Shares of Staples Inc. (Nasdaq: SPLS) and Office Depot Inc. (Nasdaq: ODP) tumbled in early trading after a federal judge blocked the combination of the two largest office suppliers, saying it would create an unrivaled giant.
U.S. District Judge Emmet Sullivan in Washington thwarted the $6.3 billion deal late Tuesday, a victory for the Federal Trade Commission, which argued that uniting the national suppliers of pens and printer paper would harm buyers. The companies said they wouldn’t appeal the ruling and would terminate their agreement effective May 16.
The FTC met its “burden of showing that there is a reasonable probability that the proposed merger will substantially impair competition in the sale and distribution of consumable office supplies to large business-to-business customers,” Sullivan wrote in a three-page order.
Staples fell as much as 18 percent to $8.52 in early trading in New York on Wednesday, while Office Depot tumbled as much as 38 percent to $3.75. Staples had gained 9.4 percent this year through Tuesday on optimism that the deal may go through, while Office Depot had advanced 8 percent.
Sullivan’s ruling -- an injunction putting the deal on ice while the FTC challenges the tie-up in its administrative court -- killed the planned merger. Office Depot Chief Executive Officer Roland Smith said in a statement after the decision that the retailer will host a conference call later this month to discuss its strategy as a standalone company.
The ruling is a win for antitrust officials who are grappling with a record wave of mergers that are marrying some of the biggest companies across industries. Sullivan’s decision marks the second time the FTC has blocked a combination between the two companies. In 1997, the commission successfully sued to halt their proposed merger.
“Today’s court ruling is great news for business customers in the office supply market," Debbie Feinstein, the head of the FTC’s bureau of competition, said in an e-mailed statement. "This deal would eliminate head-to-head competition between Staples and Office Depot and likely lead to higher prices and lower quality service for large businesses."
The decision caps Sullivan’s role in an often contentious proceeding during which the judge criticized the FTC’s handling of the case and frequently interrupted the questioning of witnesses for his own queries. That led some investors to become optimistic that he would allow the deal to proceed.
“Given some of the judge’s rulings during the trial, it was somewhat surprising,” Seth Bloom, an antitrust lawyer at Bloom Strategic Counsel. “This is another example of how one can’t make a judgement based on a judge’s comments from the bench.”
Staples Chief Executive Officer Ron Sargent said in a statement that the company was “disappointed” by the decision. The retailer will now focus on a strategic plan that includes trying to win mid-market business customers, exploring alternatives for its European operations, cutting costs and returning cash to shareholders.
The FTC sued Staples and Office Depot late last year, contending that a single national office-supply seller with no obvious rival would undermine the ability of large corporate clients to bargain for better prices by playing the two firms off one another in negotiations.
Sullivan said he would issue a sealed opinion Wednesday explaining his rationale. That document will remain under seal until at least May 16, when it will be redacted to remove competitively sensitive information, the judge wrote.
Defense lawyers argued that the companies needed to combine to contend with looming competition from Amazon.com Inc. and its year-old Amazon Business unit. They claimed the merger would make the enlarged Staples more efficient and allow it to pass on lower prices to consumers. The companies attacked the government’s case as contrived to make the deal appear unfairly anticompetitive.
After the FTC presented its case to Sullivan, Staples told the judge the agency hadn’t met its burden for blocking the deal and declined to present its own evidence in support of the merger.
Too much attention was paid during the trial to the judge’s courtroom comments, which were often critical of the FTC, according to Ira Gorsky, an analyst with Jersey City, New Jersey-based Elevation LLC, who followed the case.
“Since Staples didn’t put on a defense, Staples witnesses weren’t cross-examined in the same way as the government’s witnesses were,” Gorsky said.