Dire Predictions Failed to Save Office-Supply Merger

     WASHINGTON (CN) – A federal judge blocked the proposed merger of the nation’s two largest office retailers despite being told the fate of the companies is akin to “penguins whose destinies appear doomed in the face of uncertain environmental change.”
     Unfazed by the dire warning, U.S. District Judge Emmet Sullivan found that the merger could reduce competition, could create a monopoly and could drive up prices for large businesses that buy office supplies.
     In a 75-page ruling initially filed under the seal but made public Monday, Sullivan noted that the two companies argued that “they are like ‘penguins on a melting iceberg,’ struggling to survive in an increasingly digitized world and an office-supply industry soon to be revolutionized by new entrants like Amazon Business.”
     Office Depot and Staples opted not to present expert witnesses, arguing that the International Trade Commission and its co- plaintiffs, the Commonwealth of Pennsylvania and the District of Columbia, “failed to establish their prima facie case.”
     In the end, Sullivan disagreed and found that the merger would leave few other competitors in the market capable of competing against the merged enterprise.
     “Although Amazon Business may transform how some businesses purchase office supplies, the evidence presented during the hearing fell short of establishing that Amazon Business is likely to restore lost competition,” the ruling stated.
     “Large companies purchase more than $2 billion of office supplies from defendants annually,” the memorandum opinion notes, adding that such companies prefer to work with a single vendor that can meet all of their needs.
     Since Office Depot and Office Max merged in 2013, Office Depot and Staples have captured a significant chunk of office supply sales.
     “Defendants’ market share of the Fortune 100 sample as a whole is striking: Staples captures 47.3 percent and Office Depot captures 31.6 percent, for a total of 79 percent market share,” the ruling states.
     That market share, as the court defines it, occurs in the “B-to-B” space, according to the ruling. The companies that occupy that space purchase at least $500,000 of office supplies annually, including pens, post-it notes and paperclips, and were treated by the court as a separate market.
     Office Depot and Staples contested that market definition as “gerrymandered,” alleging that their market share would be smaller if it included ink and toner. Again, the court disagreed, citing “voluminous record evidence” that supports its exclusion.
     “Defendants could have presented expert testimony to support that proposition,” Sullivan wrote, noting again that they chose not to.
     “Antitrust laws exist to protect competition, even for a targeted group that represents a relatively small part of an overall market,” Sullivan wrote.
     While smaller office supply vendors do exist, the ruling says they do not typically bid on large contracts in the B-to-B space because they generally cannot meet the office supply needs of those companies.
     As for larger companies with more brand recognition like Amazon Business, Sullivan noted that it has yet to win a primary vendor contract and has a business model “at odds” with the B-to-B industry, because half of its sales “are from independent third-party sellers over whom Amazon Business has no control.”
     The memorandum opinion also mentioned internal company documents that show Office Depot and Staples view themselves as the only office supply option for large businesses.
     “[T]here are only two real choices for them. Us or Them,” the ruling quotes one of those documents.
     “Not surprisingly, defendants view themselves as each other’s fiercest competition,” the opinion says, noting that they “consistently compete head-to head with each other to win large B-to-B contracts.”
     That competition has been good for large businesses that buy their office supplies from one or the other, and have been able to extract significant price concessions,” the ruling says.
     “While the Court’s decision is surely a great disappointment to defendants, the court is optimistic that defendants will find ways to innovate, evolve and remain relevant in the rapidly changing office supply industry,” a footnote in the ruling said.
     Office Depot and Staples announced their proposed $6.3 billion merger in February, 2015 after which the International Trade Commission launched an investigation. The ITC filed a motion for a preliminary junction to stop the merger at the conclusion of its investigation on Dec. 7, 2015.
     According to the ruling, this antitrust case produced a staggering 15 million pages of discovery documents, with 4,000 exhibits introduced into evidence.
     Office Depot and Staples said they would not proceed with the merger if the court granted the ITC a preliminary injunction.

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