The Folly of the Staples-Essendant Deal: If It Sounds Too Good to Be True…

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Staples recently announced it plans to divest $550 million of corporate B2B contracts to one of its main suppliers, the wholesaler Essendant. Staples is trying to appease the Federal Trade Commission (FTC), which filed suit against Staples late last year to prevent its planned acquisition of Office Depot.

In a press release, Staples said it plans to “sell more than $550 million in large corporate contract business and related assets to Essendant. Essendant will pay Staples approximately $22.5 million … and approximately half of the revenue will come from Fortune 500 companies.”

In support of the deal, Staples CEO Ron Sargent said the move with Essendant "strengthens a national competitor, further enables office products dealers and helps minority and women-owned businesses compete for national commercial customers." Staples has cleared its regulatory hurdles in the E.U. and wants to do the same in the U.S., especially since it will have to pay a $250 million breakup fee to Office Depot if the deal doesn’t go through.

As George R.R. Martin, author behind the novels that led to the HBO series Game of Thrones, once wrote, “When you play the game of thrones, you win or you die.”  And in this case, Staples appears to be fighting a battle to the breakup fee death, defending its own version of The Wall.

But bad fantasy analogies aside, if you read what Sargent says, it all sounds so good. And it probably is. As the saying goes, “If it sounds too good be true…”

The Story Behind the Story

To understand what is likely going on here, you have to read behind Sargent’s carefully honed words. To do so, I’ll pose a set of questions for you, the reader, to consider, and answer some of them with my own analysis, which I have vetted and enhanced with multiple conversations with other industry insiders on this topic.

Is Essendant a “national competitor”?  

My view: No, not to Staples. It is, however, a competitor to S.P. Richards. (I’ll return to this later.)   

Essendant is a major supplier to Staples and doesn’t have anything close to an equivalent service offering to Staples. Do you really think Staples wants to create a competitor and disintermediate itself?  Sort of puts a damper on its strategic buyer-supplier relationship, no?

Weighing in on Sargent’s comment, Kaveh Bakhtiari, senior manager of investor relations at Essendant, likened the wholesaler’s relationship with Staples to “coopetition.” On the question of whether this remedy would actually mollify the FTC's main complaint that there is no national competitor for Staples, Bakhtiari said “it doesn’t really do it for the FTC.” But the agreement does give Staples something “a little more substantive” to present next time it appears in court.

Staples did not immediately respond to a request for comment.

$550 million is a big number and a big carve out. Isn't this a sizable piece of business?  

My view: This number is likely the total contract value of those contracts. So, if they are five-year deals like Staples likes to sign, the $550 million represents a $110 million annual run rate. If Staples’ commercial business is about $8 billion (like it was in 2014), and you even conservatively assume a two-year contract duration, then this carve out still represents less than 3% of its total commercial business.

Let that number sink in. Doesn’t seem like much of a carve out, does it? And it’s a fair bet that this list of contracts was sorted in order of least profitability, so it might actually be an awesome way for Staples to jettison a number of poorly performing customers. I’d also bet the lion’s share are also customers with small footprints that can be supported by smaller players that aren’t true national level competitors, of which there are basically two right now — and maybe going to one if the deal gets consummated.

Can Essendant really fulfill these contracts?  

My view: If Essendant keeps them, the answer is probably 5% yes and 95% no. Essendant has some ability to sell direct to enterprise buyers but has nothing remotely similar to the capabilities that a Staples Advantage program delivers. This begs the question of what will actually happen to those buyers who find their contracts have been re-assigned from their retail supplier Staples to a wholesaler named Essendant?  

First of all, my guess is that it only contains contracts with no penalties or restrictions on contract re-assignment. (Lesson to buyers: If you worry about your supplier getting acquired to your disadvantage, consider using an assignment clause.) It’s unclear how Essendant will provide continuity of existing services via Staples.

In response, Bakhtiari said that wholesale isn’t Staples’ go-to-market strategy, and Essendant is built to provide wholesale support. “These resellers are going to have much greater mindshare with us than with Staples and Office Depot.”

“The end customer will, of course, have a choice,” he said. “They can chose to use Essendant or go to another office products supplier.”

