Staples/Office Depot: Stories from the GCR Archives

Office supply stores gear up for FTC battle

Originally published 8 December 2015

Office supply superstores Staples and Office Depot say they intend to fight an administrative complaint filed yesterday by the US Federal Trade Commission to block their $6.3 billion merger, saying the agency misunderstood the “intense competitive landscape” in which they operate.

The FTC’s complaint, which was expected for some weeks, claims that the deal will end competition between companies that are often the top two bidders when supplying office supplies to large business customers, who then distribute the notebooks, printer paper and pens to their employees.

FTC chair Edith Ramirez said in a statement that the agency believes the deal “is likely to eliminate beneficial competition that large companies rely on to reduce the cost of office supplies.”

That market is considerably different than the direct-to-consumers sales that most people associate with the two office supply megastores. While investigating the Office Depot/OfficeMax merger, which the agency approved in 2013 without conditions, the FTC focused on sales to individuals and found that big-box stores, such as Walmart and Target, as well as online merchants, made up for whatever competition might be lost in a merger between those two stores.

But the commission says the business-to-business market is distinct from those grab-and-go retail purchases. Large companies turn to Staples or Office Depot to provide their office supplies because they offer a wide range of products, nationwide delivery, and other support and service features that businesses can require.

In a statement, the companies say they plan to fight the FTC’s challenge, both in its Part III administrative process and in federal court. The agency’s four commissioners voted unanimously to instruct staff to ask the federal court for an injunction to stop the deal while its in-house trial process played out.

The companies say that in their view, the FTC’s decision to contest the Staples/Office Depot deal is based on a flawed analysis of the market and contradicts its decision in Office Depot/OfficeMax, where the agency found the office supply market to be highly competitive. “The office products landscape has grown even more competitive since then,” Staples says in a corporate press release.

“The combination of Staples and Office Depot is based on creating an organisation able to compete in a vibrant market with strong regional players and powerful new national entrants,” Office Depot chairman Roland Smith said in a statement. “We are confident that this transaction is consistent with the 2013 FTC statement in the Office Depot/OfficeMax merger and intend to pursue legal options in order to complete this transaction.”

Those nationwide entrants include office supply dealers, manufacturers who sell direct to businesses and regional companies, among others, the companies say. The companies offered to transfer more than $500 million in commercial business contracts to third parties – likely including office supply wholesaler Essendant, which had been linked to the deal – but the FTC rejected the offer.

The companies say that between those new nationwide entrants into the office supply market and the more than $1 billion in expected savings the deal will create, the FTC’s challenge should fail. Those $1 billion in savings will occur over a three-year period as the company reduces its expenses and shutters stores.

The FTC in its statement said that it does not believe those efficiencies or new entrants will offset the harm to competition the merger would cause.

The agency also said it had worked closely with the Canadian Competition Bureau, which yesterday filed its own challenge to the deal with the country’s Competition Tribunal, and with staff of the antitrust agencies in Australia and the European Union. The EU launched an in-depth investigation of the merger in September.

FTC’s Staples/Office Depot challenge set to begin in late March

By Yasmine Harik

Originally published 18 December 2015

The District of Columbia federal court has announced that the FTC will begin its bid to stop office supply superstores Staples and Office Depot from merging on 21 March.

The announcement came Thursday as lawyers for both parties negotiated the parameters of the pending preliminary injunction hearing with Judge Emmet Sullivan. Fact discovery will close on 22 February and the final pre-hearing conference is tentatively scheduled for 16 March, Judge Sullivan said.

The FTC filed its federal lawsuit and administrative complaint against Staples last week, saying the company and its next largest rival, Office Depot, are by a wide margin “the two largest vendors of consumable office supplies to large ‘business-to-business’ customers” in the US.

These high-volume contract customers not only often get lower-than-retail prices through competitive bidding, but get their purchases delivered the next day to various drop-off points in office buildings, the FTC said, distinguishing them from individual and retail customers.

Pointing to the companies’ own documents that refer to each other as the only rival and to a “two-player” national market, the FTC said other office supply sellers could not deter a post-merger Staples from raising prices in its corporate contracts.

Weil, Gotshal & Manges partner Diane Sullivan, lead counsel for Staples, asked the judge how long, roughly, it would take for him to make a decision after the preliminary injunction hearing concluded. She noted that the FTC’s in-house administrative trial – the second and seemingly more elusive portion of an agency challenge – is set to begin on 11 May, and so asked the judge for a decision by 10 May if possible.

