Unlocking Value? Starboard Invests In Staples And Office Depot (Part 8 of 19)

(Continued from Part 7)

Federal Trade Commission

Staples (SPLS) and Office Depot (ODP) have been prolific in rolling out office supplies superstores in the past. In what would prove to be a landmark case for M&A (mergers and acquisitions) in defining the size of the product market, the FTC (Federal Trade Commission) challenged a proposed SPLS-ODP merger in court in 1997. The FTC argued that it may lead to higher prices for consumers.

The case was based on evidence suggesting that in metropolitan areas with an ODP and a SPLS superstore, prices at SPLS were relatively lower—even after costs differences and other competing players were taken into account. Internal pricing documents from the two firms formed part of the evidence. The evidence was provided to the court.

Due to the FTC’s argument, the size of the product market was narrowed for the superstores. It was determined that ODP’s presence was the main influence on SPLS’s pricing policies. SPLS’s pricing policies weren’t determined by other retailers offering similar products.

The judgment concluded that having ODP in the relevant geographic area acted as a brake on SPLS’s pricing structure. It didn’t matter if other sellers were present in the catchment area. Allowing a merger could mean higher prices in areas where the two rivals had a superstore.

1997 versus the present

However, as explained earlier, the office supplies market increased substantially since 1997. Also, there are several stores that offer the same products. There are retail (XRT) stores and online retailers. Pricing pressures come from rival superstores as well as a variety of discount stores and online retailers. Therefore, a merger likely won’t result in higher prices for consumers. Consumers would simply gravitate to other retailers with more competitive prices.

Now, there isn’t a reason for the FTC to not allow a possible combination.

The downside

In contrast, a merger between the two companies would mean greater bargaining power with its suppliers. This would be a disadvantage for the suppliers. It would also mean more store closures. This could reduce supplier sales. However, since office supplies sales are already declining for both chains, this won’t pose a strong argument against a possible merger.

As Staples CFO, Christine Komola, said, “We did underestimate the impact of the decline in our core office supplies as well as the intensity of the competitive environment at retail.” She was speaking at the 2013 earnings call.