If you're an affected customer, obviously you’re likely to fight re-assignment and have Staples chose a contract other than yours. If Staples says no, then you’ll have to find another supplier. But that’s the problem. There won’t actually be another supplier to choose from, as we’ve argued, especially if this deal gets approved by the FTC. That’s the problem with monopolies.

But can’t Essendant in turn re-assign these contracts out to smaller retail players?

My view: Yes, it can, and we hope this would be the case. Of course, I’d bet the contracts are for localized customers who can be served by small competitors that are hopefully local to the customers and serviceable by them yet far below the radar of Staples’ competitive intelligence and sales and marketing teams. If you were a conspiracy theorist and wanted to look at this more nefariously, you could view it as Staples washing its contracts through Essendant, which could then again re-assign these contracts to these players. Regardless, it’s terribly clever.

These small office product dealers are ones that might belong to co-ops or GPOs like Independent Stationers and TriMega, but most importantly, they will almost certainly be Essendant customers. So, in our hypothesized scenario, Essendant not only loses no business but also may get something more. Although Essendant is paying $22.5 million — the number is actually a bit meaningless, because trading parties can agree to any number behind the scenes that can get settled up later.  Really, you could sort of view this as Staples doing Essendant a favor. What might Essendant get in return for helping Staples avoid paying a $250 million breakup fee? Well, if the deal goes through, what might happen to any business that, say, Office Max does with S.P. Richards? Might it be at risk and get reallocated to Essendant? Maybe not, but maybe yes.

How will this move “help minority and women-owned businesses compete for national commercial customers,” as stated?

My view: It’s at best unclear, and at worst, could potentially fly in the face of such goals.

At best, Essendant could work with enterprise customers whose contracts were sold off to it and work with them to compete the business to minority and women-owned businesses (if those customers even want that). And again, these are businesses that buy from Essendant, of course. It could even outsource the effort and give the contract portfolio to someone like OfficeZilla or maybe EPIC Business Essentials, which is a combination of Independent Stationers and Point Nationwide.

At worst though, the business could be redirected to a diverse (e.g., woman-owned or minority-owned) office products dealer that many would consider a “pass through” diversity business. In the case of Staples, you can read about such a potential scenario described here. The firm mentioned, Guy Brown, was also mentioned in this industry press release as part of the proposed FTC remedy involving Essendant. This firm, and the use of pass throughs, is worthy of an entirely separate blog post. But, just to give you a flavor of this situation, if you go to the Guy Brown Products website, you see a picture of an African American woman, but, the firm was actually started by two Indian entrepreneurs,self-proclaimed brown guys from Vanderbilt”.  

I kid you not. And if you track an order on the firm’s website, you are actually directed to an Office Max web site. The irony of this is telling. I couldn't even make this stuff up!

There’s a twisty back story to this, but let’s press on.

Lessons Learned

At the end of the day, at least to me, the latest Staples proposal doesn’t seem materially different from its previous ones in the sense that there still won’t be a remedy in terms of providing for a viable national competitor to it for large commercial accounts.

I’ve shared quite a lot of information here, as well as a lot of my own ideas, so let’s wrap up with some additional general takeaways and lessons learned from my perspective:

  • Don’t launch an acquisition unless you are willing to pay the breakup fee.
  • Over-regulation is bad, but sometimes regulators do get it right.
  • Bringing in what amounts to a supplier to pose as a real competitor to help you clear a regulatory hurdle is a clever ploy, but more generally, it illustrates the concept of “supply chain versus supply chain” and tapping your supply base creatively. Procurement organizations can and should learn from this.  
  • C-level executives and activist investors who portray their intentions and activities (and press releases) in a certain way to the market must also be prepared to deal with the ramifications of when those statements are held to the light of closer scrutiny and analysis.
  • A failed acquisition is not necessarily a bad thing.  Office Depot needs the money, especially since it would exit this process weaker (in my opinion), and maybe Office Max could be spun back out — it supposedly had a pretty good technology platform — if there was a white knight to help it.  And of course, procurement organizations would win with at least some modicum of competition.
  • Supply markets will always surprise you. New, creative suppliers, alternatives and models will eventually emerge…
  • … But, in the meantime: absolute supply-side power has the potential to corrupt absolutely. Many industry insiders, analysts, and even general observers might agree that this attempted “remedy” supports this point.  
  • And finally: The house always wins, and so do the attorneys. Manage your legal spend well.

