The worst case scenario for Office Depot (ODP) and Staples (SPLS) investors has materialized. The FTC is going to sue to prevent the two companies’ plans to become one.
Owners of SPLS and ODP stock are paying the price too, with the former down 12% and the latter down 15% following the announcement from the commission.
The market pretty much saw it coming, given the relatively recent performance of each company’s shares. There’s just something about seeing a possibility become reality though — in print — to pull the rug out from underneath a stock.
ODP stock in particular is feeling those effects.
And yet, today’s drubbing may be a speculator’s buying opportunity. While the FTC commissioners ruling on the matter were unanimous in their decision, that’s a change of heart from the two-to-two split on the issue just a few days ago. That uncertainty could become clear again in a courtroom, with the FTC’s prior words on a similar matter being used against it this time around.
Not So Fast
The road to a merger between Office Depot and Staples has been a longer, tougher one than most anyone was counting on back in February, when the plan was first proposed. In fact, even before today’s punishment, ODP stock had shed 30% of its value after the merger news broke.
The companies and their investors knew there would be at least some pushback, and conceded to sell some units. Even as recently as last week the duo was offering to sell twice as much of its business a had originally been offered; the ante was upped to $1.25 billion worth of annual revenue.
Clearly it wasn’t enough.
Regardless of the arguments against uniting the nation’s No. 1 and No. 2 office supply retailers, the logic behind the “nay” case now directly conflict with the logic that explicitly allowed the pairing of Office Max and Office Depot back in 2013.
Though the FTC wasn’t keen on narrowing down the office supply retail landscape from three players to only two back in 1997 before e-commerce was even a term, the advent of the internet has altered the industry (indeed, all industries) enough that the idea of consumer choice is no longer a matter of the number and location of office supply stores.
Translation: Walmart (WMT) and Amazon.com (AMZN) sell copy paper, printers, computers, pens, and all sorts of office supplies, as well. And they’ve made life very hard for SPLS and ODP stock.
Indeed, as small business owner and Real Money contributor Jonathan Heller added to his point that the FTC’s plans to bar the pending union of Office Depot and Staples was preposterous, that landscape had changed so much that this merger may be more about sheer survival than building a monopoly.
Not the Strongest Case the FTC Has Ever Had
The FTC clearly doesn’t see things quite the same way as Heller and others do. The commission’s official announcement stated:
“The commission has reason to believe that the proposed merger between Staples and Office Depot is likely to eliminate beneficial competition that large companies rely on to reduce the costs of office supplies. The FTC’s complaint alleges that Staples and Office Depot are often the top two bidders for large business customers.”
Staples and Office Depot vowed to fight the good fight, or course, responding:
“Staples and Office Depot will demonstrate that the FTC’s decision is based on a flawed analysis and misunderstanding of the intense competitive landscape in which Staples and Office Depot compete. In fact, the FTC’s decision to contest the merger contradicts its own unanimous ruling in the Office Depot – OfficeMax merger in 2013, in which the commission declared the market highly competitive. At the time, the FTC ruled that Staples and Office Depot face ‘strong competition’ from ‘a host’ of competitors. The office products landscape has grown even more competitive since then.”
In the Federal Trade Commission’s defense, in 2013 Staples was still serving up competition to the combination of Office Max and Office Depot, and now there would be no other brick-and-mortar office supply competitor to keep a Staples/Office Max company honest.
As the FTC fully acknowledged just two years ago, however, there is strong competition in this space from a host of competitors; one fewer isn’t going to change that reality.
Some would rationally argue, in fact, that in their present form both Staples and Office Depot are jeopardizing the survival of both outfits, which would eventually lead to a duopoly by the aforementioned Walmart and Amazon.
Bottom Line for SPLS and ODP Stock
It’s a slippery philosophical slope to be sure, and one that will certainly be a tough one for any judge and jury to navigate. And logic may not factor into the equation, as recent court decisions regarding corporate decision have been moving away from the letter of the law and moving toward verdicts founded more on feeling.
One thing is for sure though … the upcoming legal battle is going to be watched closely by more than just current owners of SPLS and ODP stock. This may well be one of the decisions that has the court system pushing back against the FTC, forcing them to look at the bigger picture than just the number of players neatly categorized in a well-defined box.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
