Staples Inc. and Office Depot Inc. shares soared after the two retailers were said to enter merger talks, bowing to pressure from activist investor Starboard Value to pool their resources.
The two companies are discussing a deal that would create one major office-supply chain in the U.S., according to a person familiar with the situation, who asked not to be identified because the deliberations are still private. The negotiations were previously reported by the Wall Street Journal, which called the talks “advanced.”
Staples rose as much as 13 percent to $19.40 in New York, while Office Depot jumped 21 percent to $9.24. Through Monday’s close, both stocks had been down for the year, with Staples falling 5.4 percent and Office Depot slumping 11 percent.
A deal would create a retail chain with more than $35 billion in revenue and thousands of stores, drawing scrutiny from antitrust regulators. The Federal Trade Commission previously approved the merger of Office Depot and OfficeMax, the industry’s second- and third-biggest chains, in 2013. The question now is whether a changing retail landscape – rife with competition from e-commerce sites – means there doesn’t need to be more than one major office-supply chain.
“The FTC’s key question likely will be whether there is anything special about competition from office-supply superstores, such that reducing the number of competitors in that channel to one will result in higher prices to at least some consumers for at least some prices,” Amanda Wait, a former FTC lawyer who is now a partner at Washington-based Hunton & Williams LLP, said in an e-mailed statement.
Staples, located in Framingham, Massachusetts, had a market value of $11 billion based on Monday’s closing price. Office Depot, based in Boca Raton, Florida, was pegged $4.1 billion.
Kirk Saville, a spokesman for Staples, and Karen Denning, a spokeswoman for Office Depot, both declined to comment.
Starboard, an investor with stakes in both retailers, sent a letter to Staples Chief Executive Officer Ronald Sargent last month demanding that his company engage advisers to work on a deal. The combination could deliver more than $2 billion in cost savings and help the retailers compete with larger chains and online offerings, according to Starboard.
At the time, Staples gave a tepid response to Starboard, saying it had already met with the investment firm on several occasions to consider ideas. It didn’t discuss its willingness to make a deal.
Starboard previously pushed for the merger of Office Depot and OfficeMax, and investors have speculated that it could replicate that strategy with Staples. New York-based Starboard has said it owns about 6 percent of Staples and almost 10 percent of Office Depot.
Doug Snyder, a managing director at Starboard, didn’t immediately return a call for comment.
This isn’t the first time Staples has tried to buy Office Depot. In 1997, the FTC derailed Staples’ acquisition of Office Depot as anticompetitive. By 2013, though, the agency’s view had shifted. When the FTC allowed Office Depot to buy OfficeMax, it said the advent of online retailing ensured competition in the market for office supplies. Consumers today also rely more heavily on big-box chains such as Wal-Mart Stores Inc. for office products, the commission said.
“Our decision highlights that yesterday’s market dynamics may be very different from the market dynamics of today,” the FTC said in its closing letter about the Office Depot merger with OfficeMax in November 2013. “In this case, significant developments in the market for consumable office supplies have led us to approve a merger when we had blocked a similar merger 16 years ago.”
While that decision opened the door to allowing a merger between Staples and Office Depot, the FTC will still closely scrutinize such a combination, according to Allen Grunes, a former Justice Department antitrust lawyer who is now with the Konkurrenz Group, a Washington-based advisory firm that counsels businesses on competition, privacy and consumer protection law.
“If there is a deal, it’s going to get a very close look,” Grunes said. “Issues that may not have been present in the previous deal could arise, such as how the companies price.”