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FTC moves to block Staples-Office Depot merger

A customer walked past the entrance of a Staples store in Danvers.
A customer walked past the entrance of a Staples store in Danvers.(Lisa Poole/Associated Press/File)

The federal government on Monday moved to block a mega-merger by Staples Inc., the Framingham-based office supply chain, and its chief competitor, Office Depot Inc.

It was the second such move in two decades against the companies, which are now fighting to survive in an increasingly online sales arena.

Staples in February had announced a $6.3 billion acquisition of Office Depot, of Boca Raton, Fla. But regulators at the US Federal Trade Commission on Monday filed a legal action to kill the deal, saying it would lead to higher prices for office supplies, particularly for business customers, where the merged company would have a dominant 70 percent share of the market.

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"The Commission has reason to believe that the proposed merger between Staples and Office Depot is likely to eliminate beneficial competition that large companies rely on to reduce the costs of office supplies," FTC chairwoman Edith Ramirez said in a statement. The agency in its complaint said the merger would end the "intense head-to-head price competition" that exists between the two top players.

The FTC's action is a particular blow to Staples, a storied local company founded in 1986 by the late businessman Thomas Stemberg, with venture capital backing by Bain Capital's Mitt Romney, who went on to be governor of Massachusetts and a two-time presidential candidate. The company at its height employed 91,000 people. Today it says it has 1,900 stores and 79,000 employees.

Both companies said they plan to contest the agency's action. In a joint message to customers Monday, Staples chief executive Ronald Sargent and Office Depot chief executive Roland Smith said the FTC's decision "will hurt customers of both companies and jeopardize our ability to compete in a rapidly evolving marketplace."

But Boston College law professor Brian Quinn, a specialist in mergers and acquisitions, said it is unlikely that Staples will keep fighting.

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"It could take years to litigate this,'' Quinn said. "They have too many other things they can do with their money. Markets are moving too quickly for them to stay in place."

Staples had offered to give up more than $500 million in business with commercial customers to an established competitor, much the way national banks in the past have sold off branches in major deals, to satisfy antitrust concerns. The FTC rejected that proposal, saying the merged company would still be without competition powerful enough to force it to compete on prices.

"What the FTC is saying is the other players in the market don't have that degree of sophistication," said David Marcotte, senior vice president of retail insights at Kantar Retail in Boston, a research firm.

Far from simply delivering cartons of copier paper and file folders, Staples and Office Depot become intimately involved with their customers' businesses, helping them efficiently manage their office supply budgets, Marcotte said.

The Canadian government's Competition Bureau also moved Monday to block the merger in that country. In the United States, the FTC will now ask a federal judge to halt the merger. An administrative trial is scheduled to begin May 10, 2016.

In 1997, a federal judge also blocked a deal between Staples and Office Depot, on the FTC's objections. However, in 2013 the FTC allowed a $1.2 billion merger of Office Depot and OfficeMax Inc., the No. 2 and No. 3 sellers of office supplies.

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Since then, Staples and Office Depot have reported declining revenues, amid a rapidly changing retail environment that favors online sales, and responded by closing hundreds of stores and cutting staff. Staples' revenue last year was down 3 percent, to $22.5 billion. Net income declined to $135 million, from $620 million for continuing operations in 2013.

Together, the companies contend, they would be stronger and would lower costs for consumers and businesses.

Staples has so far been able to "financially manage against reality," Marcotte said. "The market is shrinking, but they're still profitable."

Staples shares fell nearly 14 percent Monday to $10.66. Office Depot shares dropped almost 16 percent, to $5.59.

At Staples, much has changed since Stemberg first envisioned a way to sell bulk paper clips in a wide-aisled store in Brighton. Today, customers are increasingly buying their supplies online, something Staples and Office Depot executives said the FTC commissioners did not appear to understand.

The "FTC's decision is based on a flawed analysis and misunderstanding of the intensely competitive landscape in which Staples and Office Depot operate,'' the executives said in their letter. "The FTC underestimates the disruptive effect of new competitors in the digital economy."

They said their competition includes manufacturers selling directly to businesses, as well as companies like Amazon.com and Walmart that are popular with consumers.

The FTC's four-member commission voted unanimously to file the complaint and to seek a preliminary injunction against the merger. The agency said it challenged 20 merger transactions in the year ended Sept. 30, and two other transactions were abandoned due to concerns it raised.

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Beth Healy can be reached at beth.healy@globe.com. Follow her on Twitter @HealyBeth. Hiawatha Bray can be reached at hiawatha.bray@globe.com. Follow him on Twitter @GlobeTechLab.