A lawyer defending a merger of Staples and Office Depot once described these two office-supply giants as penguins caught on a melting iceberg.
She argued that online shifts — particularly those pushed by Amazon — were bringing about massive climate change in the industry and upending the old order.
That was five years ago. A federal judge at the time didn’t quite see it that way: Amazon Business, the workplace supplies arm of the retail giant, was in its infancy, and Staples and Office Depot still dominated the market. The judge agreed with the Federal Trade Commission and blocked the $6 billion-plus deal on antitrust grounds in May 2016.
A lot has changed since that fateful day. Amazon’s growth in the business-to-business sector poses more of a threat to Framingham-based Staples, but it might also help reopen the door for this merger. Now, private equity mogul Stefan Kaluzny, whose firm Sycamore Partners acquired Staples the following year, has revived the concept of an Office Depot buyout.
This time around, Staples is proposing a deal valued at $2.1 billion, or one-third of what it offered in the previous go-around. (Staples and Office Depot also tried, unsuccessfully, to get hitched in 1997.) This decreased valuation over the past several years reflects the challenges both companies face — challenges that were exacerbated by the work-from-home trend during the COVID-19 pandemic. More office supplies are being shipped directly to consumers’ doorsteps. This is a world in which Amazon thrives.
Kaluzny sent a letter to the board of Office Depot parent ODP Corp. on Monday, offering $40 per share for ODP. That’s a 61-percent premium over its average share price for the past 90 trading days, as Kaluzny emphasized in the letter. But it’s more like an 8-percent premium compared to ODP’s closing price on Friday of $36.96.
To fend off regulatory concerns, Staples would accept a divestiture of ODP’s business-to-business operation to a third-party buyer. It’s the business supply issue, not the retail side, that got the merger into trouble the last time. Affiliates of Staples/Sycamore already own nearly 5 percent of ODP’s shares.
Other Office Depot investors sure seem to be on board. ODP’s stock price rose nearly 20 percent on Monday, to $44.14 a share, after the news broke.
But Kaluzny and his lieutenant, Staples chief executive Sandy Douglas, need to win over antitrust regulators, too. The Biden administration’s arrival may not mean much at the FTC, at least not right away: The agency’s five commissioners serve staggered, seven-year terms, although the president can pick who chairs the group. Alicia Downey, a Boston antitrust lawyer, said she’s not aware of any radical shift in how the FTC analyzes these deals in the past five years.
Downey fully expects Staples will revive the argument about the threat posed by Amazon and other big retailers expanding into the office-supplies game. It’s not just the shift online, Downey said, but also the changing market as companies conduct more of their business digitally. It’s a trend that was underway long before COVID-19, but it accelerated in 2020. Companies simply need fewer boxes of paper, printer cartridges, folders, and filing cabinets — many of the “staples” for an office supplier.
So how formidable is Amazon Business? The Amazon division cleared $1 billion in annual revenue in 2016, a year after its formation. By 2018, that number had grown tenfold, to $10 billion. That makes it similar to ODP in size. (Staples no longer discloses its revenue figures.) Amazon Business also supplies a number of other kinds of workplaces beyond offices. Before the pandemic, one analyst predicted the group could clear $30 billion in annual sales by 2023.
Jennifer Merton, a legal expert at the University of Massachusetts Amherst’s Isenberg School of Management, speculates that federal regulators might see a Staples-Office Depot combination as a way to rein in the seemingly unstoppable Amazon.
But the proposal will surely run into resistance from the likes of the Institute for Local Self-Reliance, a nonprofit advocacy group. Co-director Stacy Mitchell has highlighted the harm that Amazon’s ascendancy can pose to local businesses before. But that doesn’t mean she sees this megamerger as a solution. Far from it.
Mitchell and her group unsuccessfully lobbied the FTC about two years ago, to prevent Sycamore and Staples from buying Essendant, one of the country’s largest office supply wholesalers. This industry rollup, Mitchell said, is problematic for customers and for the independent office suppliers that still represent about one-quarter of the market.
The independents have proven resourceful, though. Many pivoted to sell cleaning supplies and other things employers suddenly needed when the pandemic hit, said Mike Tucker, executive director of the Independent Office Products & Furniture Dealers Association. Sure, independents will work to capitalize on some of the disruption that trails any megamerger. But Tucker worries a Staples-Office Depot combo could put some of his 600-plus members out of business.
In the end, the Staples-Office Depot merger may come down to the story of those penguins — and whether federal authorities now believe Amazon has become powerful enough to melt that iceberg.
Jon Chesto can be reached at firstname.lastname@example.org. Follow him on Twitter @jonchesto.