Office Superstores, Again?
FTC v. Staples is a seminal case in modern antitrust analysis of horizontal mergers. Judge Posner has described it as the economic “coming of age” of merger analysis. It is also a landmark decision in the development of unilateral effects theories. Despite the fact that Judge Hogan did not explicitly rely upon the econometric evidence presented to demonstrate that a post-merger combination of Staples and Office Depot would be able to increase prices, it is also often discussed as having particular importance for the role of econometrics in antitrust analysis. As Jonathan Baker observes:
Judge Hogan’s hidden opinion supports the government’s use of econometric evidence, though the court did not trumpet doing so. The opinion never uses the term, presumably in a conscious effort to downplay novelty in order to avoid creating an issue for appeal. Yet Judge Hogan demonstrably relied on econometric evidence in one instance,(14) when he stated that “in this case the defendants have projected a pass through rate of two-thirds of the savings while the evidence shows that, historically, Staples has passed through only 15-17%.”(15) The sole basis in the record for the 15-17% figure is the testimony of the FTC’s econometric expert as to the conclusions of his statistical analysis of the pass-through rate.
The district court was persuaded by the FTC’s pricing evidence, and evidence that entry would not timely, likely and sufficient to counter any price increase. Part of that entry analysis was rejecting the defendant’s claim that firms like Walmart would discipline any attempt to increase prices. In any interesting turn of events, nearly 15 years later, it looks like we are heading toward another significant merger between office superstores:
Office Depot Inc. (ODP) and OfficeMax Inc. (OMX) may need to merge after heightened competition for office-supply sales and a 26-year high in the U.S. unemployment rate helped wipe out almost $13 billion of shareholder value.
Office Depot, the second-largest U.S. office-supply chain, has plunged 90 percent to $1.16 billion in the last five years, more than any American retailer that still has a market value greater than $500 million, according to data compiled by Bloomberg. OfficeMax was valued at $664 million yesterday after plummeting 78 percent, the third-steepest drop. Both trade at 10 cents or less per dollar of sales — one-tenth of the industry average and ranking in the bottom five of 126 retailers.
Interestingly, competitive pressure from Wal-Mart and Target, among others, appears to have developed into a significant force in the market.
With businesses spending less on paper and printers as the U.S. jobless rate hovers at 9 percent, combining Office Depot with OfficeMax may reduce costs by almost $500 million, said KeyBanc Capital Markets Inc. Regulatory approval won’t be a hurdle because of more competition from Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) since Staples Inc. (SPLS) was blocked from buying Office Depot in 1997, said BB&T Capital Markets. Money-losing Office Depot of Boca Raton, Florida, hired interim Chief Executive Officer Neil Austrian in May after a seven-month search.
“Office Depot needs OfficeMax,” said Anthony Chukumba, an analyst with BB&T in New York. “They need to combine so they can scale up to better compete with Staples. For them to bring in a guy who’s been on the board forever and who has been CEO twice before on an interim basis, that just smacked of them saying, ‘We’re going to try to sell the company.’”
Of course, the ex post expansion of Wal-Mart and others into this territory does not mean that the FTC or Judge Hogan were wrong ex ante. Indeed, the strength of the economic evidence in the case suggested that entry would be difficult — and indeed, perhaps it was. Nonetheless, a merger of the the second and third largest office superstores is surely to attract some attention at the agencies. Indeed, it may well be the case that the sale of consumable office supplies through office superstores in no longer a relevant antitrust product market. However, the markets have changed in ways other than the emergence of significant pricing discipline from Wal-Mart and others. The story notes that Office Depot’s market value has decreased by over $10,3 billion ($2.3 billion for OfficeMax since June 2006).
Given the growth of Wal-Mart and others, I suspect that even a replay of the Staples-Office Depot transaction of the late 1990s would have a significantly better chance of approval today than it did then. Those in the industry appear to be expecting a merger announcement, but describe government approval as “certainly not a given.” In any event, a Office Depot – Office Max merger will provide a good opportunity to go back and look at the predictions of the agencies at the time, to evaluate those predictions against the development of the market, and perhaps to learn something useful about competitive dynamics and entry in the retail sector.