If Amazon buys Office Depot, is Staples doomed?

Why the FTC Is Fighting the Staples-Office Depot Deal

Amazon.com(NASDAQ: AMZN) is rumored to be interested in buying Office Depot's (NASDAQ: ODP) corporate accounts business. As that was the crown jewel of what rival Staples(NASDAQ: SPLS) was looking to gain control of when it sought to buy the office supplies retailer, if Amazon ever got hold of it, you might as well stick a fork in Staples.

A year ago Staples and Office Depot agreed to a $6.3 billion buyout. Following the Great Recession and Office Depot's own acquisition of Office Max, the marketplace was littered with more retail locations than it could handle, and while both outlets announced plans to close hundreds of stores, it was clear both were too weak to effectively remain competitive without further consolidation.

Over the years not only had the office supplies retailers engaged in cutthroat competition with one another, but others entered into the market as well. From Wal-Mart and Target in the bricks and mortar space, to Amazon.com online, the landscape had changed dramatically.

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If Amazon buys Office Depot, is Staples doomed?
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Jeff Bezos, Chairman and CEO of Amazon, speaks at the George W. Bush Presidential Center's Forum on Leadership in Dallas, Texas, U.S., April 20, 2018. Picture taken on April 20, 2018. REUTERS/Rex Curry
Amazon founder and CEO Jeff Bezos laughs as he talks to the media while touring the new Amazon Spheres during the grand opening at Amazon's Seattle headquarters in Seattle, Washington, U.S., January 29, 2018. REUTERS/Lindsey Wasson
2018 Vanity Fair Oscar Party ? Arrivals ? Beverly Hills, California, U.S., 04/03/2018 ? Amazon CEO Jeff and wife MacKenzie Bezos. REUTERS/Danny Moloshok
Amazon founder and CEO Jeff Bezos (L) answers a question from the media while getting a tour from Ron Gagliardo, senior manager of horticultural services for the Spheres, during the Amazon Spheres opening event at Amazon's Seattle headquarters in Seattle, Washington, U.S., January 29, 2018. REUTERS/Lindsey Wasson
Amazon and Blue Origin founder Jeff Bezos addresses the media about the New Shepard rocket booster and Crew Capsule mockup at the 33rd Space Symposium in Colorado Springs, Colorado, United States April 5, 2017. REUTERS/Isaiah J. Downing
Amazon founder and CEO Jeff Bezos looks over a balcony on the top floor of the Amazon Spheres during an opening ceremony event at Amazon's headquarters in Seattle, Washington, U.S., January 29, 2018. REUTERS/Lindsey Wasson
Amazon founder and CEO Jeff Bezos gives some closing comments after opening the new Amazon Spheres with some help from Alexa during an opening event at Amazon's headquarters in Seattle, Washington, U.S., January 29, 2018. REUTERS/Lindsey Wasson
Amazon and Blue Origin founder Jeff Bezos addresses the media about the New Shepard rocket booster and Crew Capsule mockup at the 33rd Space Symposium in Colorado Springs, Colorado, United States April 5, 2017. REUTERS/Isaiah J. Downing
Jeff Bezos, founder of Blue Origin and CEO of Amazon, speaks about the future plans of Blue Origin during an address to attendees at Access Intelligence's SATELLITE 2017 conference in Washington, U.S., March 7, 2017. REUTERS/Joshua Roberts
Jeff Bezos, founder of Blue Origin and CEO of Amazon, speaks about the future plans of Blue Origin during an address to attendees at Access Intelligence's SATELLITE 2017 conference in Washington, U.S., March 7, 2017. REUTERS/Joshua Roberts
Jeff Bezos, founder of Blue Origin and CEO of Amazon, arrives to speak about the future plans of Blue Origin during an address to attendees at Access Intelligence's SATELLITE 2017 conference in Washington, U.S., March 7, 2017. REUTERS/Joshua Roberts
Amazon CEO Jeff Bezos addresses the Economic Club of New York in New York City, U.S., October 27, 2016. REUTERS/Brendan McDermid
Jeff Bezos, owner of The Washington Post, delivers remarks at the grand opening of the Washington Post newsroom in Washington January 28, 2016. REUTERS/Gary Cameron
Jeff Bezos, owner of The Washington Post, delivers remarks at the grand opening of the Washington Post newsroom in Washington January 28, 2016. REUTERS/Gary Cameron
Jeff Bezos, owner of The Washington Post, delivers remarks at the grand opening of the Washington Post newsroom in Washington January 28, 2016. REUTERS/Gary Cameron
Jeff Bezos, founder and CEO of Amazon.com, leaves the Allen and Co's annual media conference in Sun Valley, Idaho July 10, 2014. REUTERS/Rick Wilking (UNITED STATES - Tags: BUSINESS)
