#2 Staples to acquire #1 Office Depot: FTC problems likely

#2 Staples to acquire #1 Office Depot: FTC problems likely

The Deal

Staples agreed to buy archrival Office Depot for $3.36 billion in a stock transaction valuing Office Depot at $21.375/ s. Office Depot shareholders would receive 1.14 shares of Staples stock for each of their own The transaction would be treated under the pooling of interest accounting method and would not create good will on the Staples’ balance sheet

The Problems:

(1) The merged company will have 1,100 superstores in 96% of the U.S. metropolitian markets creating a marketing powerhouse.

(2) Analysts put the office equipment and office supplier market at $125 bil. to $185 bil. in size. However the office supply superstore market is established at $23 bil. in size. This merger will give the two a 44% market share. Realistically, this is really a 3 company market and the concentration would be even greater.

(3) Staples’ CEO Tom Stemberg said the combined companies would likely extract lower prices from suppliers. For example, he said they currently buy envelopes from three vendors. They would get proposals from all three and say, “You can have all of the business or none of it.”

(4) Earlier this year the FTC blocked Rite Aid’s $1.8 billion acquisition of Revco on the grounds that the combination could monopolize too many markets. Presently the FTC is suing Toys ”R” Us for allegedly using its 21% market share to pressure toy makers into hurting a discount retailers’ ability to compete. Toys “R” Us denies any wrongdoing.

Copyright Quality Services Company Sep 9, 1996

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