Will Regulators Destroy Office Depot Merger with Staples?

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Staples vs Office Depot
  • Office Depot is a failing company by the numbers
  • Staples is a success
  • Regulatory agencies still have to decide if they can merge
  • If regulators say no, and Office Depot eventually goes bankrupt, and Staples buys the assets…
  • Isn’t that the same thing?

Office Depot (ODP) just accepted a deal by Staples (SPLS) to buy the company for $6.3B. Will the government let it go through?

Beginning in September 2006, Office Depot began falling into the Office Gutter, and has not yet extricated itself.

Office Depot Chart

In 2006, Office Depot made just over $500M in earnings and had made, as a company, $3.4B until that time. The next year its earnings tanked to $400M due to increased business expenses. In 2008 it lost $1.5B, and since then has not had a profitable year except for 2011, where it earned a paltry $60M in profit.

Staples, on the other hand, weathered the Great Recession rather well, with net income dropping 19% from 2007 but staying strongly positive at $800M. Earnings are down 37% from their peak in 2012, but unlike Office Depot, it’s still making money.

The bottom line is this: Since becoming a company, Staples has made $7.2B. Office Depot has lost $900M. With Staples’ earnings plateauing and Office Depot bleeding cash, now looks like a good time to merge.

Except, regulators have to approve the merger because it might break “antitrust” laws. Antitrust law says that companies cannot merge to create a “monopoly”. The problem is, what defines “monopoly” is entirely subjective, and will be decided by bureaucrats on a whim. An Office Depot / Staples merger has been prevented in the past. If it is prevented this time in order on the pretence of protecting consumers then Office Depot will continue losing money and could even go bankrupt.

It would be a case where the law mandates company losses, by preventing Office Depot from saving itself.

The frivolity of antitrust laws can be seen in the following hypothetical: What if Office Depot were to just suddenly announce it was disbanding and sell all its assets to the highest bidder? Are they allowed to do that? Just quit? It’s the same thing as a merger, because somebody ends up with the assets. Or are they just supposed to dynamite all their stores so as not to merge with another company and break antitrust laws?

The old joke about antitrust goes like this: Three guys are sitting in a jail cell. They start telling each other why they were arrested. One says he set his prices too high because his competitors were bad and he was arrested for price gouging. Another says he set his prices too low because his competitors were too good and was arrested for lowballing. The third says he set his prices exactly the same as his competitors and worked together with them and was arrested for breaking antitrust laws.

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