ECO 6655 Auburn Staples and Office Depot Again Propose a Merger Questions

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Staples and Office Depot Again Propose a Merger1
On February 4, 2015, Staples and Office Depot announced a definitive agreement between the
two companies in which Staples would acquire all of the outstanding shares of Office Depot.
Office Depot shareholders would receive cash and Staples stock in return for their shares of
Office Depot stock. Based on the cash and stock offering, the deal values Office Depot $6.3
billion.
This was the second proposed merger between the two companies. A 1996 proposed merger
between the two companies was challenged by the Federal Trade Commission (FTC) on the
grounds that it would create monopoly power in the office supply market. In July 1997, a judge
issued an injunction against the merger, and the two companies withdrew their plans. However,
much had changed in the retail landscape between 1997 and 2015.
In December, 2015, the FTC filed an administrative complaint alleging that the merger violated
antitrust law and would lead to significant harm to consumers. The following is an outline of the
case argument presented by the FTC.
NATURE OF THE CASE
Staples and Office Depot are—by a wide margin—the two largest vendors of consumable office
supplies to large “business-to-business” (“B-to-B”) customers (i.e., business customers buying
for their own end-use) in the United States. Staples’ and Office Depot’s own documents state
that they are the only participants in a “two player” national market. They are the best options for
most large B-to-B customers—and the only meaningful options for some large B-to-B
customers—particularly those with facilities in multiple regions of the country. And they are
each other’s closest competitors for such customers. As Staples explained at an internal
Leadership Summit, “There are only two real choices for customers,” Staples and Office Depot.
Office Depot similarly made clear to a customer that “[o]n a national scale, Office Depot’s
competition is Staples.”
Direct head-to-head competition between Staples and Office Depot yields substantial benefits to
large B-to-B customers in the form of lower prices and better service. If consummated, the
merger of Staples and Office Depot (the “Merger”) would eliminate that competition. Office
Depot acknowledged this in April 2015—two months after the Merger was announced—
encouraging a large B-to-B customer to accept its “best and final” offer promptly, stating, “If and
when [Staples’] purchase of Office Depot is approved, Staples will have no reason to make this
offer.”
By eliminating direct competition between Staples and Office Depot, the Merger threatens
significant harm to a wide range of large B-to-B customers. Office supplies vendors sell and
1
Kyle Anderson, Michael Baye, and Jeffrey Prince prepared this case to serve as the basis for classroom discussion
rather than to represent economic or legal fact. The case was written based on the public documents involving the
Federal Trade Commission vs Staples, Inc. and Office Depot, Inc. (December 2015).
distribute consumable office supplies (e.g., pens, staplers, notepads, folders, and copy paper) to
all manner of businesses across the United States. Employees of these businesses use
consumable office supplies in connection with their jobs. As a result, businesses depend on
vendors to provide consistent and reliable delivery of consumable office supplies so that their
employees have the products they need to work productively and on a cost-effective basis.
Large B-to-B customers typically require an office supplies vendor with experience and a strong
reputation for providing consumable office supplies to large B-to-B customers. These
requirements are especially important for customers seeking delivery on a multiregional or
national basis. Many large B-to-B customers require that their office supplies vendor provide a
broad range of national-brand and private-label products, flexible and reliable delivery (including
desktop delivery), high levels of customer service, customizable product catalogs, detailed
utilization reporting, and sophisticated information technology (“IT”) interfaces for procurement
and billing. Moreover, large B-to-B customers require those features and services to be part of
the transaction, along with consumable office supplies at competitive prices.
Large businesses typically purchase consumable office supplies pursuant to contracts awarded
through requests for proposal (“RFPs”), auctions, or bilateral negotiations. Staples and Office
Depot generally compete head-to-head in such proceedings. They are often the two finalists in
RFPs or other contests because they can obtain the lowest cost of goods from office supplies
manufacturers and they possess similar networks of distribution centers, salesforces, and other
services and features, such as strong reputations and experience, high levels of customer service,
sophisticated IT, and product utilization monitoring and tracking. Large B-to-B customers often
use those similar offerings to play one competitor off the other to obtain lower pricing, other
financial incentives, better service, and improved contract terms. Indeed, Staples and Office
Depot frequently lower prices, increase discounts, and offer other financial incentives to take
business away from each other, and to avoid losing business to each other.
