FTC Votes to Reject Staples’ Purchase of Office Depot

WASHINGTON —  The Federal Trade Commission voted to reject Staples Inc.’s $4-billion acquisition of Office Depot Inc., saying a compromise agreement to sell stores to OfficeMax Inc. doesn’t resolve antitrust concerns.

Friday’s vote, blocking the biggest office-supply merger in history, means the FTC will go to court within the next week to seek an order banning its completion. A majority of the commissioners said a Staples-Office Depot combination--even with the sale of 63 stores to OfficeMax--would violate antitrust laws and lead to higher prices for office supplies.

“If the merger is allowed to proceed, consumers will pay millions of dollars more for their copy paper, envelopes, pens and file folders,” said William Baer, director of the FTC’s Bureau of Competition. “Rejection of this settlement suggests there isn’t a settlement out there that would resolve these competitive concerns.”

Top executives at Staples, Office Depot and OfficeMax expressed shock over the FTC’s decision, after the efforts the companies have made to alleviate the agency’s concerns about competition.

“We went so far as to offer to sell 63 stores at significantly below fair market value to the lone competitor that the FTC designated as the only potential candidate,” said Tom Stemberg, chairman and chief executive of Westboro, Mass.-based Staples. “And despite our willingness to do that, the commission once again flip-flopped and voted against the solution.”

Stemberg said, “It is highly likely this matter will end up in litigation.” Court proceedings could extend beyond the May 31 deadline for the merger agreement between the two companies. After that date, either company could opt out of the transaction.

News of the vote sent shares of Delray Beach, Fla.-based Office Depot plunging 30% to close at $13, down $6, on the New York Stock Exchange, on trading of more than 26 million shares, making it the most actively traded stock in U.S. trading. Staples shares rose 62.5 cents to close at $21.875 on Nasdaq on trading of 20.2 million shares, making it the second most actively traded stock. Shares of OfficeMax fell $1.125 to close at $11. 875 on the NYSE.

Staples’ agreement to sell stores to OfficeMax mostly involved areas where a single office-supply superstore would be left after the proposed merger with Office Depot. It didn’t deal with cities where three superstores compete today and only two firms would remain, he said. The FTC found prices are higher in areas where only two office superstores compete.

The FTC cited several examples of markets where prices differed depending on the number of office-supply superstores. In Orlando, Fla., where all three companies operate stores, a box of file folders sells at Office Depot for $1.95. But 50 miles away, in Leesburg, Fla., where only Office Depot operates, the same folders cost $4.17.

Staples argued that it gets just 37% of its annual revenue from the sale of office supplies, with the rest coming mainly from computers and furniture. And it said it competes with a long list of other retailers that sell office products.

The merger would have created a $10-billion powerhouse with more than 1,000 office-supply superstores nationwide. The new company, which was to be known as Staples Office Depot, would have become far and away the leader in the $185-million office-supply market.

Consumer rights groups such as Ralph Nader’s Public Citizen and Center for Study of Responsive Law applauded the FTC’s decision. “We are extremely pleased the commission decided to protect consumers and preserve competition,” said Todd Paglia, staff lawyer at the Washington-based center.

The commission voted 4-1 to reject the proposed settlement, with Commissioner Roscoe Starek casting the one vote to accept it.

Staples’ Stemberg estimated that the two companies have spent about $10 million trying to win FTC approval for the combination.

Staples, Office Depot and OfficeMax are in a dead heat in terms of the number of office-supply superstores they operate. Staples has about 577 stores, OfficeMax operates about 580 and Office Depot runs about 572. In terms of annual revenue, Office Depot is ahead, followed by Staples, then OfficeMax.