Amazon CEO Jeff Bezos talks about his company's new Fire smartphone at a news conference in Seattle, Washington June 18, 2014. Bezos unveiled a "Fire"smartphone on Wednesday equipped with a 3D-capable screen and the ability to recognize objects, music and TV shows, hoping to stand out in a crowded field dominated by Apple Inc and Samsung Electronics. REUTERS/Jason Redmond (UNITED STATES - Tags: SCIENCE TECHNOLOGY BUSINESS TELECOMS)
Amazon CEO and Chairman Jeff Bezos receives the Citation of Merit on behalf of the Apollo F-1 Search and Recovery Team at the 110th Explorers Club Annual Dinner at the Waldorf Astoria in New York March 15, 2014. The club, which promotes the scientific exploration of land, sea, air and space featured catering by chef and exotic creator Gene Rurka. Chef Rurka prepared a variety of dishes featuring an array of insects, wildlife, animal body parts and invasive species. REUTERS/Andrew Kelly (UNITED STATES - Tags: SOCIETY SCIENCE TECHNOLOGY BUSINESS FOOD)
Amazon.com Chief Executive Officer Jeff Bezos speaks during a keynote speech with Amazon.com Chief Technology Officer Werner Vogels at the AWS Re:Invent conference at the Sands Expo in Las Vegas, Nevada November 29, 2012. REUTERS/Richard Brian (UNITED STATES - Tags: SCIENCE TECHNOLOGY BUSINESS)
Amazon CEO Jeff Bezos (R) arrives at the annual Allen and Co. conference at the Sun Valley, Idaho Resort July 12, 2013. REUTERS/Rick Wilking (UNITED STATES - Tags: BUSINESS HEADSHOT)
BERLIN, GERMANY - APRIL 24: Jeff Bezos attends the Axel Springer Award 2018 on April 24, 2018 in Berlin, Germany. Under the motto 'An Evening for' Jeff Bezos receives the Axel Springer Award 2018. (Photo by Franziska Krug/Getty Images)
Jeff Bezos, founder and chief executive officer of Amazon.com Inc., tours the Spheres during opening day ceremonies at the company's campus in Seattle, Washington, U.S., on Monday, Jan. 29, 2018. The Spheres, a new gathering and working space for Amazon employees located in the heart of the downtown Seattle Amazon campus, contains hundreds of plant species from cloud rainforest environments around the globe, and maintains a tropical climate similar to Costa Rica or Indonesia. Photographer: Mike Kane/Bloomberg via Getty Images
WASHINGTON, DC -DEC 14: Jeff Bezos, founder of Amazon.com (and owner of the Washington Post) arrives at the movie premiere tonight. -The world premiere of the movie, 'The Post' took place at the Newseum in Washington, D.C. tonight. All of the major stars of the movie and director Steven Spielberg attended as well as many local politicians and business people such as Warren Buffett. (Photo by Michael S. Williamson/The Washington Post via Getty Images)
Jeff Bezos, founder and chief executive officer of Amazon.com Inc., center, tours the Spheres during opening day ceremonies at the company's campus in Seattle, Washington, U.S., on Monday, Jan. 29, 2018. The Spheres, a new gathering and working space for Amazon employees located in the heart of the downtown Seattle Amazon campus, contains hundreds of plant species from cloud rainforest environments around the globe, and maintains a tropical climate similar to Costa Rica or Indonesia. Photographer: Mike Kane/Bloomberg via Getty Images
Amazon CEO Jeff Bezos arrives for the premiere of 'The Post' on December 14, 2017, in Washington, DC. / AFP PHOTO / Mandel NGAN (Photo credit should read MANDEL NGAN/AFP/Getty Images)
WASHINGTON, DC - OCTOBER 28: Honoree Jeff Bezos speaks at the 21st Annual HRC National Dinner at the Washington Convention Center on October 28, 2017 in Washington, DC. (Photo by Paul Morigi/Getty Images)
NEW YORK, NY - DECEMBER 14: Jeff Bezos, chief executive officer of Amazon, listens during a meeting of technology executives and President-elect Donald Trump at Trump Tower, December 14, 2016 in New York City. This is the first major meeting between President-elect Trump and technology industry leaders. (Photo by Drew Angerer/Getty Images)
NEW YORK, NY - OCTOBER 27: (L to R) Jeff Bezos, Chairman and founder of Amazon.com and owner of The Washington Post, addresses the Economic Club of New York as moderator Charlie Rose looks on, at the Sheraton New York Times Square Hotel, October 27, 2016 in New York City. Bezos discussed the future of Amazon, space travel, and his ownership of The Washington Post. (Photo by Drew Angerer/Getty Images)
SAN FRANCISCO, CA - OCTOBER 20: Founder/chairman/CEO of Amazon, Jeff Bezos, speaks onstage during 'The Prime of Mr. Jeff Bezos' at the Vanity Fair New Establishment Summit at Yerba Buena Center for the Arts on October 20, 2016 in San Francisco, California. (Photo by Michael Kovac/Getty Images for Vanity Fair)
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Yet in a bid to smooth over anticipated regulatory queasiness at leaving just one publicly traded office supplies company standing, Staples was pretty much willing to divest as much as half of Office Depot's assets.

