At first glance, it might feel like the merger of three former top office-supply retailers would be pretty close to a monopoly.
But this deal is probably going to be approved. And the buyer’s recent launch of the digitized Staples Exchange shows why.
In a word, Amazon.
While an Office Depot-Staples-Max would represent a borderline brick-and-mortar monopoly that would make even W.B. Mason quake in his shoes, it won’t scare Amazon.com, which has spent years chipping into Staples’ revenue stream.
Staples’ revenue, same-store sales, and stock performance have been disappointing since the financial crisis as more and more companies turned to the low-cost offerings of online suppliers.
The market has doubts
But the market isn’t totally sold on the deal, and Office Depot shares still trade well below Staples’ proposed buyout price.
Staples offered $US11 for Office Depot, and Office Depot is trading at about $US9.50 on Tuesday.
Analysts are wondering whether federal regulators will sign off on Staples’ proposed $US6.3 billion buy of Office Depot — since both companies are already among the top online retailers in the US — and Staples is on the hook for a $US250 million termination fee if their big buy is rejected in Washington.
Like cigarettes, the long-term decline is an argument
For office-supply retailers, as with a number of other American industries once seemingly immune to decline, long-term secular pressures may be sufficient to bolster their case in Washington. Activist investor Starboard Value used that argument to try to force a combination of Staples and Office Depot, and it appears to have worked for both companies’ boards and investors.
Next, being able to successfully argue M&A is necessary to provide solvency and stability to investors and employees alike will factor heavily into regulators’ assessments of big deals, from Office Depot to tobacco giant Lorillard to Time Warner Cable.
Recent quarterly numbers showed slipping sales at Staples, and even as Office Depot continues to digest its Office Max deal, reporting better revenue, the company is shuttering stores coast to coast.
Companies like Staples and Office Depot have an advantage as they gear up for Federal Trade Commission and US Department of Justice queries, which other mega M&A players — like Comcast, in its ongoing quest to tuck in Time Warner Cable — can’t yet claim.
It’s one that could also come into play as other one-time corporate behemoths strategize their integration plans.
With Staples, as with another former industry titan in the US, Reynolds American, now setting up a separate argument before regulators for its Lorillard Inc. buy, a common theme emerges. Each multibillion-dollar titan is seeing demand for its products decline, and it is unlikely either will be fortunate enough for trends to reverse.
For Staples, it’s Amazon’s increasing dominance in online retail that chips into its top line — not to mention the increasing obsolescence of products like printer ink and paper. For Reynolds, it is the ongoing health and information campaigns in the US that, since the mid-1990s, have hacked at its core user base, as well as skyrocketing tobacco taxation on a state level.
Numerous investors and economists are arguing against the proposed Staples transaction, fighting activist Starboard Value. Starboard also has built up a position in Office Depot, making it a direct beneficiary to the proposed deal. But with projections of declining revenue, Washington regulators might be more eager to allow major transactions that are accompanied by big job cuts to pass their smell test.
None of this will make Brian Roberts’ proposed Time Warner Cable acquisition any more appetizing in D.C. — yet — but if he’s not successful in getting his $US45 billion deal approved this time around, Comcast may be able to copy other industries’ templates in coming years, if Americans continue to cut the cord in favour of streaming options.
Look for other companies in US industries facing similar pressures to pursue arguments similar to Staples’ as they try to make the most of what appears to be an increasingly flexible regulatory environment.