No merger for Staples, Office Depot FTC rejects plan by nation's largest office superstores

Second denial in a month

Lack of competition equals higher prices, commission says

April 05, 1997|By Liz Bowie | Liz Bowie,SUN STAFF

The Federal Trade Commission said yesterday that it opposes the merger of Staples and Office Depot, despite an agreement by the two companies to divest 63 stores.

It was the second time in a month that the FTC has rejected a merger of the nation's largest office superstores. The vote means that the commission is set to go into U.S. District Court next week to block the merger.

The companies reacted angrily to the commission's vote, calling it "a shock," and said they would evaluate the commission decision with their boards of directors before deciding on whether to continue to fight the decision.

After the FTC's first vote against the merger March 10, Staples and Office Depot negotiated a plan to divest 63 stores, including some in Baltimore, to the third big office supplies chain, OfficeMax Inc.

"For the FTC now to prevent the transaction from closing is astonishing to us. We do not understand their rationale," Thomas G. Stemberg, chairman and chief executive officer of Staples, said in a statement.

But the commission was just as clear. In a bluntly worded statement, the commission said simply that to allow the merger to go through would mean consumers would pay more for office products.

The FTC noted that file folders cost $1.95 at an Office Depot in Orlando, Fla., where there is competition from Staples and Office Max, but that 50 miles away in Leesburg, without another superstore, the same file folders are priced at $4.17.

"If this deal goes through, in more than 40 markets, office supply prices will be a lot closer to those in Leesburg than to those in Orlando. That is what is wrong with this deal," said William J. Baer, director of the FTC's Bureau of Competition.

But the companies argued just the reverse, saying that a merger would allow efficiencies in the business which would translate into lower prices at the cash register for customers.

In addition, the companies said that consumers can buy office supplies in many different stores, from drugstores to department stores, so the marketplace is full of competition.

The FTC chose to see office superstores as a market niche, however.

The biggest question remaining was whether the two companies would pursue a court fight. If they did, analysts said, the merger might be put on hold for at least another 2 months before a decision is made, and the battle could drag out for as long as a year.

"It could be an exercise in futility for the next six to eight weeks," said Donald Spindel, an analyst with A. G. Edwards. But, on the other hand, he said, the companies could win.

Personnel leaving

A prolonged merger is particularly difficult for Office Depot. "Their sales and earnings had not been hitting on all eight cylinders," Spindel said.

The company had stopped opening new stores and had seen some people leave in anticipation of the merger. If the company does not go through with the merger, it must rebuild management and momentum, he said.

Office Depot stock plummeted $6 to close at $13 yesterday. Staples stock, on the other hand, gained 62.5 cents and closed at $21.875.

A spokeswoman for Staples, Sue Simon, said the companies would try to evaluate the decision and then the boards of both companies would meet to consider what to do.

But Stemberg said it was "highly likely" his company and Office Depot will decide to carry the fight into court.

"We feel very confident there is strong merit in our position," he said at company headquarters near Boston. "I think it's a reasonable conclusion this is going to end up in court."

Pub Date: 4/05/97

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