But the Department of Justice decided it wasn't the retail operations that were the problem, but rather the corporate contract market where both Staples and Office Depot derive around 40% of their annual revenues. By reducing the market to just one major player, the risk to business (and the government) of having to pay higher prices was too great and the antitrust regulators filed suit against the merger in an attempt to block it.

Staples, though, had agreed to divest some $600 million worth of the contract business to Essandant(NASDAQ: ESND), but the regulators apparently thought it wasn't enough. The FTC argues the two retailers sell 79% of the office supplies to Fortune 100 companies in the U.S who are worried the deal will lead to higher prices for them. In a sharply worded response, however, both Staples and Office Depot said that was based upon "flawed analysis" and "cherry picked facts."

They also point out the FTC's own analysis showed 99% of their customers would be unaffected by the deal and the agency was simply "concerned with protecting the 100 largest companies" in the U.S. It also failed to take into account the rise of competitors like Amazon and the disruption it's caused in the digital marketplace. As a result, they are seeking "15 heavily redacted documents" from Amazon about its business marketplace to prove the online retailer is far more of a competitive threat in the contract accounts business than the government is giving it credit for.

That is why if Amazon ends up buying Office Depot's contract operations, it could spell the end for Staples.

Although Amazon's acquisition of Office Depot's corporate accounts would likely pave the way for Staples and it to merger, more stores is the last thing Staples needs.

According to a recent article in The New York Post, an activist investor has taken a stake in Office Depot believing that if the online marketplace got the business, it would clear the way for Staples to make the acquisition. Earlier this month, Starboard Value, the activist investor that prodded the office supplies retailers to make the merger move, dumped its shares in Office Depot, leaving only some options to buy the stock.

But with the weakness in the retail market, Office Depot's real estate is not the deal Staples wants to make and if it was left with only the bricks and mortar footprint of its rival, would it even want to go through with it?

Office Depot reported revenues in 2015 tumbled 9% from the year ago period because of store closures while comparable sales at those that remained open were flat. Staples revenues were down 7% with comps down 3% for the year, 4% in the fourth quarter. More importantly, operating margins dropped three basis points to 4.5% in the North American retail division, but rose 27 basis points to 7.2% in the North American commercial market.

An Amazon acquisition would certainly gut the rationale for Staples own bid, but would probably also ruin its chance of a profitable recovery and could also spell its demise.

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