Many large B-to-B customers contract with a single office supplies vendor for consumable office
supplies. Doing so allows these customers to consolidate their purchases and leverage the bigger
purchasing volume to negotiate lower prices and higher discounts, rebates, or other pricing
concessions. In addition, contracting with a single office supplies vendor allows large businesses
to track and monitor usage of office supplies through one vendor, rather than several different
vendors, thereby lowering their costs and improving operational efficiency. Using a single office
supplies vendor also provides large B-to-B customers with a single point of contact for problems
or concerns, a single IT interface for ordering, and a single payee for administrative purposes.
These features are important to many large B-to-B customers because they enhance efficiency,
ease of use, and administration, thereby lowering their costs of doing business.
For large B-to-B customers with locations across the United States or in multiple regions of the
country, using a single office supplies vendor generally means choosing an office supplies
vendor with national or multi-regional distribution capabilities. Staples and Office Depot are the
only two office supplies vendors that can provide on their own the low prices, nationwide
distribution, and combination of services and features that many large B-to-B customers require.
Once a large B-to-B customer contracts with an office supplies vendor, it attempts to ensure that
the employees responsible for purchasing consumable office supplies purchase under the
contract with its chosen office supplies vendor. Maximizing spend with its contracted office
supplies vendor often allows a large B-to-B customer to earn the highest volume-based
discounts, rebates, or other pricing incentives. It also minimizes the inefficiency of having to pay
invoices from multiple vendors and accommodate multiple deliveries.
Other supply options have significant disadvantages for large B-to-B customers. Local or
regional vendors (including but not limited to W.B. Mason), local or regional consortia, and ad
hoc region-by-region networks of suppliers have higher costs and thus higher prices, limited
geographic footprints, and/or logistical and coordination challenges for large B-to-B customers.
Because of these disadvantages, these other supply options have relatively small shares of sales
to large B-to-B customers.
The Merger would combine the office supplies vendors that are—by far—the two top choices for
a significant number of large B-to-B customers. It would eliminate beneficial competition
between the two largest, most significant, and most attractive alternatives for many large B-to-B
customers.
The Merger also would create a firm with a dominant share of the relevant market and
significantly increase market concentration. Post-Merger, Staples would control more than 70%
of the relevant market. The next-largest competitor would possess less than 5% of the relevant
market. Under the 2010 U.S. Department of Justice and Federal Trade Commission Horizontal
Merger Guidelines (“Merger Guidelines”), a post-merger market-concentration level above
2,500 points, as measured by the Herfindahl- Hirschman Index (“HHI”), and an increase in
market concentration of more than 200 points renders a merger presumptively unlawful. PostMerger market concentration would be more than 4900, and would increase HHIs in an already
concentrated market by well over 200 points. Thus, the Merger is presumptively unlawful.
Other office supplies vendors, including but not limited to Amazon Business, regional vendors
such as W.B. Mason, distribution consortia, and vendors of adjacent products, such as
janitorial/sanitation products or breakroom supplies, cannot meaningfully constrain a postMerger Staples. As a result, Staples could charge higher prices and would have a diminished
incentive to maintain or improve quality for large B-to-B customers if it were allowed to acquire
Office Depot.
Similarly, manufacturers of “core” consumable office products, such as pens, folders, and
notepads, generally do not sell core office supplies directly to large B-to-B customers,
particularly in the quantities that such customers would want. They generally sell to wholesalers
or vendors such as Staples and Office Depot. Nor would it be practicable for large B-to-B
customers to buy office supplies from a large number of manufacturers. Wholesalers do not
generally sell consumable office supplies directly to large B-to-B customers. Rather, they
generally sell to office supplies vendors, which then resell those products to large B-to-B
customers.
Finally, buying at retail, whether from brick-and-mortar or online retailers, including Amazon
Business, generally would be more expensive for large B-to-B customers than purchasing from
an office supplies vendor, and generally would not provide the full combination of other benefits
important to large B-to-B customers, such as desktop delivery, order tracking, electronic
ordering, flexible payment terms, negotiated pricing, and consistency of product selection and
availability.
