On November 1, 2013, the FTC commissioners unanimously voted to close a seven month investigation of the proposed Office Depot/OfficeMax merger. The Commission issued a statement regarding its decision to close the transaction without taking any action.
Background Regarding FTC’s Successful Challenge to Staples/Office Depot
In 1997, the Commission blocked the proposed combination of Staples, Inc. (“Staples”) and Office Depot after the parties proposed a settlement offer. According to the FTC at that time, Staples and Office Depot were two of the three largest office supply superstores in the country. The proposal, offered by Staples, would have required the divestiture of a total of 63 superstores to OfficeMax, the third office supply superstore.
The FTC’s decision to ask a court to block the merger was about lower prices for consumers. If the merger were allowed to proceed, consumers would have paid millions of dollars more for their copy paper, envelopes, pens and file folders. According to Office Depot’s own ads, file folders cost $1.95 in Orlando, Florida, where it competed with Staples and Office Max, and $4.17 in Leesburg, Florida, some 50 miles away, where it was the only office supply superstore. Similar differences were found for numerous products in cities across the country. If the deal were allowed, office supply prices would have gone up in approximately 40 markets.
The proposed settlement didn’t resolve the competitive problem that would have led to higher prices. The proposal to sell stores to Office Max didn’t address cities where three superstores competed but only two firms would remain after the merger. The FTC’s data showed that in markets where three superstores competed, prices were significantly lower than in two chain markets. The proposed settlement also eliminated the possibility of increased competition in cities where Staples and Office Depot had planned to expand. Finally, the proposal would permanently eliminate Office Depot, the superstore that offered the lowest prices.
The FTC argued that office supply superstores, unlike any other retail stores selling office supplies in the United States, offer consumers the convenience of one-stop shopping for a wide variety of office supplies at deep discount prices. Staples and Office Depot were, and continue to be, two of the three largest office supply superstores in the country. The FTC said that the $4 billion acquisition would allow the combined firm, which would have approximately 1,000 superstores, to control prices for the sale of office supplies in more than 40 markets throughout the United States.
The Commission vote to reject the proposed settlement was 4-1, with Commissioner Roscoe B. Starek, III, dissenting. Commissioner Starek stated that he had reason to believe that the rejected settlement would adequately remedy the likely competitive problem arising from the proposed merger. Commissioner Mary L. Azcuenaga voted yes on the motion to reject the settlement on the ground that she did not find reason to believe that the proposed transaction violates the law.
On March 10, 1997, the FTC authorized its staff to seek a federal district court order to prevent Staples from acquiring Office Depot. The FTC argued in court that the Staples/Office Depot merger would violate federal antitrust laws by substantially reducing competition in the retail sale of office supply superstores in various markets throughout the country where each firm directly competes against each other. The federal court decision paved the way for the Commission staff to issue an administrative complaint to permanently enjoin the merger.
16 Years Later
While the FTC successfully challenged the proposed merger of office supply superstores Staples and Office Depot in 1997, the Commission observed in its statement that its investigation “has shown that the market for the sale of consumable office supplies has changed significantly in the intervening years.” As a result, office supply superstores “today face significant competition and . . . the proposed merger is unlikely to substantially lessen competition in the retail sale of consumable office supplies.”
The Commission’s statement described differences in the competition faced by office supply superstores in 1997 and today. Customers now look beyond office supply superstores when buying office supplies. Non-office supply superstores such as Wal-Mart and Target, along with club stores like Costco and Sam’s Club, have expanded their office supply product offerings and now compete with office supply superstores. Additionally, Internet retailers of office supplies, most prominently Amazon, have grown quickly and significantly, and compete with office supply superstores.
The FTC statement also discussed the potential impact of the proposed merger on the sale of consumable office supplies to large businesses and other large customers on a contract basis, a market not at issue in 1997. In particular, the FTC staff’s investigation focused on contracts for large multi-regional or national customers, which typically have the most demanding purchasing requirements and, as a result, fewer potential suppliers capable of meeting their needs. Based on the evidence collected, the Commission concluded that the merger was unlikely to substantially lessen competition in the contract channel, and, “there was little concern from contract customers about the proposed merger.” The vote to close the FTC’s investigation and issue a Commission statement was 4-0.
The FTC’s analysis is noteworthy for several reasons. While the FTC used the same analysis as it undertook in the previous merger that was challenged, the FTC determined that factual circumstances changed. This means that past precedent is still important, but the FTC is willing to listen to arguments presented by the parties that indicate that the industry has changed. Therefore, parties to a merger even in an industry where a transaction has been challenged may still be successful as long as they are prepared to show that the factual circumstances have indeed changed. Those changes relate to the addition and expansion of new competitors, such as enhanced product offerings from Wal-Mart, Costco and Amazon. Here, the FTC found that office supply superstores are not the destination that they once were and the customers now have a number of other options for office supplies. The most important lesson is that merger investigations are very fact-intensive so current and expected future competitive conditions outweigh historical facts.