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

Staples, Office Depot and the New Competitive Landscape

Nearly 20 years ago, Staples tried to acquire Office Depot to find the deal rejected by regulators.  Fast forward to today and we see the two largest office supply stores again seeking to combine.  What has changed and will the deal still be anti-competitive in the eyes of regulators?   How does the market see the prospects of the deal? What are the lessons to be learned?

To answer the last question first, there are many elements that make this an interesting story.  First is the role of activists (hedge fund Starboard Value).  Second, we have noted that a wave of consolidation in an industry is often sparked by some catalyst.  Note the Office Depot and Office Max combination of two years ago reduced the number of main stream office suppliers to two.  This merger would reduce that number to one.  Ironically, although the catalysts here are multifaceted, they led by a string of new competitors with competition for Staples and Office Depot ranging from the big box stores (Walmart and Target) to online behemoth Amazon. 

So will the deal be seen as anti-competitive?  That depends on how regulators view the market for Staples and Office Depot.  To be sure, there is considerable overlap in the geographic location of stores and the closing of duplicate stores is undoubtedly a central factor in any synergies from the deal.  But the question of market is much more complex.  For example a sizable component of the sales of the two firms comes from large quantity orders from businesses.  In addition, we have the big box and online competitors to consider.

Regulators measure anti-competitive behavior by a number of factors, including the 4-firm concentration ratio and the Hirfindahl index.  As we have noted before, the key to determining concentration is defining the market and in today's landscape, that market is widespread but the jury is out on how the regulators will view the world.

As for the market, it seems to be expressing skepticism over completion of the deal.  Office Depot closed yesterday at $9.49 a significant gap below the deal value of $10.91.  That is a quite sizable speculation spread.

(See also Comcast, Time Warner and the Myth of the Cable Industry, Concentration Ratios, the Case of Anheuser Busch and Modelo, and Speculation Spreads and the Market Pricing of Proposed Acquisitions)

All the best,

Ralph