The companies cannot show that new entry or expansion by existing vendors would be timely,
likely, or sufficient to counteract the anticompetitive effects of the Merger. Significant barriers to
entry into office supplies distribution to large B-to-B customers—particularly national and multiregional customers—exist, making entry or expansion difficult and incapable of constraining the
merged entity.
Staples and Office Depot cannot show cognizable efficiencies that would offset the likely and
substantial competitive harm from the Merger.
BACKGROUND
Jurisdiction
Staples Inc. and Office Depot, Inc., and each of their relevant operating entities and parent
entities are, and at all relevant times have been, engaged in commerce or in activities affecting
“commerce” as defined in Section 4 of the FTC Act, 15 U.S.C. § 44, and Section 1 of the
Clayton Act, 15 U.S.C. § 12. The Merger constitutes an acquisition subject to Section 7 of the
Clayton Act, 15 U.S.C. § 18.
Companies
Staples is a publicly traded corporation organized under the laws of Delaware with headquarters
in Framingham, Massachusetts. In fiscal year 2014, Staples generated $22.5 billion in sales, with
54.8% of that coming from office supplies. Staples operates three business segments: North
American Stores & Online, North American Commercial, and International Operations. In fiscal
year 2014, 36.8% of Staples’ total sales came from the North American Commercial segment.
Staples is the country’s largest vendor of consumable office supplies to B-to-B customers.
Office Depot is a publicly traded corporation organized under the laws of Delaware with
headquarters in Boca Raton, Florida. In fiscal year 2014, Office Depot had $16.1 billion in
revenue, with 47.2% of that coming from sales of office supplies. Office Depot operates through
three divisions: North American Retail Division, North American Business Solutions Division,
and International Division. In fiscal year 2014, 37.4% of Office Depot’s sales came from the
North American Business Solutions Division. Office Depot is the country’s second-largest
vendor of consumable office supplies to B-to-B customers.
The Merger
On February 4, 2015, Staples and Office Depot entered into an Agreement and Plan of
Merger (“Merger Agreement”), pursuant to which each share of Office Depot stock would be
converted into the right to receive $7.25 in cash, plus approximately 0.2 shares of Staples’
common stock. As of the market’s close on February 3, 2015, these terms of the Merger
Agreement equated to a value of Office Depot of $6.3 billion. Either party may terminate the
Merger Agreement if it is not consummated by February 4, 2016.
RELEVANT MARKET
The relevant market is the sale and distribution of consumable office supplies to large businessto business customers in the United States. Large B-to-B customers are particularly vulnerable to
the proposed Merger because many have nationwide or multiregional operations and require an
office supplies vendor that can provide low pricing, high levels of service, and delivery across all
of their operations. For such customers, Staples and Office Depot are the two best options.
Relevant Product Market
Consumable office supplies consist of an assortment of office supplies, such as pens, paper clips,
notepads, and copy paper, which are used and replenished frequently. It is appropriate to
evaluate the Merger’s likely effects through an analysis of the assortment of consumable office
supplies because each of the products in the assortment is offered under similar competitive
conditions. Thus, grouping the hundreds of individual consumable office supplies into an
assortment for analytical convenience enables the efficient evaluation of competitive effects with
no loss of analytic power.
B-to-B customers buy consumable office supplies for their own end-use (i.e., for their employees
to use in the course of performing their job duties), rather than for resale. Consumable office
supplies do not include ink and toner for printers and copiers. Many B-to-B customers,
particularly large B-to-B customers, buy ink and toner directly from ink and toner manufacturers,
or as part of a package of “managed print services,” in which vendors bundle ink and toner sales
with leases of copier and printers, repair services, and/or copy and printer maintenance services.
As a result, large B-to-B customers often purchase ink and toner from different vendors, under
different contracts, than those from which they purchase consumable office supplies.
Consumable office supplies do not include other office-related products, such as janitorial or
break-room products. Janitorial or break-room products are sold under substantially different
competitive conditions than consumable offices supplies.
