parties’ combined market shares in the B2B product market would be so high as to enable them to raise prices because they did not face enough competition from other entities, and that there would be no other entities that do today or could enter to provide the same kind of products to these kinds of customers at competitive prices. In virtually every way, the Court agreed with the positions the FTC put forward. Specifically:
1. The Court found that FTC had established a Relevant Product Market of Consumable Office Supplies Sold and Distributed by the Defendants to Large B2B Customers
In so concluding, the Court relied on evidence presented by the FTC that:
There is industry or public recognition of this market as a separate and distinct;
B2B customers demand distinct prices and are price sensitive; and
B2B customers require specialized vendors that offer value-added services.
As a result, the Court agreed that the relevant market could be established by focusing on sales of a cluster of goods (i.e., consumable office supplies, consisting of various supplies like pens, notepads and paperclips, that are used and replenished frequently) to a targeted set of customers (i.e., large B2B customers who spend $500,000 or more on office suppliers annually).
2. The Court found that FTC had established its case by demonstrating that the merger would result in an Increase in Market Concentration above Competitive Levels
The Court held that the FTC had met its burden of showing that the merger would result in undue concentration in the relevant sale and distribution of consumable office supplies to large B2B customers in the United States. SPLS captured ~47% and ODP allegedly had ~32% market share of Fortune 100 customers, for a potential combined postmerger total of 79% market share. Even the commonly calculated Herfindahl-Hirschmann Index triggered a presumption that the merger was illegal.
3. The Court found that FTC had established that the merger would eliminate important Head-to-Head Competition between Close Competitors Resulting in Lessening of Competition
The Court reviewed additional evidence that suggested that the companies were critical head-to-head competitors for large B2B accounts, including:
Staples/Office Depot win-loss and bid data and found that it demonstrated that the defendants won large B2B customer bids more frequently than other bidders;
Staples/Office Depot documents that showed they viewed themselves as each other’s closest competitors; and
Witness testimony from large B2B customers who believed Staples/Office Depot were their best options and that postmerger, they would lose leverage and pay higher prices.
4. The Court did not find persuasive arguments that the merger was not anticompetitive because of Potential Entry or Expansion from Amazon Business or Others
The Court flatly rejected the arguments that Amazon Business and other local and regional office supply companies would restore the competition lost from the merger. While Amazon Business may someday be an equal threat, the Court found that it faced many challenges that prevented it from being on equal footing to the offerings of Staples and Office Depot, including: lack of RFP experience, no commitment to guaranteed pricing, inability to control third-party agent pricing and delivery, inability to provide customer-specific pricing, lack of dedicated customer service agents, among other items.
As a result, large B2B customers did not view Amazon as a viable alternative to Staples/Office Depot. Similarly, the Court rejected the notion that regional competitors such as WB Mason had the desire or wherewithal to expand to take on the potentially combined Staples and Office Depot on a large, national scale.
The FTC’s win is significant and shows that retail mergers will remain under close scrutiny. It also illuminates the ways in which product market definition can be crafted by the FTC in retail industries to make potential transactions more challenging.
In light of this, retailers considering transactions should be sure to assess the antitrust risks upfront so as to minimize the risk that their transaction will meet the same fate as SPLS and ODP.
Andrea Agathoklis Murino is a partner and co-chair of Goodwin Procter LLP’s Antitrust & Competition group in Washington, D.C. She advises clients, including retail entities, on all aspects of antitrust law, especially as it relates to mergers and acquisitions.
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