Staples has already announced that it will drop its bid to join forces with Office Depot should Judge Sullivan grant the FTC’s preliminary injunction request. The fate of the deal is in Judge Sullivan’s hands, the lawyers reiterated on Thursday.

When pressed on the number of days he will carve out for the hearing, Judge Sullivan said “at this point, there are no finite days. It is so arbitrary to do that, to choose a limit on days, and I’m not going to do it.”

“For example, if one party wants 10 days for the hearing and another wants only 5, it’s so artificial to just take the average and say 7 or 8,” Judge Sullivan said. The two prior FTC merger challenges – Sysco/US Foods in the DC district court, and STERIS/Synergy in Cleveland district court – lasted only a handful of days.

On the topic of confidentiality, Judge Sullivan said he would follow the same boundaries that he put in place for the DOJ’s trial against the abandoned GE/Electrolux tie-up, but encouraged the parties to limit confidential exhibits to strictly those “that shouldn’t see the light of day.”

So far in its investigation, the FTC has received 14 million pages of documents, 83 hours of deposition testimony and 130 custodial files.

But lead counsel for the commission Tara Reinhart said Staples is ducking what the FTC really wants: documents from the companies’ legal departments and higher-level executives who likely discussed the merger with competitors and customers, and had conversations trying to elicit letters of support for the deal. Judge Sullivan told Reinhart to make specific requests, and gave Staples more time to comply.

When the status conference ended, Judge Sullivan asked the lawyers if there is any chance of settlement. “We’ve had substantive conversations,” the Weil Gotshal partner said, but claimed the FTC has not countered Staples and Office Depot’s proposal.

Reinhart said there has been no counter-proposal and there won’t be until Staples’ proposal actually addresses the concerns of the commission – thus far, it has not done so, she said.

Staples defence team presses FTC witness’s credibility

By Charles McConnell

Originally published 31 March 2016

The Staples defence team yesterday pressed FTC witness Leo Meehan on why WB Mason removed and replaced a map that had been on their website for six years, the day Meehan, its president and chief executive officer, was set to testify in the Staples/Office Depot challenge.

In its effort to block the merger between Staples and Office Depot, the FTC has said WB Mason is only a regional player and would not be able to compete with a post-merger Staples and Office Depot on a national scale. The defence, however, has touted the company as a nationwide competitor.

The issue over the map came up during Staples counsel Allison Brown’s cross-examination of Meehan. Brown pointed out that for the past six years, a map of the United States existed on the “locations” tab of the WB Mason website.

That map highlighted the WB Mason distribution centres and branches, as well as wholesaler Essendant’s warehouses, from which some products are shipped.

Along with the map, there was a sentence that said WB Mason could service customers in all 50 states, as well as one that included the number of employees and locations. Meehan said the information had become out-of-date and needed to be corrected.

But Brown continued to push him on the timing. To prepare for his testimony, Meehan said he visited his company’s website yesterday and saw certain statistics were out of date.

Meehan said he then told the team in charge of that part of the website to update it. Some of the changes included changing the number of employees from 2,300 to 3,400 and changing the number of locations from 40 to 60.

The company changed the map. The site now features one representing what WB Mason calls “Masonville” – the 13 core states in which the company makes 97% of its revenue – with a map of the US below it. Accompanying the new maps is new wording, stating that WB Mason “can service branch locations outside of our delivery footprint for customers headquartered in Masonville.”

Brown pointed out that the new Masonville map is the exact map WB Mason sent the FTC, and the one that was eventually included in Meehan’s declaration. Brown asked Meehan if anyone at the FTC had contacted him and told him to make the changes to the company’s website.

Meehan said no, insisting that he just wanted to correct information that was out of date.

Brown pointed out that she had shown Meehan the “out-of-date” map at his deposition over a month ago and that the changes were only made Tuesday.

FTC attorney Maggie Dimoscato later asked Meehan if the agency had put any untrue statements in his declaration; last week, another witness had claimed the agency had attempted to embellish his declaration.

At one point, she explicitly asked him if he felt the FTC wanted him to say things that weren’t true, or if the FTC had added facts into a draft of the declaration. Meehan said no, and added the entire process was very fair. He said he was impressed with how accurately the FTC had condensed the three or four hours of conversations into the declaration.

Following those questions, the focus of DiMoscato’s direct examination was showing WB Mason as a strong regional player, highlighting the differences for them between “Masonville” and the rest of the country.

Masonville is the crux of the office supply company’s business. Meehan said it is home to 800 of the company’s approximately 830 trucks, all four of the company’s distribution centres, all but one of the company’s approximately 1,200 sales representatives and all of its approximately 350 customer service representatives.