Large B-to-B customers include, but are not limited to, those that buy $1 million annually of
consumable office supplies for their own end-use. The sale and distribution of consumable office
supplies to large B-to-B customers, many of whom have multi-regional or national operations,
entails the warehousing, sale, and distribution of a wide range of such office supplies, along with
high levels of customer service and value-added services.
The sale and distribution of consumable office supplies to large B-to-B customers is distinct
from the sale and distribution of consumable office supplies to other customers, including
individual consumers or small- and medium-sized businesses. Large B-to-B customers generally
require, and the sale and distribution of consumable office supplies to large B-to-B customers is
distinguished by, a number of key attributes, including but not limited to:
1. Procurement Processes: Large B-to-B customers generally procure consumable office
supplies on contracts awarded through formal RFPs, auctions, or direct negotiations, often
obtaining lower prices than other customers.
2. National or Multi-Regional Distribution: Many large B-to-B customers have operations
in multiple regions of the United States. As a result, to increase efficiency and reduce
transaction costs, large B-to-B customers often require a single vendor with a broad
geographic footprint that can distribute consumable office supplies to all their locations in
multiple regions of the country.
3. Next-Day Desktop Delivery: Many large B-to-B customers require next-day and desktop
delivery—that is, delivery to one or more desks or drop-off points within an office
building—to reduce storage costs.
4. High Levels of Service: Large B-to-B customers require that their office supplies vendors
provide high levels of customer service, including dedicated account representatives
and/or customer service representatives to address any customer concerns or issues in a
timely manner.
5. Valued-Added Services: Large B-to-B customers often require detailed utilization
reporting to allow them to track and monitor on a regular basis their employees’ uses of
and needs for office products. They also often require the creation of customizable
product catalogs to encourage their employees to order and use products for which they
have already negotiated the lowest prices.
6. Sophisticated IT Systems: Large B-to-B customers generally require their office supplies
vendor to have sophisticated IT capabilities that interface directly with their eprocurement and billing systems.
7. Reputation and Financial Stability: Large B-to-B customers generally require an office
supplies vendor with experience and a strong reputation for supplying large B-to-B
customers with office supplies, as well as financial stability.
Staples and Office Depot recognize the particular needs of large B-to-B customers and tailor
their products and services to meet those needs. Both companies categorize B-to-B customers by
size, with groups of employees dedicated to serving different groups of customers.
Thus, the sale and distribution of consumable office supplies to large B-to-B customers is the
relevant product market in which to analyze the Merger’s likely effects.
Relevant Geographic Market
Staples and Office Depot compete for the sale and distribution of consumable office supplies
across the United States. Many large B-to-B customers operate nationally or in multiple regions
of the country. Accordingly, it is appropriate to analyze the competitive effects of the Merger in
the United States.
Internal company documents acknowledge the existence of a national market for the sale and
distribution of consumable office supplies to large B-to-B customers, referring to themselves as
the only two players in a “national market.” They compete to provide the sale and distribution of
consumable office supplies to large B-to-B customers through their respective networks of
warehouses and distribution centers located around United States.
Many large businesses have a number of locations dispersed nationwide or across multiple
regions of the United States. A substantial number of large B-to-B customers choose a single
office supplies vendor with a geographically dispersed network of distribution centers to serve
their facilities. These customers do so because consolidating their purchases with a single vendor
gives them the ability to get lower prices, or increased discounts, rebates or other pricing
incentives, from that vendor. In addition, choosing a single nationwide office supplies vendor
provides large B-to-B customers with centralized and consistent services and terms across their
facilities, including: (1) centralized contracting, (2) a single point of contact, (3) a single
reporting/auditing function, (4) a single IT interface for users, and (5) ease of administration of
the distribution contract.
Additionally, many large B-to-B customers enter into contracts for nationwide distribution, with
nationwide pricing terms, and consider the vendor’s ability to provide nationwide distribution
and service in the selection process. Many large B-to-B customers with operations in multiple
regions of the country, as opposed to nationwide, similarly want one vendor that can provide
consistent pricing, service, and delivery across all their locations, and therefore often require a
vendor with national capabilities. Therefore, for consumable office supplies sold and distributed
to large B-to-B customers, the United States is the relevant geographic market.
