Government Wins Again In Bid To Stem the Wave of Industry Consolidation, Obtains Preliminary Injunction Against Staples-Office Depot Merger
 

The ongoing trend of companies in a wide range of industries seeking to grow quickly by acquiring competitors has increasingly been met with government resistance over the past few years.  For example, approximately one year ago, cable and broadband provider Comcast abandoned its plans to acquire Time Warner Cable in the wake of scrutiny from Department of Justice antitrust regulators.  And earlier this month, oilfield-services giants Halliburton and Baker Hughes announced that they would walk away from their $30 billion merger in the face of opposition from antitrust regulators (which requires payment by Halliburton to Baker Hughes of a $3.5 billion breakup fee).  Last week, Judge Emmet Sullivan of the United States District Court for the District of Columbia sided with the Federal Trade Commission (“FTC”) and entered a preliminary injunction blocking the combination of the country’s two largest office supply retailers, Staples and Office Depot, after holding a two-week trial.

Judge Sullivan’s full memorandum of opinion has not yet been unsealed (and even when it is unsealed, it will likely contain extensive redactions).  In Judge Sullivan’s already-published three-page order, however, the court found that the government showed “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.”  Order, Fed. Trade Comm’n v. Staples, Inc., Civ. No. 15-2115 (EGS) (May 10, 2016). 

Notably, the court appeared to define the relevant market for antitrust purposes in this case somewhat narrowly, insofar as it did not include, for example, individual consumers of office supplies who can purchase their pens, pencils, and notebooks, from several outlets, including from online retailers such as Amazon.  The court apparently found merit in the FTC’s argument that large corporations currently have only two options (Staples and Office Depot).  Nevertheless, both Staples and Office Depot have closed hundreds of stores amid falling revenues over the past three years as consumers have turned to other large retailers such as Wal-Mart and Amazon and other online retailers. Thus, had the market been defined more broadly to include individual consumers, the result might have been different.  

Following the decision, the companies indicated they will abandon the transaction rather than continue to fight, which means that Staples must pay a $250 million breakup fee to Office Depot.  The fee, which represents approximately four percent of the deal’s estimated value of $6.3 billion, was actually slightly below the median antitrust reverse breakup fee in public-company transactions over the last ten years (approximately 4.3 percent of transaction value) and well below the average (approximately 5.8%).  In light of the government’s willingness to oppose merger transactions between leading companies in a given industry, such companies looking to gain market share through acquisitions might make bargaining for smaller antitrust reverse breakup fees a higher priority during deal negotiations.