Staples, Office Depot deal collapses after federal judge rules in favor of FTC

A federal judge in the U.S. blocked Staples Inc takeover of rival Office Depot Inc, which prompted office supply companies to call off the $6.3 billion deal, as per news reports.

The Federal Trade Commission (FTC) had sought a preliminary injunction with the U.S. District Court for the District of Columbia to stop the proposed deal pending a decision by an FTC administrative judge.

Judge Emmet Sullivan in a three-page order granting FTC’s request for a preliminary injunction, said the agency had shown there was a "reasonable probability" that the merger would "substantially impair competition" for the sale of office supplies to large business customers, Reuters reported. (http://beroeinc.co/1rHqOaD)

As discussed in our previous blog post, both Staples and Office Depot have been telling the court that for years office supply companies are facing declining revenue and demand, and were facing stiff online competition that includes web retail giant Amazon.

A Staples lawyer argued that the deal was needed, saying that Amazon was entering the office supply market, which may shake up the market.

Amazon’s entry into the office supply market was critical to the case because Staples and Office Depot say that the online retailer will be a formidable competitor to the combined entity.

For its part, FTC argued that the two companies are large suppliers and the tie-up would lead to higher prices to corporate customers.

Online retail firms or big-box retailers may not be big players in the office products segment for now. However, there is a good possibility that players such as Amazon, Shoplet, Wal-Mart, Target and W.B. Mason may begin to focus more on the contract sales business to Fortune 1000 companies and other corporates – the market dynamics will then begin to change.

In April, Amazon launched a marketplace called Amazon Business that will connect businesses with suppliers. Apart from office supplies, Amazon Business will also offer IT and lab equipment to education and food service supplies.

Amazon Business will help the online retail giant to grab a share in the B2B marketplace, which is likely to account for about 12 percent of B2B sales in the U.S. by 2020, according to estimates by Forrester Research, Reuters reported. (http://beroeinc.co/1rZCCVt)

Gross sales through Amazon Business have exceeded $1 billion over the past year, Fortune reported citing Amazon. Those sales have grown 20% monthly since the marketplace’s launch, according to Fortune, which cited company data. (http://beroeinc.co/1OkeVS3)

Contract term:
Since the deal fell through, we need to wait and watch whether there would be any change in preferred contract term for buyers. Earlier, we had said that if the deal had gone through then the term could be 3 years – since long-term contract (like 5 years) would increase the risk of price rise and post-merger integration issues. On the other hand, a short term contract (like 1 year) would not be attractive for Staples, Office Depot or other suppliers in the industry.

Price check and category spend visibility:

The buyers need to have internal price check mechanism and visibility on key spend of office supplies items.

In case prices are trending upward, fixed or cap price contracts can be initiated with more emphasis on negotiations, or alternate suppliers can be approached to facilitate other sourcing functions and objectives like inventory management, cost savings etc.

Multiple vendor engagement:

The contract office supplies industry is consolidated with limited presence of online retailers, big-box chains and regional suppliers. However, efficient engagement with multiple vendors (even though with smaller presence) can allow buyers to know industry benchmarks, negotiate prices and ensure key performance and service level parameters across vendors.