Staples' motto must be "If at first you don't succeed, try try again." For the third time, the office supplies giant is trying to acquire rival Office Depot (NASDAQ:ODP), this time offering $40 per share, or $2.1 billion, about one-third of what it offered six years ago.
The last time -- the last two times, actually -- the merger was rejected by the Justice Department over antitrust concerns, as the agency dismissed the threat rivals like Amazon.com (NASDAQ:AMZN), Walmart, or Target posed to the two retailers.
Even before the COVID-19 pandemic, the two office-supply companies were damaged by having been kept separate as competition ate away at the customer base and their financial performance.
Staples ended up being taken private, and by the end of 2019, Office Depot saw its sales decline by nearly 10%, and its stock lost two-thirds of its value.
Since history indicates regulators are not especially good at picking winners and losers in the marketplace, investors might wonder whether this time, they will let Staples and Office Depot merge.
Too many stores, too much market share
The problem the two office-supply rivals faced in 2016 was they were overstored, as many retailers discovered when consumer preferences shifted to shopping online. Staples had more than 1,300 locations, while Office Depot had more than 1,500 following its merger with OfficeMax several years prior. Both, though, had committed to closing down locations.
Today, Staples has 1,068 locations, and Office Depot has fewer than 1,250.
However, the issue that hung up their merger with regulators was the commercial contract market, from which both retailers each derived about 40% of their revenues. The government said Staples held a 47% share of the business-to-business market for Fortune 100 companies, while Office Depot controlled 32%, and it was concerned the world's largest corporations might have to pay more for paper, pens, and ink if the deal went through.
Staples argued that 99% of customers wouldn't be affected by the merger, but the government insisted the megacorporations would be harmed.
The elephant in the room
As expected, though, Amazon has proven to be the significant threat the retailers had feared. In 2017, for example, Amazon won a five-year contract with U.S. Communities, a purchasing cooperative that negotiates on behalf of municipalities and government agencies. The value of the contract was estimated at around $500 million, and it took away business from both Staples and Office Depot as well as independent retailers.
NPD Group estimated $200 million worth of sales in the office-supplies industry moved online in 2019, double the amount from the previous year. While retail stores still supplied 85% of the $12.8 billion total, it was e-commerce that saw growth, and that undoubtedly spiked higher last year.
Now both Staples and Office Depot are in a much more weakened state than the last go-round, but Staples has said it is willing to sell off Office Depot's business-to-business operations to any buyer the Federal Trade Commission approves of and that is qualified in order to get the deal done.
Office Depot, though, has said it's not fully on board with a merger anyway. The Wall Street Journal reported early Tuesday that the retailer has rejected Staples' offer but is willing to consider a new deal. Rather than accepting a buyout of the whole company, Office Depot might prefer a merger of only the two companies' retail operations.
A new reality
The retail world is in a completely different place than it was six years ago, a landscape much more dreary than the last time these two companies considered merging. Even though they were deemed to be essential businesses during the pandemic, with much of the commercial world shuttered at the outset, Office Depot's sales tumbled 17% in last year's second quarter.
It announced a reorganization plan that would see it close or consolidate distribution facilities and retail stores while reducing the number of its employees by approximately 13,100 positions by the end of 2023.
Since Staples was willing to eject the B2B portion of Office Depot's business if they merged, and Office Depot says it's willing to sell the rest of the company other than the B2B business, but not merge, this might be a case in which the third time is the charm and antitrust regulators can finally sign off on the deal.