(Bloomberg)—Staples Inc. will face a challenge by U.S. antitrust officials, who said for the second time in 20 years that the office supply chain’s proposed takeover of Office Depot Inc. will squelch competition and should be blocked.
The U.S. Federal Trade Commission filed a complaint Monday seeking to block the combination, which would leave just one national retailer of office supplies and raise prices for corporate customers who buy under contract, the agency said in a statement.
“The commission has reason to believe that the proposed merger between Staples, No. 4 in the Internet Retailer 2015 Top 500 Guide, and Office Depot (No. 8) is likely to eliminate beneficial competition that large companies rely on to reduce the costs of office supplies,” said FTC Chairwoman Edith Ramirez. “The FTC’s complaint alleges that Staples and Office Depot are often the top two bidders for large business customers.”
Staples and Office Depot, in a letter to customers released Monday afternoon, say they plan to “fight to complete this transaction.”
“The government’s challenge, if successful, will hurt customers of both companies and jeopardize our ability to compete in a rapidly evolving marketplace,” the letter states. “This merger creates an unparalleled opportunity to better serve customers of Staples and Office Depot. The combined company would generate significant savings from synergies, and we’re committed to investing these savings to enable lower prices for all customers. We will also use the savings to continue to invest in our people, technology and customer service.”
During its investigation, the FTC zeroed in on the market for corporate customers that buy office products in large quantities through contracts that ensure steady deliveries and discounted prices. Two years ago, when the agency approved Office Depot’s merger with Office Max, it found that retail consumers have numerous options due to competition from Amazon.com Inc. (No. 1 in the Top 500), and big-box retailers like Wal-Mart Stores Inc. (No. 3).
The $6.3 billion deal, announced in February, would combine the two biggest office-supply retailers in the U.S., reducing the industry to a single major chain. The tie-up is part of a merger wave sweeping across industries from beer to drug stores to pharmaceuticals that’s under scrutiny from antitrust officials at the FTC and the Justice Department.
The Office Depot takeover is still facing an in-depth review in the European Union after regulators there said in September that the deal may reduce choice and raise prices.
The merger would create a retail chain with about $39 billion in revenue and thousands of stores. The two companies agreed to the transaction following pressure from activist investor Starboard Value, which owns about 8% of Office Depot. Starboard had pressed the companies to combine to better weather competition from retailers including Target Corp. (No. 16)
Ron Sargent, chief executive officer of Framingham, Massachusetts-based Staples, said when the merger was announced it would allow the company to cut costs and reap at least $1 billion in synergies. In its third quarter earnings report released Nov. 18, Staples said it has shuttered 70 stores this year and approximately 230 stores in North America since the beginning of 2014.
The FTC’s decision is the second time it has weighed in on a combination of Staples and Office Depot. In 1997, the commission successfully sued to block their proposed merger, saying the tie-up would have hurt competition. But in 2013, the agency opened the door to a second attempt by Stapleswhen it approved the combination of Office Depot and OfficeMax. In that case, the FTC said the market for office supplies had changed significantly.
“Our decision highlights that yesterday’s market dynamics may be very different from the market dynamics of today,” the FTC wrote about the approval. “In this case, significant developments in the market for consumable office supplies have led us to approve a merger when we had blocked a similar merger sixteen years ago.”
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