The Staples-Office Depot Merger Fail — A Post-Mortem Analysis

Staples Andrey Burmakin/Adobe Stock

It’s official: The planned merger of Staples and Office Depot is not going to happen. The Federal Trade Commission (FTC) argued that there was "reasonable probability" that the merger would "substantially impair competition."

Staples will not appeal the case and will have to pay Office Depot a $250 million breakup fee. (You can read some decent summaries of the general case details here or here.) The planned marriage has been left at the altar of Judge Emmet G. Sullivan’s gavel, as Sullivan upheld the FTC lawsuit blocking the planned merger announced last year.

Honestly, I was a little surprised by the decision, as were a lot of hedge fund managers — Office Depot shares were down day-on-day 36% as of this writing — who may not be getting their eight-figure bonuses this year, as the options calls were outnumbering the puts yesterday. I had expected that the Staples high-powered defense team would prevail.

I’ve been reading the court transcripts since the trial began, and it’s been interesting drama, but I haven’t been posting. It’d be great traffic for the site, but no new information emerged that changed our historical analysis and recommendations.

Before I do the formal post-mortem, I did learn a few interesting things:

  • The amount of money gambled — er, invested — by hedge funds on these events, and the importance they place on any information edge they can get, is fascinating, to say the least. I wouldn’t have the stomach for that job.
  • Some attorneys really do excellent work. Kudos to the Staples legal team, even though it didn’t go their way. Although they were likely paid a fortune, they did solid work. The 69-page opposition brief was methodical, surgical and actually a pretty good read filled with persuasive (and colorful) language. I’ll summarize their arguments momentarily, and also point out where I think they went off the rails.
  • Never try to outguess a wise and wily judge. Sullivan had an iron grip on his proceedings and was extremely displeased with 1) the FTC’s alleged request to ask Amazon Business Vice President and General Manager Prentis Wilson for a signed affidavit that was somewhat counter to his eventual testimony, and 2) an email the defense produced citing a Corporate United employee who testified for the defense and allegedly said that his testimony was a “work of art mixed in with some bullshit.” Sullivan also asked some hard questions and made statements such as, “I just find it hard to understand why it would be so challenging to find alternate sources for office supplies.” Many observers and investors clearly read too much into the tea leaves of his statements.
  • Conducting yourself conservatively, professionally and ethically is very underrated as a trait for executives. I’ve been very impressed by how Prentis Wilson has conducted himself throughout this whole process. He spoke at our Global Procurement Tech Summit on Amazon’s progress and plans and has had to endure a lot of unwanted attention as he’s trying to grow his business. Wilson is fairly reserved and soft spoken, but he speaks with his actions, and Amazon’s progress to date has been very impressive. We are also a small business, and I can’t confirm or deny that we’re an Amazon Business customer that like many others gets surveys on how Amazon could better serve us, but I’ll just say that all providers, including procurement organizations themselves, should be very user-focused in the design of their solutions.

The Staples Defense

The Staples attorneys basically argued that the FTC was seeking to “protect the largest most powerful corporations in America from supposedly higher prices for paper clips, Post-it notes, and rubber bands.” Those firms have long-term contracts, alternate supply sources and are just fine, thank you, even though Staples and Office Depot portrayed themselves (fairly accurately) as fighting for survival. They compared themselves to “a penguin on a melting iceberg” and seemed to argue that the FTC was pronouncing a death sentence similar to an FTC ruling against Blockbuster Video and Hollywood Video (RIP). Finally, they said that Staples’ offer to give up its “diversity business” was a meaningful carveout to ameliorate the FTC. It wasn’t.

It was a strong argument. But at the end of the day, although the large B2B office segment is small and Staples said the narrowly defined segment only represented 6% of its revenues, the dominant market share of a Staples/Office Depot for that market basket was enough to prompt the decision.

The key here is the term “market basket,” because although each line item in that ever-expanding market basket is generally a commodity, the entire “solution” is not.

The more you supersize that basket and look for “winner take all” as a sourcing strategy, your market options will shrink rapidly. (I devoted a whole post to this topic here.) Category managers may do some unbundling of the highest volume SKUs (i.e., paper and ink/toner), the rest gets combined with a bunch of ancillary services (desktop/closet delivery, personalized fulfillment, nationwide store-based inventory/services) and, most importantly, the ability to craft a multi-year program for a category manager that shows demonstrable year-on-year cost savings. This is how Staples Advantage will continue to compete successfully. Office Depot, however, will need to do something “strategically.”

What Next?

Both chains obviously need to continue reducing their physical asset footprints if they’re going to survive. I’m not strategy consultant, but it seems like they will have to do something fundamentally different. For example, what about:

  • “Office Depot powered by Amazon”?
  • Using the $250 million breakup fee to combine Office Depot with WB Mason and get them on a best-in-class technology platform.
  • Setting up these businesses as franchises that can re-intermediate local office products suppliers? This is the OfficeZilla business model.
  • Washing Office Depot through chapter 11 and integrating it into something like Best Buy that could enter the B2B market. Or sell it to Grainger, which could go enterprise rather than just MRO? Or sell to to go after Amazon Business in B2B?
  • Carving out a supply chain fulfillment business out of both businesses and turning that into a 3PL?

These are all just hypotheticals, but there are always options, and I wouldn’t exactly be pronouncing Staples dead. It is a strong competitor and has an excellent supply chain to rely upon, but it will likely need to transcend its “medium box retailer” and perhaps completely spin out a B2B marketplace (or MSP/BPO) business that can contract with its asset-owning sibling to provide local inventory presence.

CPOs can breathe a momentary sigh of relief, but they should also think about the value they could have created if the merger did actually happen.

Would you take another hard look at the category? Would you carve out some more items and go direct? Maybe look at group purchasing organizations? Would you take a harder look at Amazon Business? Perhaps you might benchmark your pricing against Amazon and see how market conditions have changed? And shouldn’t you be doing all these things anyway?

You always have options, whether in office products or any supply market category. If any procurement organizations need some guidance on how best to proceed here, or on broader B2B e-commerce strategies and tools, please feel free to contact us.

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