Office Retailers Say a Merger Will Keep Them Competitive

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An Office Depot store in New Jersey. Staples and Office Depot say they have many rivals now. Robert Caplin for The New York Times
Updated, 6:48 p.m. | In planning a $6.3 billion merger, Staples and Office Depot are betting that 18 years was long enough for government regulators to change their minds about how consumers buy office supplies.
The deal, announced on Wednesday, is expected to be closely evaluated by antitrust authorities, given that it will shrink the world of office supply retail specialists to a single chain. A previous attempt to unite the two in 1997 was shot down by the Federal Trade Commission.
But the two retailers will argue that since then, the business of selling office supplies has become significantly more competitive. Customers can choose from a variety of sources, including giants like Walmart, Target and Amazon. It is this rise of alternatives that helped propel the latest merger talks in the first place.
Even the federal government has signaled that it is more open to merging traditional office goods retailers, despite the specter of reduced competition. When Office Depot bought its rival OfficeMax in 2013, the Federal Trade Commission blessed the transaction, ruling that the deal was “unlikely to substantially lessen competition.”
“Our decision highlights that yesterday’s market dynamics may be very different from the market dynamics of today,” the commission wrote in a letter signing off on that merger.
Merging Staples and Office Depot is a much bigger proposition. The combined Office Depot and OfficeMax created a new company with $18 billion in sales and over 2,500 stores. If it goes through, the Staples-Office Depot deal will create a retailer nearly twice as large, with $34 billion in revenue and 4,400 stores.
But Staples and Office Depot argue that the proposed merger is necessary to compete in a new world where bigger store chains and online competitors have reduced prices and provided enormous new numbers of competition. Annual revenue at Office Depot, for example, has fallen 36 percent from 2007 to 2013.
“I think Amazon just launched a business-to-business office products initiative, so I’m sure they’re in there knocking on the door,” Ronald L. Sargent, Staples’ chief executive, told analysts in a conference call on Wednesday.
Those dynamics have rippled through the entire retail sector: RadioShack is preparing to file for bankruptcy after years of losing customers to bigger, lower-cost rivals.
A merger is meant to ward off that fate for the two office suppliers. Staples said it expected to reap at least $1 billion in savings from the deal through layoffs and combining purchasing and marketing costs.
“Financially, this transaction makes sense and is necessary for the long-term health of these two companies,” David Strasser, an analyst at Janney Capital Markets, wrote in a research note.
To help secure the deal, Staples and Office Depot said that they were willing to sell off up to $1.25 billion worth of Office Depot’s sales. If the government requires more than that, or requires divestitures that have a materially harmful effect on Office Depot’s international operations, Staples can walk away.
But Mike Keeley, a partner at the law firm Axinn, Veltrop & Harkrider and a specialist in antitrust law, says that if the F.T.C. thinks that the office-supply sector consists of more than the two companies, the agency will demand relatively few asset sales. Big-box chains and online retailers, he argued, are available everywhere.
He noted that antitrust regulators had changed their views on competition in other industries as well, like when the government allowed Macy’s and Federated Stores to merge after years of looking warily at huge department store mergers.
“Think about the way competition works,” Mr. Keeley said. “There are different sources of competition all across the country. The Internet is available across the country.”
For his part, Mr. Sargent declined to speculate on how this merger would fare with regulators.
“It’s not our place nor could we publicly handicap what the F.T.C. might say,” he said in a conference call with analysts. But he added that he agreed with the agency’s remarks at the close of the OfficeMax deal.
Under the terms of the transaction, Staples will pay $7.25 in cash and 0.2188 of a share in Staples stock for each share of Office Depot. Based on the closing prices on Tuesday, the deal was valued at about $11.41 per Office Depot share, a 44 percent premium to where the stock was trading before news of the impending deal leaked on Monday night.
And Staples will increase the size of its board to 13 from 11 by adding two existing Office Depot directors.
Despite public pressure from an activist investor, Starboard Value, beginning late last year the two companies said that work on the merger had begun months ago, with the discussions beginning in September.
Nevertheless, the hedge fund, which owns a 6 percent stake in Staples and a nearly 10 percent stake in Office Depot, can claim another victory of sorts with Wednesday’s transaction. The four-year-old firm has ridden a string of notable successes in recent years, including its ouster of the board of Darden Restaurants, the parent of the Olive Garden chain.
Shares in Staples have risen 14 percent since Starboard disclosed its stake in the company, suggesting that the hedge fund has reaped a healthy return on its investment.
Representatives for Starboard did not return requests for comment.
But other investors appeared more concerned about the prospects of antitrust opposition. Shares in Staples tumbled nearly 12 percent on Wednesday, to $16.73. And Office Depot’s stock closed below the offer price, at $9.48.
Even Tom Stemberg, a co-founder and former chairman of Staples, said he believed that closing the deal — something the companies expect by year end — would not be easy.
“It’ll potentially be a long and nasty legal skirmish,” he said in a CNBC interview.