FTC Prevents Staples from Acquiring Office Depot As the leading competitor in the office supplies…

FTC Prevents Staples from Acquiring Office Depot

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 As the leading competitor in the office supplies superstore
market, Staples’ proposed $3.3 billion acquisition of Office Depot received
close scrutiny from the FTC immediately after its announcement in September
1996. The acquisition would create a huge company with annual sales of $10.7
billion. Following the acquisition, only one competitor, OfficeMax with sales of
$3.3 billion, would remain. Staples pointed out that the combined companies
would comprise only about 5% of the total office supply market. However, the
FTC considered the superstore market as a separate segment within the total
office supply market. Using the narrow definition of “market,” the FTC
concluded that the combination of Staples and Office Depot would control more
than three-quarters of the market and would substantially increase the pricing
power of the combined firms. Despite Staples’ willingness to divest 63 stores
to Office Max in markets in which its concentration would be the greatest
following the merger, the FTC could not be persuaded to approve the merger.
Staples continued its insistence that there would be no harmful competitive
effects from the proposed merger, because office supply prices would continue
their long-term decline. Both Staples and Office Depot had a history of
lowering prices for their customers because of the efficiencies associated with
their “superstores.” The companies argued that the merger would result in more
than $4 billion in cost savings over 5 years that would be passed on to their
customers. However, the FTC argued and the federal court concurred that the
product prices offered by the combined firms still would be higher, as a result
of reduced competition, than they would have been had the merger not taken
place. The FTC relied on a study showing that Staples tended to charge higher
prices in markets in which it did not have another superstore as a competitor. In
early 1997, Staples withdrew its offer for Office Depot.

 Case Study Discussion Questions

1. How important is properly defining the market segment in
which the acquirer and target companies compete to determining the potential
increased market power if the two are permitted to combine? Explain your
answer.

2. Do you believe the FTC was being reasonable in not
approving the merger even though Staples agreed to divest 63 stores in markets
where market concentration would be the greatest following the merger? Explain
your answer.

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