Competition, Consolidation and the FTC: The Staples and Office Depot Deal

The Staples and Office Depot Merger is in the news.  Today's WSJ reports that the FTC is seeking sworn legal statements about the impact of the merger from those potentially impacted.  Here are a few quick thoughts:

• Catalysts for merger include changes in technology.  In this case, the internet has had at least two impacts on the office supply market.  First, we are using less paper than before, shifting to a less-paper if not paperless economy.  Second, the internet has given rise to rivals like Amazon and Walmart.
• These changes suggest the need for consolidation.  Both firms have closed hundreds of stores and two years ago Office Depot acquired Office Max.
• Competition brought about the need to consolidate.  Ironically, the FTC worries that too little competition will remain if the deal goes through.  This, of course, depends on how one views the market and which products, competitors and regions are included in the analysis.
• The Speculation Spread on this deal is huge.  The journal quotes the deal value for Office Depot at $10.35 with the current price of $7.64.  That's a 35% spread!  If the deal closes in three months that suggests a 142% gain on an annualized basis.  Of course, the spread is a direct indication that the market is highly skeptical the deal will be completed.

One thing is certain.  Something will change in this market.  Too few dollars chasing too many goods - combined with the fixed costs of the physical presence of the stores, insures this will happen.  We'll know more in October when the deadline for FTC action occurs.

All the best,

Ralph

The Google Waze Acquisition

The proposed Google, Waze acquisition illustrates many of the themes we've developed in previous posts.  First would be motives for acquisition.  In this case, we have acquiring technology, increasing market share and staying relevant - all consistent with increasing shareholder value (see Catalysts for Merger and  Motives for Merger).  But then we also have Merging defensively - (to prevent a competitor from doing the deal and getting an advantage) and the motive of 'eliminating the competition - by acquiring them'.   Now this may also increase shareholder value, but is, of course, frowned upon by the FTC, which is precisely why the FTC is now investigating the issue.  What criteria will the FTC use in deciding whether the deal is in restraint of trade?  See our post concerning the Herfindahl index.  

As the Wall Street Journal reports, 

"The FTC is expected to focus on whether Waze would have become a head-to-head competitor with Google, whose Google Maps software is the dominant digital mapping and navigation service around the world, or whether there is any evidence, such as emails, that show that Google wanted to acquire the company only to keep it out of the hands of rivals."

The complete WSJ article can be downloaded here.  

All the best,

Ralph