The U.S. District Court for the District of Columbia recently granted the Federal Trade Commission’s (FTC’s) motion to preliminarily enjoin the merger of Staples and Office Depot, the country’s two largest brick-and-mortar retailers and distributors of office supplies.[1] The injunction caused the companies to abandon the merger.
Background
Interestingly, the FTC’s theory was not based on the loss of competition in the retail market for office supplies, which is not heavily concentrated. Rather, the FTC claimed the proposed merger would eliminate competition in the business-to-business (B-to-B) market for office supplies, i.e., large businesses purchasing vast quantities of supplies for their own use. The FTC argued that the merging parties were the only alternatives for these customers. By focusing on such a narrow set of customers, the FTC’s theory mirrored the arguments it used to successfully challenge the Sysco/US Foods merger in the restaurant and hospitality supply industry.[2]
The Decision
As in most merger cases, the critical question was the definition of the relevant product market. The court ultimately concluded that large B-to-B customers constitute a separate market. The court found that the customers comprising this market require different services than other customers, such as sophisticated IT capabilities, personalized customer service and expedited delivery capabilities. The court determined that the combined market share of Staples and Office Depot in the large B-to-B customer market was so high as to be considered presumptively illegal.[3] The court was also persuaded by bid data and documents showing that Staples and Office Depot were considered by themselves and customers as the primary competitors in this market.
The merging parties’ primary argument that the merger would not have anticompetitive effects was that the digital threat of Amazon Business would provide increased competition. Staples and Office Depot likened their fate to brick-and-mortar companies that had failed, such as Circuit City and Blockbuster. The court rejected this argument as highly speculative, noting that Amazon Business does not yet have the capabilities to successfully compete for these large B-to-B customers. The court granted the requested preliminary injunction, causing the parties to abandon their deal.
Companies contemplating mergers should review the effect of the transaction on each customer type, application and product, not just on the broad customer base.
Lessons
The court’s decision highlights a few important points. First, in any kind of concentrated market, it will be difficult for a merger of the firms with the largest and second-largest market share to avoid FTC scrutiny. The FTC defined the market based on the characteristics and preferences of a fairly narrow segment of customers and focused on the competitive harms to this distinct group alone. Companies contemplating mergers should review the effect of the transaction on each customer type, application and product, not just on the broad customer base.
Second, when the merging parties view themselves as each other’s closest competitor for any particular segment of the business, the transaction will likely face a substantial challenge.
Third, a defense resting on the alleged future strength of relatively marginal competitor and changed market conditions should be based on compelling evidence. Puffery, marketing or bold statements made by the competitor about its plans will likely be insufficient indicia of true competition.
[1] FTC v. Staples, Inc., No. 15-2115 (D.D.C. May 10, 2016), available at https://www.ftc.gov/system/files/documents/cases/051016staplesopinion.pdf.
[2] See FTC v. Sysco Corp., 113 F. Supp. 3d 1 (D.D.C 2015).
[3] Staples, No. 15-2115, slip op. at 49–50.