(Bloomberg) Staples Inc. and Office Depot Inc. abandoned their merger after a federal judge sided with U.S. antitrust officials who challenged the combination of the two largest office suppliers, saying it would create an unrivaled giant.

U.S. District Judge Emmet Sullivan in Washington blocked the $6.3 billion deal late Tuesday, a victory for the Federal Trade Commission, which argued that uniting the national suppliers of pens and printer paper would harm buyers. The FTC met its “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,” Sullivan wrote in a three-page order.

Staples fell 10 percent in after-hours trading before being halted, while Office Depot plunged 26 percent. Before the ruling, which the judge had said would come after the market closed, shares of the retailers rose in after-hours trading on an unverified Twitter message that the companies had prevailed.

The abandoned merger also led to a scuttled deal by Essendant Inc., a major distributor of office supplies and other business and industrial products, to acquire from Staples wholesale contracts with minority and woman-owned office supply resellers and their large corporate customers representing sales of more than $550 million annually, Essendant said yesterday.

“While we are disappointed that we are not able to close on the transaction, we always understood this to be a potential outcome given the contingent nature of the agreement,” said Robert B. Aiken Jr., president and chief executive officer of Essendant. “We have demonstrated the ability to grow our enterprise account business and expect to continue this growth by fully enabling our independent resellers, many of whom are preferred options in the marketplace.”

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Killed Merger

Sullivan’s ruling—an injunction putting the deal on ice while the FTC challenges the tie-up in its administrative court—killed the planned merger. Office Depot Chief Executive Officer Roland Smith said in a statement after the decision that it would not appeal and that the companies would terminate the agreement effective May 16.

The ruling is a win for antitrust officials who are grappling with a record wave of mergers that are marrying some of the biggest companies across industries. Sullivan’s decision marks the second time the FTC has blocked a combination between the two companies. In 1997, the commission successfully sued to halt their proposed merger.

“Today’s court ruling is great news for business customers in the office supply market,” Debbie Feinstein, the head of the FTC’s bureau of competition, said in an e-mailed statement. “This deal would eliminate head-to-head competition between Staples and Office Depot and likely lead to higher prices and lower quality service for large businesses.”

Contentious Proceeding

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The decision caps Sullivan’s role in an often contentious proceeding during which the judge criticized the FTC’s handling of the case and frequently interrupted the questioning of witnesses for his own queries. That led some investors to become optimistic that he would allow the deal to proceed.

“Given some of the judge’s rulings during the trial, it was somewhat surprising,” Seth Bloom, an antitrust lawyer at Bloom Strategic Counsel. “This is another example of how one can’t make a judgement based on a judge’s comments from the bench.”

Staples chairman and CEO Ron Sargent said late yesterday that his company was disappointed in the court’s decision, but that his company would proceed with other plans to grow and improve its finances.

“We are extremely disappointed that the FTC’s request for preliminary injunction was granted despite the fact that it failed to define the relevant market correctly, and fell woefully short of proving its case,” Sargent said. “We believe that it is in the best interest of our shareholders, customers, and associates to forego appealing this decision, terminate the merger agreement, and move on with our strategic plan to drive shareholder value. We are positioning Staples for the future by reshaping our business, while increasing our focus on mid-market customers in North America and categories beyond office supplies.” Staples said it would hold a conference call May 18 to provide more details on its growth plans.

Office Depot also said it would proceed with other plans to improve its business. “As the Staples merger process comes to an end, we look forward to re-energizing our business,” Smith said yesterday. “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.”

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The FTC sued Staples and Office Depot late last year, contending a single national office-supply seller with no obvious rival would undermine the ability of large corporate clients to bargain for better prices by playing the two firms off one another in negotiations. Staples is No. 21 in the B2B E-Commerce 300; Office Depot is No. 42; Essendant, No. 111.

Sealed Opinion

He said blocking the merger was “in the public interest.” Sullivan also said he would issue a sealed opinion Wednesday explaining his rationale. That document will remain under seal until at least May 16, when it will be redacted to remove competitively sensitive information, the judge wrote.

Defense lawyers argued that the companies needed to combine to contend with looming competition from Amazon.com Inc. and its year-old Amazon Business unit. They claimed the merger would make the enlarged Staples more efficient and allow it to pass on lower prices to consumers. The companies attacked the government’s case as contrived to make the deal appear unfairly anticompetitive.

After the FTC presented its case to Sullivan, Staples told the judge the agency hadn’t met its burden for blocking the deal and declined to present its own evidence in support of the merger.

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Too much attention was paid during the trial to the judge’s courtroom comments, which were often critical of the FTC, according to Ira Gorsky, an analyst with Jersey City, New Jersey-based Elevation LLC, who followed the case.

“Since Staples didn’t put on a defense, Staples witnesses weren’t cross-examined in the same way as the government’s witnesses were,” Gorsky said.

The case is Federal Trade Commission v. Staples Inc., 15-cv-2115, U.S. District Court, District of Columbia (Washington).

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