The Federal Trade Commission (FTC) has closed its seven-month investigation into the $1.2 billion merger between Office Depot, Inc. and OfficeMax, Inc., the second and third largest "office supply superstores" in the country. The FTC’s decision is of particular interest given the FTC’s 1997 successful challenge of a similar proposed merger between Staples, Inc. and Office Depot, then the nation’s largest office supply superstores. FTC v. Staples, 70 F.Supp. 1066 (D.D.C. 1997). The agency’s decision to close its Office Depot-OfficeMax investigation was based on changed circumstances over the last sixteen years. According to the FTC, "the market for the sale of consumable office supplies has changed significantly" due to the proliferation of mass merchants and club stores and the "explosive growth" of online commerce. In short, the evidence of potential anticompetitive effects that caused the FTC concern in 1997 simply was absent in 2013.
FTC v. Staples
In September 1996, Staples and Office Depot announced plans to merge the two companies. In May 1997, the FTC obtained a preliminary injunction from United States District Court for the District of Columbia. While a combined Staples-Office Depot would have had only a 5.5% share of all sales of consumable office supplies, the FTC pushed to define the relevant product market as the sale of consumable office supplies through office supply superstores, in which there only three significant players. According to the FTC, both qualitative and quantitative evidence supported this narrow market definition. The FTC relied heavily on econometric evidence that demonstrated that prices were higher in areas where one office supply superstore did not have a nearby superstore competitor. Company documents explicitly confirmed this finding, revealing an intense competitive focus on other superstores and a general lack of concern with other types of suppliers, and these undoubtedly were persuasive to the district judge. The FTC also heard numerous, credible customer complaints about the proposed Staples-Office Depot deal. Recognizing that the case "hinges on the proper definition of the relevant product market," the district court accepted the FTC’s narrow market definition – "the sale of consumable office supplies through [office supply superstores]" – and determined that the merger would reduce the number of competing superstores from three to two, and even from two to one in many local areas. The parties abandoned that transaction.
The Office Depot-OfficeMax merger
In February 2013, Office Depot and OfficeMax announced their plan to merge. After a lengthy investigation, and just like in 1997, once again the FTC heavily relied on econometrics to gauge the likely competitive effects of the merger. According to the FTC, "all of the econometrics, none of which assumed or depended on any particular definition of a relevant product or geographic market, indicate that the merger is unlikely to lead to anticompetitive price increases." The econometric analyses reflected that office supply superstores now face significant competition from other brick and mortar stores and online retailers that would constrain anticompetitive price increases. Mass merchants and club stores, such as Wal-Mart and Costco, have expanded their product offerings and sales of consumable office supplies, and there has been an "explosive growth" of online retailers, such as Amazon, who stock a vast array of office supply products and ship nationwide at low cost.
Company documents supported the econometric conclusions, confirming that Office Depot and OfficeMax lose sales to online competitors and that both companies have had to develop new pricing strategies to compete effectively with online rivals. The FTC also found that Office Depot and OfficeMax’s pricing policies now take into account brick-and-mortar competitors such as Wal-Mart, Target, and Costco. Additionally, Office Depot and OfficeMax now price the majority of office supply products nationally, rather than based on price zones.
The FTC also analyzed a second sales channel of office supplies that it did not consider in its Staples-Office Depot investigation – sales to large multi-regional or national customers on a contract basis. As with the retail sales, the FTC found that the proposed merger was unlikely to lessen competition or to harm large contract customers. Company documents showed that Office Depot and OfficeMax rarely were each other’s closest competitor for this type of business; that non-superstore competitors take business from the parties in a substantial number of instances; and that the parties would continue to face strong competition from these suppliers as well as Staples. The FTC also recognized the potential for new entry from suppliers in adjacent product categories. Finally, unlike in the FTC’s investigation of the Staples-Office Depot deal, there was little complaint from large contract customers to the agency. In sum, office supply customers have many choices today, many more than they did in 1997.
This FTC decision is yet another reminder that facts do matter in antitrust analysis and that assessing likely competitive effects (not market definition) should be the ultimate aim of merger review. Here the FTC credited the parties’ evidence that past significant competitive interaction among "office supply superstores" is no longer a good proxy for current and future competition. There is no mention of the number of significant competitors remaining or calculations of market share and concentration. This reflects the lessened emphasis on market definition in the revised Horizontal Merger Guidelines now used by the agencies and the fact that the office supply business has grown to include more and different types of suppliers. Supportive qualitative evidence, including ordinary course documents and customer reactions, continue to play an important role in merger analysis. If the documents and customers’ views had not supported the econometrics, the parties would have faced an uphill battle in trying to persuade the FTC that the market dynamics of today are very different from the market dynamics in the past.
The FTC’s November 1, 2013, closing statement can be found here.