MARKET STRUCTURE AND THE MERGER’S PRESUMPTIVE ILLEGALITY
Staples and Office Depot are by far the two largest vendors of consumable office supplies to
large B-to-B customers. When large B-to-B customers issue RFPs for the sale and distribution of
office supplies, Staples and Office Depot (including OfficeMax, which was acquired by Office
Depot in 2013) are usually the two finalists for the business. In fact, Staples and Office Depot are
often the only two companies that submit a proposal to supply a broad range of consumable
office supplies on a nationwide basis.
The Merger Guidelines measure concentration using the Herfindahl-Hirschman Index (“HHI”).
The HHI is calculated by totaling the squares of the market shares of every firm in the relevant
market. Under the Merger Guidelines, a merger is presumed likely to create or enhance market
power—and is presumptively illegal—when the post-merger HHI exceeds 2,500 and the merger
increases the HHI by more than 200 points.
The market for the sale and distribution of consumable office supplies to large B-to-B customers
is highly concentrated, and the parties control the majority of sales. Post-Merger, the market
would be substantially more highly concentrated than it is today. Post-Merger, Staples would
control more than 70% of this relevant market. The next largest competitor would possess less
than 5% of the relevant market. The Merger would result in a post-Merger HHI of well over
2500, and an increase in concentration of well over 200 points. Post-Merger market
concentration would be more than 4900, and would increase HHIs in an already concentrated
market by well over 200 points. Thus, the Merger would result in concentration above the
amount necessary to establish a presumption of competitive harm.
ANTICOMPETITIVE EFFECTS:
The Merger Would Eliminate Vital Head-To-Head Competition between Staples And
Office Depot
The two companies are each other’s closest competitors. They are the two largest vendors of
consumable office supplies to large B-to-B customers in the United States. The scale and
capabilities of Staples and Office Depot are similarly matched, and are much larger and more
robust than those of the next-largest vendor of consumable office supplies to large B-to-B
customers (a regional office supplies vendor, W.B. Mason).
Staples’ and Office Depot’s size allows them to obtain products from manufacturers at lower
prices than other vendors generally can. Both also offer a collection of distribution services that
no other vendor of consumable office supplies can match: a national footprint with an extensive
array of warehouses and distribution centers located across the country; correspondingly large
salesforces; product breadth and depth, including private-label products; a single point of contact
across all of a customer’s locations; a single user interface that connects to a customer’s
procurement and billing systems; and other significant value-added offerings, such as order
tracking, utilization reporting, and customizable catalogs.
The companies acknowledge that they are each other’s closest competitors. One of Office
Depot’s own documents indicates that “[o]n a national scale, Office Depot’s competition is
Staples.” Staples refers to itself as operating in a “2 player national market” and notes that
“[t]here are only two real choices for customers.”
They are often the first and second choices for large B-to-B customers of consumable office
supplies, and predominantly win large B-to-B customers from, and lose large B-to-B customers
to, each other.
Staples and Office Depot compete aggressively with each other on price and non-price terms to
win and retain the business of large B-to-B customers. Staples and Office Depot frequently must
compete with each other by lowering prices, increasing discounts or rebates, and providing
significant cash incentives to win or keep large B-to-B customer accounts.
Large B-to-B customers benefit from the competition between the two firms. Among other
things, that competition enables customers to pit Staples and Office Depot against each other to
obtain lower prices and better contract terms. Large B-to-B customers switch, or threaten to
switch, their business from Staples to Office Depot, and vice versa, to obtain better prices,
discounts, cash incentives, and other beneficial terms. There are many of examples of direct
price competition between Staples and Office Depot for large B-to-B customers. The Merger
would eliminate this intense head-to-head price competition for large B-to-B customers.
Staples and Office Depot also compete aggressively on non-price terms to win large B-to-B
customers by offering high-quality services. They currently risk losing business to each other if
large B-to-B customers perceive one company’s service as inferior or lacking. After the Merger,
Staples would face substantially less competition for large B-to-B customers, and would have
less incentive to improve, or even maintain, its current level of service to win or keep business.
Retail stores and internet websites directed at retail consumers are not viable alternatives for
most large B-to-B customers. Such retailers cannot provide the level of pricing or service that
office supplies vendors such as Staples and Office Depot provide and that large B-to-B
customers require.