In sum, the business in Masonville represents about 97% of the nearly $1.5 billion in annual revenue for WB Mason, Meehan said. He added that while they can compete regionally, only Staples and Office Depot offer the ability to accommodate the needs of the large companies with nationwide office supply needs.

There used to be six companies that could provide the necessary services nationwide as recently as the early 2000s, Meehan said.

“Now it’s down to two players,” he added. Even regionally, he said it’s a “small community of people” who can provide the dedicated sales representatives, desktop delivery, demanding IT requests and more.

Asked why the company does not have any distribution centres outside of Masonville, Meehan said, “We don’t have enough business to justify it.”

Staples counsel Brown pushed back in her cross-examination on this point, highlighting a case study by WB Mason after closing a deal with Ryder, which Meehan claimed was significant because of its size and scope. In exchange for leasing 400 trucks for its fleet, WB Mason received nearly all of Ryder’s nationwide office supply business.

The case study on the deal, released last summer, included plans for expansion by WB Mason into the Midwest and growth to $2 billion in annual revenue in the next five years. Additionally, Brown pointed out that the case study said WB Mason hoped to have a presence in all 50 states within the next 10 years.

In a redirect, Meehan said that he gets a kick out of Staples and Office Depot claiming WB Mason is a national player during the trial. He said that those two, as well as OfficeMax in the past, have always told potential customers that WB Mason is a regional player, adding that since he’s now in Washington, DC, testifying, his company is suddenly national.

As per one of the main themes of the trial so far, both the FTC and the Staples teams eventually moved the focus of its questions to Amazon and Amazon Business, which Staples has said will become a significant competitor.

Meehan said he is not worried about Amazon becoming a major competitor.

“I think that they would be challenged,” he said, adding that large businesses take interest in the value proposition of the full-service offerings of companies like WB Mason, Staples and Office Depot.

He added that desktop delivery to places like Harvard University – WB Mason handles thousands of them – are a unique offering that Amazon would have to develop.

“They’re going to have to get their hands dirty,” Meehan said, referring to the process of dealing with issues such as oil changes, trucks and unions.

During cross-examination, Brown asked Meehan if he had looked in depth into Amazon Business’ website or its capabilities. Meehan admitted he had not, but added if Amazon Business were making a splash into requests for proposal within Masonville, he would have heard.

Ultimately, Meehan said he is “neutral” on the merger, and said WB Mason will survive either way. He said his company will be able to compete in Masonville regardless of whether the two companies merge, and regardless of whether the merger results in lower or higher office supply prices.

He did say the merger would make it very challenging for a new player to enter the market. He said the $39 billion of market power combined with the developed buying power and expertise of a potential merged entity would be daunting for anyone to deal with on a national level.

A potential competitor, he said, would have to be a company “like Amazon.”

FTC says case against merger stands unrebutted by Staples

By Charles McConnell

Originally published 6 April 2016

After the Staples legal team rested its defence yesterday without calling a single witness, lead FTC attorney Tara Reinhart said the agency’s arguments against the company’s proposed tie-up with Office Depot have not been countered.

Reinhart said that the testimony by the FTC’s economic expert Carl Shapiro stands unrebutted, as does all the evidence presented to date in the case, because the defence refuses to call any witness or expert.

Lead Staples attorney Diane Sullivan yesterday interrupted an exchange between Judge Emmet Sullivan and Reinhart over a potential rebuttal witness, saying she would save everyone some time: the defence had decided to rest its case before it even began.

After a brief recess, Judge Sullivan said he still wanted to hear summation arguments from the two sides.

During her summation, Reinhart homed in on the major themes presented in her opening statement and throughout witness testimony over the past two weeks.

She stuck by the FTC’s decision not to include ink and toner in the agency’s analysis of the relevant product market, despite nine witnesses – by Judge Sullivan’s count – who included the products in their definition of consumable office supplies.

Reinhart said the increased presence of managed print services, which often supply ink and toner as part of a package, has made it easier for business customers to get those products from someone other than an office supply retailer. Large companies are increasingly carving ink and toner out of their traditional contracts with office supply vendors, she claimed.

Judge Sullivan asked if he can judge Amazon Business’s potential as a competitor to Staples in the next three years based on Amazon’s performance in the past three; Reinhart responded that he can look backwards and forwards in his assessment of the competitive landscape.

No evidence suggests that any existing companies will be able to expand enough to compete with a merged Staples and Office Depot, she said. “The evidence is just not there, your Honor.”

Staples attorney Diane Sullivan blasted the FTC in her summation for drawing a “gerrymandered product market” without ink and toner to inflate Staples and Office Depot’s market share.