Before I close this out, let me state that Spend Matters, nor its parent company, Azul Partners, has any vested stake in this merger. None of the companies mentioned in this article has a commercial relationship with us — unless it has bought access to our online premium research with a credit card — nor do we have any financial interests or incentives of any sort tied to the outcome. We are only sharing our opinion on something that we feel is bad for competition. And if it’s bad for competition, it’s bad for procurement.

You’ll have to forgive all the major media outlets out there who don’t understand the deeper workings of the supply chain. They’re not from procurement, nor are (most) experienced analysts. It’ll actually be interesting to see whether they’ll even cover this story.

As always, we’d welcome your feedback in the comments section below. Or catch me at the ISM and Spend Matters Global Procurement Tech Summit March 14–16 in Baltimore.

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Voices (11)

  1. J Yachmaster:

    One of the questions I have is of this “Diversity” business how many of those distributors really like doing business with Essendant? And will they have an option of taking their business to the competition (SP Richards)? Essendant is a widely known hated company not only by the distributors it sells to but also its employees.

    Also….”passes on savings” Essendant is a ridiculously margin hungry company that prefers to stock items even if they sit on the floor for four years. But has to sell them at 20%margin plus 8% pad. Plus most of these “diversity” distributors will fall on one of their highest price brackets since they are probably not big enough to be in their “best” pricing bracket.

  2. Pierre Mitchell:

    Fair enough, but I don’t see major competitors on the horizon unless something major happens (big box entrant; M&A, private equity, OM getting spit out, Amazon makes bigger play; etc.).
    But I agree with the ‘conspiracy’ believers. I’ve heard through the grapevine that OD is indeed suffering because all this. The $250M check from Staples will be s’mall’ consolation prize.

    1. Andy Braithwaite:

      It’s all interesting stuff, Pierre.
      Let’s see how things pan out over the next couple of months…

      1. Susan Mintmire:

        Fascinating stuff! I read this exchange between the 2 of you with great interest. Who ever thought the world of office supplies could hold such intrigue?

  3. Pierre Mitchell:

    Thanks Andy, yes, you’ve got a good point about Staples needing to find a buyer for OD. It’ll be interesting to see how that unfolds to create a competitor against Lyreco. The problem here in the US is that there is no Lyreco (other than Lyreco itself with WB Mason partnership, but that doesn’t really count), which is why I was re-emphasizing the main point of the article that this latest offer by Staples is still just ‘noise’ and doesn’t address core FTC complaint. So why do they keep throwing out these little incremental mollifications full of sound and fury (and motherhood, apple pie, and diversity), but signifying nothing relative to the FTC complaint. So, again, unless they propose jettisoning the commercial business of OD/OM (or even just OM) in March, this latest red herring is meaningless relative to the complaint – don’t you agree?

    Re: Essendant, don’t get me wrong, they are super smart and power the distribution across so many channels (small OD retailers, GPOs, big box, etc.). And I like THEM serving the diversity channel rather than a big box retailer like Staples. It cuts out one more middleman and hopefully passes on savings to the disadvantaged communities. No large firm should have a ‘diversity arm’. Diversity in the supply chain to me is about aligning the demographics of your customers with those of your suppliers – and doing it as a design principle in designing your supply chain – not a separate business to earn diversity credits and do ‘diversity washing’.

    1. Andy Braithwaite:

      Hi again Pierre,
      I’d rather wait for the outcome of the court hearing to see how meaningless or not this transaction turns out to be – I’ve got a bit more information about what assets are being sold that will be published on
      But I think we can see Staples building an aggressive case against the FTC’s challenge to the deal. One aspect of that will be to demonstrate the presence of competitors able to service this enterprise market.
      I also think Staples will try to discredit the FTC’s judgement by focusing heavily on the 2013 statement that OK’d the Office Depot & OfficeMax merger.
      There is also a conspiracy theory: the longer this goes on, the weaker Office Depot becomes – Depot’s contract sales were down in the mid-single digits in 2015, for example. Therefore, it’s in Staples’ interest to eke out this litigation process as long as it can in order to further weaken Depot – all part of a grand master plan to bring its biggest direct rival to its knees!!

