Staples, Office Depot stocks plunge after deal called off

May 11, 2016, 5:21 PM EDT
(Source: Mike Mozart/flickr)
(Source: Mike Mozart/flickr)

Staples and Office Depot saw their stocks plunge after their $6.3 billion merger was blocked by a federal judge.

USA Today reports:

Investors flocked away from both retailers after the office supply giants scrapped their deal in the wake of a federal judge's decision to issue a temporary injunction blocking the accord. The judge ruled on objections raised by the Federal Trade Commission. Office Depot shares (ODP) plummeted 40.4% to close at $3.63 while Staples shares (SPLS) fell 18.3% to $8.46. The merger deal's demise casts a cloud of uncertainty over the next steps for each retailer. The Obama administration had challenged the deal on anti-competitive grounds. It was the second time in 19 years that the companies called off a merger after federal regulators raised antitrust concerns. Debbie Feinstein, director of the FTC's competition bureau, characterized the ruling as "great news for business customers in the office supply market." "This deal would eliminate head-to-head competition between Staples and Office Depot and likely lead to higher prices and lower quality service for large businesses that buy office supplies," said Feinstein. In a statement, Office Depot CEO Roland Smith expressed dismay and said the merger deal would formally end May 16.

The Wall Street Journal notes:

Staples said Tuesday it will cut another $300 million in annual costs and explore alternatives for its European operations, which include more than 200 stores. The Framingham, Mass., company will pay its smaller rival a $250 million breakup fee. Office Depot CEO Roland Smith said the Boca Raton, Fla., retailer wouldn’t appeal. He said the two companies will end their merger agreement on Monday. The decision was released after U.S. stock markets had closed Tuesday. Wall Street has been skeptical for most of the past year of the prospects for the combination to overcome the antitrust challenge, and Office Depot shares have been trading at a wide discount to the proposed stock-and-cash offer.

Bloomberg writes:

Buyers from Pfizer to Halliburton and Canadian Pacific all arguably should have been more prepared for the regulatory uproar that their respective deals caused. Tax inversions were a known target for the Treasury Department, falling oil prices made a major combination of services providers even less palatable to customers, and regulators have made their dislike of major train deals pretty darn clear for years. But Staples and Office Depot have a right to be a little bewildered.  There's a reason there are only two major brick-and-mortar office supply retailers left in this country: they're a dying breed. Staples hasn't increased revenue in years, while Office Depot is mired in what would be an eight-year slump if not for its 2013 purchase of OfficeMax. The great irony is that combining the two wouldn't necessarily stop the downward spiral. It would just make it less painful -- maybe. It's hard to raise prices and gain market share when you're eager for whatever business you can get in the face of competition from Amazon, which can do everything cheaper and more efficiently.