Staples’ parent company recently announced plans for an attempt to buy all outstanding stock of Office Depot’s parent company (ODP) for $2.1 billion, stating that it will pursue an all-cash tender offer in March if the parties cannot reach an agreement by then.
Staples attempted a similar purchase in 2016, which it called off after the D.C. District Court granted the FTC’s request for a preliminary injunction precluding the purchase. We previously reported on that hearing. ODP has indicated it shares Staples’s desire to once again attempt to unify, but it nonetheless rejected Staples’s offer, potentially signaling a skittishness to antitrust scrutiny. The recency of Staples’ defeat in court has led some to feel a sense of déjà vu. What lessons are there to learn from Staples’ prior efforts?
In 2016, the FTC challenged the purchase by arguing that the two companies were the largest office supplies vendors to large “business-to-business” (“B-to-B”) customers, which it defined as those who spent $500,000 or more per year on consumable office supplies, and that the elimination of Staples and Office Depot’s direct competition would result in anticompetitive harm to their large B-to-B customers. In responding to the FTC’s antitrust allegations, Staples and Office Depot focused largely on two issues: (1) the FTC’s market definition, and (2) the prospect that Amazon Business, founded just the year before, would offer sufficient competition to offset any anticompetitive effects of the merger.
As to the first issue, the court rejected Staples and Office Depot’s argument that the FTC’s market definition was overly narrow by including only large B-to-B customers, and by excluding ink, toner, and other items “beyond office supplies” (“BOSS”) from its definition of consumable office supplies. See generally FTC v. Staples, Inc., 190 F. Supp. 3d 100 (D.D.C. 2016). Applying the “practical indicia” test for defining a relevant product market, announced in Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962), the court found that the office supplies industry recognizes large B-to-B customers as constituting a separate economic entity, that large B-to-B customers are highly price elastic, and that they demand tailored bundles of goods and services. Id. at 119–21. The Court similarly sided with the FTC by excluding ink, toner, and adjacent BOSS markets from its analysis, finding that Staples and Office Depot faced greater competition from managed print services (“MPS”) that bundle ink and toner sales with the service and maintenance of printers and copiers. Id. at 123–25. Although the FTC had previously defined consumable office supplies as including ink and toner in 1997 when it challenged Staples’ and Office Depot’s first merger attempt, the court distinguished the 2016 merger attempt by noting that “the office supply market ha[d] changed dramatically [over the previous 20 years].” Id. at 125.
As to the second issue, the court similarly rejected Staples and Office Depot’s contention that Amazon Business was sufficiently positioned in the large B-to-B market to offset any anticompetitive effects of the merger, finding that despite Amazon Business’s “impressive strengths,” it was unlikely to restore competition lost from the merger due to its “significant institutional and structural challenges.” Id. at 134.
But just as the market had changed in the 20 years prior to 2016, Staples may be counting on arguments that the market has also changed since Staples last grappled with the FTC. Such change may be reflected, for example, in Amazon’s increasing market presence and the economic effects of the pandemic over the past year. In its offer letter to ODP, Staples also signaled plans to divest ODP’s B-to-B unit, thereby attempting to distance itself from the regulatory concerns that surfaced in 2016. In its letter rejecting Staples’ most recent offer, ODP highlighted the costs associated with their previously failed merger attempts, but it expressed its potential willingness to forge a new partnership with Staples.
We will closely watch the ongoing negotiations between the two companies as they once again navigate the antitrust regulatory waters.