“They had blinders on in this case,” she said, adding that the FTC was simply looking for a litigation win. Customers of, and competitors to, Staples all include ink and toner in consumable office supplies, she said – including the FTC’s own procurement officer.

The judge could stop his analysis of the case and make his ruling simply on the FTC’s “failure to define the relative product market correctly”, Ms Sullivan said, but she offered even more reasons why he should rule in the defence’s favour, such as the new competition posed by Amazon Business.

She also criticised the FTC’s handling of declarations, pointing to several instances when a witness struck something from the agency’s suggested draft of their declaration – most notably with regards to Amazon witness Prentis Wilson’s testimony.

“The government should not be in the business . . . of trying to get people to say things that aren’t true,” Sullivan said.

Although he seemed sceptical that he had the jurisdiction, authority and enforcement capability to do so, Judge Sullivan entertained the defence’s proposal that they would honour and extend contracts through to 2019.

Lead Office Depot attorney Matt Reilly also gave a brief summation argument, focusing on the importance of the merger for Office Depot. Without it, he said, the company will not be able to stay relevant and compete, citing $10 billion in lost revenue since 2007.

Judge Sullivan would be “making history” if he granted the FTC a preliminary injunction, Reilly said, because the agency has never won a case in which it failed to establish a presumption of anticompetitiveness.

Reinhart retorted that the defence was leading the judge “down the primrose path”.

Judge Sullivan asked Reinhart – but opened the question up to any counsel who could answer – if the FTC had any avenues to monitor competition if he let the merger happen.

FTC bureau of competition director Deborah Feinstein moved to the microphone to explain that the commission could pursue its parallel internal administrative trial and seek structural remedies if Judge Sullivan let the merger happen, but said it is very hard to “unscramble the eggs”.

Even if the FTC were to prevail in an administrative trial after the merger was consummated, Feinstein said, imposing and enforcing remedies on a merged entity is very difficult.

She offered the opposite as an option: issuing the preliminary injunction and allowing the companies to assess the competitive landscape. If there are substantial changes to competition – like Amazon Business growing – then the FTC would consider greenlighting the deal, Feinstein said.

Judge Sullivan ordered approximately 100 pages of findings of fact and conclusions of law to be filed by next Wednesday. He said he will hear arguments on 19 April at 10am.

But it is not clear in which direction he is leaning. He “seriously” urged the parties to talk and reach an agreement in the meantime, adding that he will remain flexible to meet if there are any developments.

FTC wins Staples/Office Depot challenge

By Charles McConnell

Originally published 11 May 2016

In a highly anticipated order issued yesterday evening, Judge Emmet Sullivan granted the FTC a preliminary injunction against the merger of office supply companies Staples and Office Depot.

“After considering the extensive record and the parties’ legal arguments, the court finds that plaintiffs have met their 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,” he wrote in the order.

Judge Sullivan did not make public the memorandum explaining his rationale for the decision, citing concerns about competitively sensitive information that would need to be redacted first.

Staples and Office Depot will officially terminate the merger on 16 May, with Staples paying a reverse termination fee of $250 million to Office Depot. The companies had said before and during the hearing that the deal wouldn’t survive a preliminary injunction.

“We are extremely disappointed that the FTC’s request for preliminary injunction was granted despite the fact that it failed to define the relevant market correctly, and fell woefully short of proving its case,” said Ron Sargent, chief executive of Staples, in a statement last night.

Judge Sullivan’s ruling comes 19 years after another Washington, DC, federal judge blocked Staples from acquiring Office Depot. At that time, the FTC’s concern was that Staples and Office Depot were two of the three largest office supply superstores in the US and that retail consumers would be harmed by the loss of competition.

However, when in 2013 Office Depot sought to merge with the third-largest office supply superstore chain, OfficeMax, the antitrust agency cleared the deal unconditionally on the grounds that both online and bricks-and-mortar retailers provided sufficient competition.

In February 2015, Staples announced that it would buy Office Depot for $6.3 billion, combining the two biggest office supply stores in the US.

The proposed tie-up alarmed the FTC. In December 2015, the agency sued to block the proposed merger, claiming the deal would end competition in the business-to-business office supply industry because the two companies are often the only choices for national entities looking for office supply vendors.

Debbie Feinstein, director of the FTC’s bureau of competition, called Judge Sullivan’s ruling against the merger “great news for business customers in the office supply market.”

“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 that buy office supplies,” she said in a statement last night.

