The Federal Trade Commission (FTC) last week challenged Staples’ $6.3 billion bid for Office Depot, claiming that the proposed merger would significantly reduce competition nationwide in the market for office supplies to large companies.  Large companies rely on competition between the two suppliers to hold down the cost of items such as pens, pencils, notepads, sticky notes, file folders, paper clips, and paper used for printers and copy machines, the FTC said.

The market the FTC defined in its complaint—sale and distribution of consumable office supplies to large, business-to-business customers—is distinct from the retail market for office supplies sold to consumers.  In the business-to-business market, customers enter into contracts with vendors for supplies, nationwide delivery, customer service, customized online catalogs, integration of procurement systems, and detailed utilization reports.  Staples and Office Depot are often the top two bidders for customers in this market, the complaint alleges.

The complaint marks the second time the FTC has objected to a merger between Staples and Office Depot.  The two companies attempted to merge in 1996, maintaining the move would generate economies of scale and reduce prices.  In successfully blocking that deal, the FTC argued that competition from smaller, non-specialized retailers selling office supplies did not affect the prices of office-supply superstores.  At the time, Staples and Office Depot were two of only three office-supply superstores.

The third was OfficeMax, which Office Depot acquired two years ago for $1.2 billion.  The FTC allowed that merger to go forward after its seven-month investigation found general superstores like Wal-Mart and online retailers like Amazon provided ample competition to office-supply superstores. It considered but rejected the possibility of harm to the large business customers at issue in the current challenge.  In concluding the Office Depot/OfficeMax merger was unlikely to have a significant adverse effect on competition in the business-to-business market, the FTC explained that corporate customers can bypass suppliers by buying directly from manufacturers or multiple vendors. It pointed out that Office Depot and OfficeMax were rarely top rivals for contracts with large companies—unlike in the case at hand—and that competition from Staples and other suppliers would have a downward impact on prices for contract customers.  At the time, the FTC emphasized that its conclusions were limited to the facts of that case.

Staples and Office Depot contend that the FTC’s decision to block their proposed merger contradicts its findings in the Office Depot/OfficeMax merger.  Nonetheless, some commentators have noted similarities between this complaint and the FTC’s approach in its recent challenge to the Sysco and US Foods merger—which was successful, as the FTC won preliminary injunction halting that transaction in June. (We previously covered the Sysco/US Foods merger hereherehere, and here.)  Like here, the FTC focused in the Sysco/US foods case on the merged entity’s significant control over national sales to large buyers, rather than on consumer prices.

The Canadian Competition Bureau has also moved to block the deal.