A federal judge on Monday blocked the merger of office superstores Staples and Office Depot, saying federal regulators had shown the deal could limit competition.
U.S. District Judge Thomas Hogan issued a preliminary injunction blocking the proposed merger, as requested by the Federal Trade Commission.
The agency had asked to stop the $3.5 billion deal, saying it was anti-competitive and would burden consumers with higher prices for items from pencils to computer paper.
Lawyers for the companies had argued that the merger could actually lead to lower customer prices. They said their combined $11 billion in sales would account for only 5 percent of a diverse office supply market that includes other large retailers, such as Wal-Mart, mom-and-pop stationery stores, and mail-order companies.
David I. Fuente, chairman and chief executive officer of Office Depot, said the board of directors for both companies will review the decision and decide whether to appeal. However, he said, a merger now appears unlikely.
Thomas Stenberg, Staples chairman and chief executive officer, agreed, saying pursuing the merger would be too expensive. His company alone has invested more than $20 million in the case, he said.
“The additional expense and time involved in pursuing the matter further in the court system doesn’t seem to be in the best interest of our shareholders, employees or customers,” he said.
The case has been closely watched as a gauge of how the government will regulate the growing phenomenon of superstores across the retail industry.
It now goes back to the FTC, which must bring its case before an administrative judge. However, Monday’s ruling could end the deal. The two companies had indicated they might not fight further if the judge granted an injunction.
The decision was announced after trading ended. At the close of trading, Staples stock had fallen 25 cents on the Nasdaq Stock Market to $23.25 per share, while Office Depot rose 12.5 cents to $19.438 per share on the New York Stock Exchange.
Staples, based in Framingham, Mass., announced last September it would acquire Delray Beach, Fla.-based Office Depot for about $3.5 billion in stock.
But the FTC objected in March that the two companies combined could control prices in markets in the 18 states and the District of Columbia where they are the only office-supply superstores.
The companies cut a deal to sell 63 stores to third-ranked competitor Office Max, but to no avail. Staples and Office Depot still would have had more than 1,000 stores between them.
During the hearing in U.S. District Court, the companies had argued that customer prices could drop because of efficiencies created by the merger. Superstores can save money by cutting better deals with suppliers and distributors and consolidating overhead and advertising expenses, the companies argued.
But a former Justice Department antitrust economist testified that a merger would result in price increases for office supply products of about 7 percent.
The economist, Frederick Warren-Boulton, also showed a colorful pie-chart, produced by Staples for strategic planning. It illustrated that without the merger the company anticipated new competition from Office Depot in 76 percent of its markets by 2000, compared with 46 percent now.
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