It looks like Staples' merger deal with Office Depot is in danger of unraveling as regulators stand ready to quash the attempt a second time.

Was this the Post-It note of death? The New York Post reported that a Federal Trade Commission senior official slapped a "No deal" sticky note on the file for the $6.3 billion merger of Staples (SPLS) and Office Depot (ODP -0.14%).

This comes after rumors swirled that regulators were already leaning toward approving the deal and requested more information, pushing back the anticipated closing date. A negative decision would mark the second time regulators blocked industry consolidation. It was a ludicrous ruling back then -- the two only accounted for 6% of the office supply market at the time, hardly a monopolistic position -- but blocking it now, after the rise of much stronger competitors like and Wal-Mart, would only weaken two already-struggling retailers.

Yet with the European Union now also opening a probe into the acquisition, the office supplies retailers are facing a very high hurdle to complete the transaction.

If the regulatory forces arrayed against Staples and Office Depot do thwart the merger, investors need to consider what will happen to both companies afterwards. Sure, their stocks will fall, but a failure to merge will mean a lot more than just a loss of market value.

Last quarter, Staples said total sales fell 5% year-over-year as it was forced to close down 15 stores due to weakened demand. Since the beginning of 2014, the office supplies leader has shuttered more than 210 stores, with at least a total of 225 to be closed by the end of this year. Office Depot closed 99 stores in the second quarter and anticipates closing 175 stores this year. It will close 60 more next year for a total of at least 400 stores by the end of 2016. Like Staples, it is also expecting revenues to keep falling due to the shrinking footprint of its operations.

Despite thinking about these retailers in terms of their physical stores, both actually have significant business contract operations that generate substantial revenue for them. Staples and Office Depot derive around 40% of total sales from their commercial businesses. In fact, if there's any real point of contention with regulators, it probably stems from the dominance the two have over such contract work.

Both retailers have reported that while their retail store business is sagging, commercial contracts are growing, with sales rising 3% in 2014 for each. Over the first six months of 2015, they were up a similar percentage for Staples but down by a like amount for Office Depot as it transitioned out of several large contracts that had been part of OfficeMax's operations.

The reality is there just aren't many alternatives out there. Even though an Amazon B2B office supplies marketplace could, in theory, provide a competitive counterpoint, the Internet retailer sold $70 billion worth of product in 2014 across all its business lines. In contrast, Staples and Office Depot sold a combined $40 billion worth of nothing but office supplies. Amazon or any other retailer would have a hard time making much of a dent in that market dominance, even if they dedicated a lot of time, energy, and money to the effort.

An undoing of the merger deal by regulators could mean the office supplies companies would have to take drastic measures with their retail stores. Source: Mike Mozart

All of this suggests the office supplies retailers would need to take some drastic measures if the deal falls through. They might be forced to separate their operations into three discrete business -- retail, commercial, and international -- either spinning off the physical stores into a separate entity that would trade independently or perhaps creating a franchise model for the stores. Company-owned stores could remain in areas best serving their commercial interests, while franchises would be delegated to areas where there's more of a need for just a retail option.

Regulators have a poor record of picking winning and losing merger deals. When they put the kibosh on Staples' acquisition of Office Depot in 1997, they couldn't predict the rise of the Internet or the vast purchasing power Wal-Mart would wield in bringing everyday low prices to tens of millions of people daily. That fallibility suggests that should regulators once again thwart a merger of these two companies, it just might result in a major restructuring that will leave the companies unrecognizable.