Business & Tech

Staples, Office Depot stocks plunge as merger is called off

With the Office Depot merger dead, Staples said Tuesday that it would cut an additional $300 million of costs by 2018, as well as close more stores.
Lynne Sladky/Associated Press/File
With the Office Depot merger dead, Staples said Tuesday that it would cut an additional $300 million of costs by 2018, as well as close more stores.

Shares of Staples Inc. and Office Depot Inc. fell sharply a day after the two office-supply giants called off their merger in the face of opposition by a federal judge and regulators over anti-trust concerns.

Staples’ stock was down 17 percent, trading at $8.58 a share. No. 2 Office Depot’s price was down to $3.75 a share, a nearly 40 percent plunge.

Investors have believed that the merger was crucial for the two companies to survive a changing retail market for pens, papers and printers.

Advertisement

But a federal judge delivered a staggering blow to the two companies Tuesday, backing the decision by government regulators to block the Framingham company’s $6.3 billion takeover of its Florida rival.

Get Talking Points in your inbox:
An afternoon recap of the day’s most important business news, delivered weekdays.
Thank you for signing up! Sign up for more newsletters here

Staples, the largest US office supply company, had pitched the merger as a key element of its revival to help fight off shrinking revenue, a shift to online sales, and stiff competition from Amazon.com and Walmart.

But the Federal Trade Commission went to court in December to halt the merger, arguing that it would drive up prices for big customers. Following weeks of testimony, US District Judge Emmet G. Sullivan sided with the FTC.

After Sullivan’s ruling, Staples and Office Depot called off the deal. Staples said it would consider “strategic alternatives” for its European business, cut an additional $300 million of costs by 2018, close more stores, and seek to grab a bigger share of the market for midsize companies by cutting prices and hiring more salespeople.

“We are extremely disappointed that the FTC’s request for preliminary injunction was granted,” said Ron Sargent, Staples’ chairman and chief executive officer, adding that the commission “fell woefully short of proving its case.”

Advertisement

But Sargent said the company wouldn’t appeal the judge’s decision so it could “move on with our strategic plan.” Staples will also have to pay Office Depot a $250 million break-up fee, under the terms of their merger agreement. Staples said it would also drop its plan to sell $550 million of its large corporate contract business, which it had offered as a concession to win regulatory approval of the merger.

“It’s going to be a difficult road forward,” said Rajiv Lal, a professor of retailing at Harvard Business School.

The companies are stuck with too much of their money and resources in real estate, employees, and inventory, as demand for their products has shrunk, Lal said.

“They have to go back to the drawing board and think how you need to go forward,” he said.

The failure of the merger is likely to be a more serious blow for Office Depot, which is in a weaker position, said Oliver Wintermantel, a managing director at Evercore International Strategy & Investment Group, based in New York.

Advertisement

Office Depot will “go first and Staples will struggle,” Wintermantel said. “Staples will have to close a lot of stores. I think there will probably be a lot of layoffs.”

Staples, which opened its first store in Brighton in 1986, has been trying to revive its bottom line in recent years. Sales for 2015 fell by 6 percent to $21 billion from $22.5 billion in 2014. Staples also cut costs by $550 million in the last two years.

It laid off more than 1,000 employees between November and January, although it did not disclose exactly where the layoffs had occurred. It has closed more than 300 stores since 2011.

Staples has also been testing new concepts. In April, the company announced a partnership with Boston co-working startup Workbar to convert some of its stores into shared working space.

Staples now also offers designer office supplies, such as its line created by New York sportswear and accessories designer Cynthia Rowley.

In 2013, the company launched a redesign of its Staples.com website featuring faster speeds and more personalized product offerings to compete with Amazon.com.

The company needs to do more of that, said Ani Collum, a partner and consultant at Retail Concepts in Norwell.

Its traditional business model is crumbling as work environments and consumer behavior evolve, she said.

Staples is still modeled as a one-stop shop for everything office-related and overwhelms customers with its selection, Collum said. It’s an experience that consumers no longer want, she said.

The merger would have given Staples more breathing room and resources to make that transition, Collum said.

Now, it doesn’t have that luxury.

“They need to think about how to shed this big corporate image,” she said of Staples.

This was the second time that Staples and Office Depot have tried to merge and failed. The FTC blocked a combination of the two companies in 1997. At that time, too, the commission sued to halt the proposed merger, saying it would hurt competition.

The failure of the Staples-Office Depot merger is the latest example of the Obama administration enforcing antitrust regulations. Last week, Halliburton and Baker Hughes abandoned a $34 billion merger after challenges from the Justice Department.

And late last year, General Electric scuttled the $3.3 billion sale of its appliance division to Electrolux of Sweden following complaints from the Justice Department.

Last month, Attorney General Loretta Lynch warned about the risks to consumers from consolidation and vowed that the Justice Department, which shares antitrust jurisdiction with the FTC, would oppose problematic deals.

Debbie Feinstein, who heads the competition bureau at the FTC, heralded the ruling as ‘‘great news for business customers.’’

‘‘This deal would eliminate head-to-head competition between Staples and Office Depot, and likely lead to higher prices and lower-quality service for large businesses that buy office supplies,’’ Feinstein said in a statement to the Associated Press.

Deirdre Fernandes can be reached at deirdre.fernandes@globe.com. Follow her on Twitter @fernandesglobe. Megan Woolhouse can be reached at megan.woolhouse@globe.com. Follow her on Twitter @megwoolhouse.