The Federal Trade Commission is so dead set against Staples (NASDAQ:SPLS) buying Office Depot (NASDAQ:ODP) that it tried to get an Amazon.com (NASDAQ:AMZN) executive to lie about the Internet retailer's ability to compete against the office supplies retailer.
That is the explosive allegation made by the federal judge presiding over the case the government has brought against the pair to stop their merger from happening. The judge made public the transcript of his questioning of Amazon executive Prentis Wilson because he said the public had a right to know how far the government was willing to go to achieve its goal.
Staples offered to buy Office Depot last year in a $6.3 billion deal that would reduce the office supplies field to a single, publicly traded company. But that doesn't mean there's not competition in the space.
From Wal-Mart and Costco in the bricks-and-mortar arena to Amazon in the online sphere, the office supplies market is a fairly broad and competitive industry. Both Staples and Office Depot, though, have overbuilt their retail footprint to an extent the market can no longer support all the stores and both companies committed to significantly reducing their footprint. To survive, Staples has even made concessions to various regulators around the globe to shed some of Office Depot's operations to gain approval.
But the FTC says it's not so much the retail landscape that would be controlled in a lopsided fashion by the combined entity, but rather the commercial contract market where Staples and Office Depot each generate about 40% of their annual sales. The trade regulator says the two retailers provide 79% of such sales to Fortune 100 companies, and the government buys from them as well. By merging, the likelihood of price increases rises dramatically.
Staples and Office Depot blasted the government's argument, saying even the agency acknowledges that 90% of their customers would not be affected by the merger and it was primarily concerned with protecting the interests of the 100 largest corporations in the country.
Now it appears the FTC went so far as to pressure Amazon.com to lie so that it could make its case.
Staples has long argued that rather than the commercial contract market sporting a weak field against it, competition is just as fierce, particularly from Amazon. In fact, the office supplies retailer has filed a motion in the Washington, D.C. U.S. District Court to compel Amazon to produce more documents and data about its plans for the commercial contract space. It's been rumored recently the Internet retailer even has designs on buying Office Depot's contract business.
While sentiment seems to have favored the FTC up until now, the explosive testimony the judge elicited from Amazon may have just turned the tide against the agency. Essentially, the FTC wanted Amazon to say it wouldn't be ready to take on commercial contract business for at least two years and had little control over third-party office supplies vendors who operate on its Amazon Business site. But the retailer struck out the proposed language and testified it did have some control over outside sellers.
On the contrary, as Staples has maintained, Amazon is indeed a huge threat to its survival and it likely really does need to merge with Office Depot to stay in business. The FTC's case against the merger looks like it's taken a major hit, and it's quite possible this deal will now get approved, but whether anyone at the agency is held accountable for their actions as they should be remains doubtful.
Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.