Shares in Staples, Inc. (NASDAQ:SPLS) and Office Depot Inc (NYSE:ODP) plunged after a federal judge blocked their proposed merger and one has to wonder how either of these chains — and ODP or SPLS stock — can survive.
In a head-scratcher of a decision, a federal court sided with the Federal Trade Commission’s contention that a tie up of the nation’s two largest office supply companies would result in higher prices for big enterprise customers.
No, this is not a joke.
U.S. District Judge Emmet Sullivan in Washington said the proposed $6.3 billion merger would “substantially impair competition in the sale and distribution of consumable office supplies to large business-to-business customers.”
Someone needs to tell this judge guy about a little e-commerce company called Amazon.com, Inc. (NASDAQ:AMZN).
ODP and SPLS aren’t trying to merge because they’re greedy, mad for power or evil. They’re trying to survive. Even if the merger went through, it’s not like the combined company’s prospects were particularly bright. Indeed, Wall Street has cliches for describing what ODP and SPLS were trying to pull off, such as, “Tying two bricks together to see if they’ll float” or “Two drunks trying to prop one another up.”
It’s not like the outlook for a combination of SPLS and ODP was sunshine and unicorns. No matter what else management tries to sell you, mergers and acquisitions are largely about cost cuts.
That’s why they spend so much time spinning tales of amazing and accretive to earnings all the synergies are going to be.
A Death Blow for SPLS or ODP?
This wasn’t some kind of imperial play on the part of ODP and SPLS. It was the only move either company had left. And the most laughable part of all this is the FTC actually thinks this somehow improves the competitive landscape in the office supplies industry.
In the FTC’s view, a successful merger of the dying chains would eliminate “head-to-head competition between Staples and Office Depot and likely lead to higher prices and lower quality service for large businesses.”
You know what is also going to lead to higher prices and lower quality service for customers? Staples or Office Depot or both going out of business. As Seema Shah, a retail analyst for Bloomberg Intelligence said:
“This leaves them in a pretty poor position competitively. The chains now face the prospect of managing declining businesses on their own amid increasing threats from online rivals such as Amazon.com Inc.”
Staples stock and Office Depot stock didn’t crash 20% to 40% on the news because the judge’s ruling was a temporary setback. They’re cratering because this could be the beginning of the end. This merger was an existential Hail Mary pass and the refs just blew the call.
There’s may be a case for owning or trading SPLS or ODP on the technicals or some kind of arbitrage play, but on the fundamentals? Eesh.
Research shows that most mergers and acquisitions fail to create shareholder value. In general, they’re easy to oppose on those grounds alone.
But when to comes to Office Depot and Staples, what the heck else were they supposed to do?
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.