By Brent Kendall
WASHINGTON--A merger between rivals Staples Inc. and Office
Depot Inc. could test how far U.S. antitrust enforcers views of
competition in the office-supply market have evolved.
The Wall Street Journal reported late on Monday that the
companies were in advanced merger talks. A deal to combine the top
two office-superstore chains would serve as a sequel to the
companies' ill-fated merger effort from nearly 20 years ago, which
was derailed by a Federal Trade Commission lawsuit. A federal judge
in 1997 sided with the FTC in a notable ruling that prevented the
competitors from joining forces.
The new merger talks come at a time when competitive dynamics in
the industry have shifted dramatically, a fact the FTC acknowledged
in 2013 when it allowed Office Depot to merge with OfficeMax, then
the number-three office superstore chain.
The FTC, after a seven-month investigation, issued a detailed
statement on why it allowed that deal to proceed, and many of the
commission's comments are sure to be cited by Staples and Office
Depot if they agree to merge.
The FTC said it found overwhelming evidence to support the
conclusion that office-supply superstores faced significant
competition from big-box retailers like Wal-Mart and Target, as
well as from online retailers, especially from Amazon.com.
"Everything the commission talked about in 2013 could carry over
into this deal," said antitrust lawyer Robert Davis of Venable LLP,
a former FTC staffer.
Mr. Davis said the FTC would want to make sure that its recent
competitive analysis was correct, while also examining any changes
in industry practices since Office Depot and OfficeMax combined.
The FTC's staff likely will want to take a close look at the
companies' business documents and may want to conduct another
detailed economic analysis, he said.
When looking at everyday consumers, the FTC in 2013 found that
fewer shoppers sought out office-supply chains as a retail
destination, preferring instead the convenience of buying pens,
notebooks and other office supplies at stores that offered many
other kinds of products as well. The commission also said the
office superstores were losing substantial in-store sales to online
competitors.
The FTC's 1997 case against a Staples-Office Depot merger relied
heavily on evidence that the two retailers set their prices
according to the number of other office superstores competing in a
local area. Fewer superstores battling head-to-head in a local
market meant higher prices.
But the FTC's 2013 statement said pricing practices no longer
followed the same pattern. The commission said its investigation of
Office Depot and OfficeMax showed office superstores now price many
of their products on a national basis, and they respond to
competition from other retailers that don't specialize in office
supplies.
Steven Cernak, an antitrust lawyer with Schiff Hardin LLP, said
one area of FTC focus could be on whether a Staples-Office Depot
merger would impact large business customers that buy office
supplies on a contract basis.
The FTC in 2013 said the Office Depot-OfficeMax merger wouldn't
harm those customers because big national businesses used a variety
of tools to ensure they receive competitive prices. The FTC's
statement, however, also cited competition from Staples as one of
several reasons why the 2013 merger wasn't a problem.
"I wonder if those buyers will now complain," Mr. Cernak
said.
Allen Grunes, an antitrust lawyer with the Konkurrenz Group,
said several factors fell into place perfectly for the FTC when it
prevailed in the 1997 Staples-Office Depot case, from what the
internal documents revealed to which judge was assigned to rule on
the lawsuit. "It was like the miracle case," Mr. Grunes said. "The
odds of that happening again are low."
Write to Brent Kendall at brent.kendall@wsj.com
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