Wholesale suppliers of office supplies are not meaningful alternatives for most large B-to-B
customers because wholesalers generally sell only for resale, not to businesses for their own use.
Even when wholesalers work with independent vendors to distribute to customers, those
wholesaler-vendor partnerships cannot provide the level of pricing or service that large office
supplies vendors provide and that large B-to-B customers require.
Manufacturers of consumable office supplies are not a viable distribution option for most large
B-to-B customers’ consumable office supplies needs. Given the breadth of office supplies large
B-to-B customers buy, such customers would have to purchase from a large number of different
manufacturers to cover their employees’ needs. Such purchasing would be highly inefficient,
costly, and not practicable for most large customers. Moreover, manufacturers of consumable
office supplies generally sell only in very large quantities, generally far larger than a B-to-B
customer would purchase for its own use. As a result, manufacturers of consumable office
supplies generally do not sell their products directly to customers buying for their own end-use
and not for resale.
Other office supplies vendors, such as Amazon Business, regional vendors such as W.B. Mason,
distribution consortia, and vendors of adjacent products, such as janitorial/sanitation products or
breakroom supplies, generally have some combination of higher costs and thus higher prices,
limited geographic footprints, and/or logistical and coordination challenges for large B-to-B
customers. As a result, they would not meaningfully constrain Staples’ exercise of market power
post-Merger.
LACK OF COUNTERVAILING FACTORS
Barriers to Entry and Expansion
It is not likely that new entry or expansion by existing firms would be timely, likely, or sufficient
to offset the anticompetitive effects of the Merger. A firm seeking to enter or expand in the
market for the sale and distribution of consumable office supplies to large B-to-B customers,
many of whom operate nationally or in multiple regions of the country, would face significant
barriers to success.
One key obstacle to expansion by regional firms or consortia is having the geographic footprint
to serve large B-to-B customers, many of which operate nationally or in multiple regions of the
country. Creating a national distribution network anywhere close to that offered by Staples or
Office Depot would be time and resource intensive.
Other vendors of consumable office supplies are many years and significant capital investments
away from being in a position to replace the competition that Office Depot currently provides to
Staples, even assuming those other vendors were likely to expand their geographic footprints.
Additionally, entrants must develop sophisticated IT systems that large B-to-B customers expect,
to allow customized ordering systems that interface with the customer’s procurement, billing, and
utilization tracking systems. Such systems are costly to develop and maintain.
Large B-to-B customers also value having a relationship with an experienced sales representative
that understands their particular needs. Thus, vendors seeking to enter or expand must recruit and
hire a competent and experienced salesforce that can serve customers in multiple regions of the
country. To hire enough sales representative to enter or expand on a sufficient scale to constrain
the merged firm in multiple regions or nationally would take a significant amount of time and
effort, particularly in light of noncompetition and non-solicitation agreements that incumbent
vendors have with their employees.
Entrants also must overcome reputational barriers to entry and the companies’ strong
incumbency advantage. A significant percentage of RFPs are won by incumbent vendors-and
often by Staples or Office Depot.
Efficiencies
Staples and Office Depot have not demonstrated cognizable efficiencies that would be sufficient
to rebut the strong presumption and evidence that the Merger likely would substantially lessen
competition in the relevant market.
CONCLUSION
For the reasons outlined above, the Staples and Office Depot merger should not go through as
proposed by the two companies. The merged entity would have the ability to significantly raise
price, and due to diminished competition would have less incentive to increase service to this
segment of customers.
1. How would you classify the office superstore industry in 2015? Who
are the competitors? What are the characteristics of this industry that
lead to this conclusion?
2. What barriers to entry help maintain the industry structure?
3. What is the relevant market for this case? Who are the customers?
Should retailers that sell, but do not specialize in office products, be
considered as part of the market? What evidence supports this
conclusion?
4. How is the Herfindahl-Hirschman Index (HHI) affected by the
merger? Are the HHI levels in the case indicative of high industry
concentration?
5. What arguments could Staples and Office Depot make in defense of
their merger?
6. Use a search to find out how the case was resolved.

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