  4. Pierre Mitchell:

    Andy, thanks for writing in. Your comment was longer than the article! 🙂
    Since there was no ‘color’ in the press release and the firm hasn’t commented on my post, it’s hard to surmise the exact nature of these contracts and the annual contract value.
    The bottom line here is that carving out a few percentage points off its $8B commercial/B2B business (especially if it’s merely allocating a chunk of your ‘pass through’ business from you to your supplier), does NOTHING to actually address the FTC concerns of Staples becoming a monopoly for national level B2B accounts. There is no credible competitor now, and this move of merely re-assigning some pass-through business obviously is just changing the deck chairs on the same fishy boat (which is a separate story). Let’s stop the whole terminology of Retailers creating a “wholesale business” that sure looks like a shell game to get diversity credits.

    Andy, to revisit the bottom line, please tell me how reassigning some diversity business creates/strengthens a national competitor who can compete with Staples for national commercial contracts (which is what the FTC is looking for). Who is the national competitor who is created or strengthened here???

    I look forward to your response to this this simple question.

    I’m not sure who pays off the regulators in Europe, but here in the US, I applaud our regulators for smelling and stopping a monopoly when they see one. And I personally know many CPOs who are happy as well. It’s hard to run a competitive bidding event with one supplier!
    Thanks for writing in.

    1. Andy Braithwaite:

      Hi Pierre,
      I actually spoke to the Essendant CEO last Friday – he confirmed to me that $550m annual figure and the 30 or so diversity suppliers involved.
      To answer your question, I think what we would see emerge is an enterprise contracts unit run by Essendant, with an Essendant e-commerce platform & support team, but with the contracts owned by its reseller partners – either MWBE businesses or other independent dealers.
      In theory, that would be a national competitor in terms of ‘being able’ to service these national contracts, but I don’t believe it will have the scale to be regarded as a ‘viable’ competitor in the short term. That’s why I said in my original comment that I don’t think this in itself will be enough to convince the federal judge in the court hearing that starts next month. And why we still might hear about other divestments from Staples in the run-up to that hearing.
      What Essendant is trying to do is not a million miles away from something it already does via its Vertical Markets business unit which helps dealers on regional accounts, local government contracts, things like that. It just wants to extend that to the larger enterprise segment, and it has some sophisticated & clever dealer partners that are ready and willing to compete with the big boxes nationally. In fact, this is something we will probably see more of even if (or when) the Staples/Depot acquisition is rejected.
      Just a follow-up on your comment about the regulator in Europe. While the Staples PR applauds the ‘approval’ in Europe, it is really nothing of the sort. The EU regulator stipulated that Staples has to sell off the entire Office Depot contract unit for it to approve the transaction AND that Staples has to come up with a buyer – to be approved by the EU Commission – BEFORE the transaction can be finalised, even if Staples is successful in the US/Canada.
      Staples then threw the rest of Office Depot’s European business into the mix (retail stores in France & Sweden and its direct business, including Viking) because it knows it will have a better chance of selling the whole lot instead of the contract business (plus its business in Sweden) in isolation.
      And that’s with the presence of a strong pan-European competitor in Lyreco. I’d say that is more stringent than the FTC’s green light for the Depot/Max merger in 2013 because it is refusing a 3 into 2 scenario….

  5. Pierre:

    Thanks Mike, I didn’t realize it only just the “wholesale” business. If that’s the case, yes, truly nothing is changing other than giving the fulfillment of these diversity accounts to Essendant. And this doesn’t address FTC concerns in the least. No national competitors getting created here.
    Can foresee ANY scenario that will create a real competitor?
    Could OfficeMax get spit back out and find a white knight? I’m really scratching my head on this one.

    Personally, I think it’d be cool to have Amazon have local ‘stores’ (beyond the bookstore thing) that are mini distribution centers and pick up sites. Sort of like the NYC electronics stores like a B&H where it’s basically a small front end of a DC. Instead of sipping lattes or getting food samples like at Costco, the kids can watch the little drones and/or Kiva robots bring them their order.