Staples and Office Depot insisted that they would continue to face plenty of competition for corporate customers from regional rivals such as WB Mason, and most importantly, from new entrant Amazon Business. However, the FTC said none of these alternatives, nor a proposed divestiture of up to $1.25 billion of commercial contracts, would replace the lost competition.

In a surprising turn during the preliminary injunction hearing, lead Staples attorney Diane Sullivan, a partner at Weil, Gotshal & Manges, decided to rest the defence’s case without calling a single witness.

That move may have cost Staples a potential victory, however, as no one will know what the outcome might have been had the defence called its own witnesses. While Ms Sullivan thought the FTC came “woefully short” of meeting its burden, the judge disagreed.

The decision not to call a single witness may be scrutinised. At least one observer is interested to see if Judge Sullivan mentions it in his opinion: Daniel Bitton, an antitrust partner at Axinn, Veltrop & Harkrider in New York, said the ruling against the merger was “not entirely surprising” and said he is keen to see whether the judge factored in Staples’ decision to rest its case.

“It was a pretty unprecedented move,” Bitton said. “Who knows if that was ultimately outcome determinative though.”

Bitton added that the decision indicates Judge Sullivan probably accepted the FTC’s market definition and market share calculation of the two office supply giants. The FTC said in its opening statements that a combined company would command 79% of the relevant market.

“If you can show a high market concentration with high market shares, then the defendants have to come up with a pretty compelling counter argument,” Bitton said, adding that Staples, by resting its case, gave up the opportunity to rebut the FTC’s structural case with its own witnesses and economic expert.

“They largely put their eggs in one basket to basically attack the FTC’s market definition and share calculations,” he said, but added that he is not critical of the defence’s decision since there were likely important factors that went
into it.

Andy Goodson, a former FTC attorney who now advises hedge funds, also did not criticise the defence strategy. He raised the possibility that Staples could have thought it had more to lose by exposing its witnesses to the FTC’s cross-examinations.

Judge Sullivan noted yesterday that he would not issue his decision before 4.30pm – which is after the 4pm closing bell at the New York Stock Exchange. Nonetheless, Office Depot’s stock fell more than 26% and Staples’ stock more than 10% in after-hours trading.

While Canada also sued to block the merger, the European Commission diverged and cleared it with remedies.

Sophisticated Staples/Office Depot efficiencies defence never saw the light

By Alex Wilts

Originally published on 9 February 2017

Staples/Office Depot could have been the first case that defendants had won based on an efficiencies defence, the lead FTC lawyer on the case said last week.

Tara Reinhart, who has since moved back to private practice at Skadden, Arps, Slate, Meagher & Flom, said she had been expecting Staples and Office Depot to present a sophisticated efficiencies argument to defend their merger. Instead, the defence decided to rest their case without calling a single witness.

The two office supplies companies announced their plan to merge in February 2015, but the FTC sought a preliminary injunction against the transaction, saying it would harm consumers. Judge Emmet Sullivan sided with the agency in May 2016, leading to the companies’ decision to call off
their deal.

Weil, Gotshal & Manges partner Diane Sullivan was the lead attorney for Staples. Throughout the trial, she and her team told a story of an industry with strong regional competitors such as WB Mason, and a rising Amazon Business that could potentially change the way office supplies are sold to businesses.

“In the opening statement, Staples counsel compared Staples and Office Depot to penguins on the melting iceberg,” Reinhart said on Friday while speaking on a panel. “They were in a declining market, and the online retailers were driving their retail business [profits] lower and lower. And she promised the judge that they would put this case on about how difficult things were, and how good this deal would be for all the customers.”

Reinhart said Staples had told Judge Sullivan that he was legally obliged to weigh the alleged harm of the merger against the alleged efficiencies.

The companies could have pointed to evidence of synergies that had grown out of the 2013 Office Depot/OfficeMax merger, Reinhart said.

“That was the plan, but they didn’t do it,” she said. “I do think this judge had an open mind, and was very concerned about the possibility of Amazon developing very quickly, and was looking for a good efficiencies argument that he could accept and he could weigh.”

Also speaking on the panel last week, Simpson Thacher & Bartlett partner Andrew Lacy, who represented Office Depot, said the lawyers determined that their case hinged on whether they could convince the court that Amazon Business was going to be a market game changer – not on whether there would be potential cost savings from the transaction.

The defence had also kept in mind that efficiencies have never saved an other­wise anticompetitive merger, he said.

“I think I can say that I hope in my lifetime I do have a case with as strong of an efficiencies case as we had in Staples/Office Depot,” Lacy said.

Unlock unlimited access to all Global Competition Review content