    1. Andy Braithwaite:

      Over the past few months, I’ve enjoyed reading your posts about the Staples/Office Depot acquisition from a purchasing perspective.
      Just a few comments and observations about this Staples-Essendant deal:
      1. As Mike pointed out (although I wouldn’t agree that it is a ‘minor point’), it is not a question of Essendant owning these contracts and becoming a reseller in its own right. It is taking on the fulfilment of diversity contracts owned by the likes of Guy Brown, Faison, et al – about 30 contractors, I believe.
      2. That $550m number IS the annual sales going through these contracts, not the overall value of the contracts. About half that amount is with Fortune 500 companies.
      3. While that $550m is still small compared with the combined Staples/Office Depot enterprise accounts business, it will give Essendant the scale to fast-track investments on things such as sales people, customer support, e-commerce systems, etc. This will not make Essendant itself a direct competitor of Staples/Depot, but will – over time – give independent resellers the opportunity to compete on larger, national accounts in partnership with Essendant. So there will be an alternative out there. Whether that will be enough to convince the federal judge to dismiss the FTC’s challenge is another matter! In my view, it is a step in the right direction in terms of addressing antitrust concerns, but still does not go far enough.
      4. Staples had already offered to divest $1.25bn worth of annual contract sales, substantially more than the $550m in diversity contracts that Essendant has agreed to acquire. This offer was rejected by the FTC. Presumably, there is still $700m in business ($1.25bn – $550m) that Staples is prepared to let go of – therefore, I wouldn’t be surprised to see another announcement made by Staples ahead of the start of the court hearing in March.
      So, just to address some of the specific paragraphs of your article:
      – Is Essendant a “national competitor”?
      A: No, and it doesn’t want to be. Its goal is to facilitate an enterprise contracts solution for its reseller partners. Remember, these include $1.5bn dealer WB Mason and other dealers with sales in excess of $100m.
      – $550 million is a big number and a big carve out. Isn’t this a sizable piece of business?
      A: See above, it is the annual sales number with about half coming from Fortune 500 companies. And the contracts have not been ‘carved out’ or selected individually by Staples or Office Depot – it is their entire diversity ‘wholesaling’ business.
      – Can Essendant really fulfill these contracts?
      A: Physically, it has the distribution capabilities to fulfil the business on behalf of the contract owners – remember, it’s not a question of reassigning the contracts. The question mark is on the e-commerce systems and customer service, etc.
      – But can’t Essendant in turn re-assign these contracts out to smaller retail players?
      As already pointed out, it’s not about reassigning any contracts. Of course, in addition to these diversity contracts, Essendant will also be looking to grow the enterprise accounts business with other reseller partners – that’s part of its growth strategy.
      I agree that all this doesn’t do any harm to Essendant’s relationship with Staples – we’ll see how that wholesaler/customer relationship pans out should the Office Depot acquisition go through, but there is probably still going to be substantial business for a second wholesaler partner anyway, certainly in the shorter/medium term.
      – How will this move “help minority and women-owned businesses compete for national commercial customers,” as stated?
      It won’t change anything in terms of these contracts being regarded as ‘pass throughs’, which, as you correctly point out, is a different matter altogether. What might change is the ability of these diversity resellers to offer the same level of pricing through Essendant as they can through Staples given the latter’s superior purchasing power. Viewed like that, it might even level the playing field for other MWBE businesses not currently aligned with one of the big boxes.
      Again, it’s not a question of enterprise customers having their contracts ‘sold off’ to Essendant, nor of Essendant being able to ‘give the contract portfolio’ to third parties.
      Of course, all of this is purely hypothetical if the Staples/Office Depot acquisition is not approved. But I think it shows that Staples is still serious about trying to get the deal done, even if it is still very much of a long shot.

      Andy Braithwaite
      OPI (Office Products International)

  6. Michael Maggio:

    Great analysis, very well done. One minor point. The business being “sold” is what Staples calls it’s “wholesale” business. The contracts in question actually reside with Guy Brown and other pass through’s. My point is that re-assignment is not required, at least not until they are up for renewal. That does not diminish your point that the remedy is woefully inadequate and worse than a fig leaf. Again, I enjoyed your blog and appreciate your insight.

    Mike Maggio
    TriMega Purchasing Association

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