Office Depot-Staples Merger Opposition Has Ironic Elements, Says Federal Judge

The federal judge who could block the office products superstore merger of Staples Inc. of Westborough and Office Depot Inc. mused Thursday about an irony in the case: The Federal Trade Commission would never have tried to kill the deal if the two companies had not been so good at cutting prices.

Staples, Florida-based Office Depot, and the nation’s third “superstore,” Ohio-based OfficeMax, sell office supplies at such low prices that they form their own market and do not compete with any other chain, such as Wal-Mart or Kmart, the FTC reiterated Thursday during final arguments in the case.

That means Staples’s proposed $4 billion buyout of Office Depot would cut a market of three players into two, lessening competition and causing higher prices, FTC lawyer George Cary said.

But Federal District Court Judge Thomas F. Hogan noted that the three superstores could not form a unique market if they were not so adept at price-cutting to begin with.

“Ultimately what you’re saying is that because Staples and Office Depot have been so successful in lowering prices … they’re bound by their success, essentially,” Hogan told Cary.

The comments were among Hogan’s first public exchanges with lawyers on either side of the case. During five days of testimony last month, Hogan said barely a word and gave no indication of his opinion of the evidence. He will rule by the end of June on whether to block the merger until a full trial is held before an administrative law judge.

Hogan’s inquiries zeroed in on the case’s central point. The government contends prices at any one superstore are affected by only one factor: the presence of a rival superstore. If Staples buys Office Depot, the government says, cities that have all three superstores will then have only two, and many cities with two superstores will have just the Staples chain. That will allow Staples to raise its prices, or to cut them more slowly than it would if the merger does not occur.

Lawyers for Staples, however, argue the company competes not only with Office Depot and OfficeMax but with a vast array of rivals, including Wal-Mart, Kmart and mail-order firms.

The three superstores, Staples says, have only 10 percent of the $180 billion market for office products. That means a merged Staples-Office Depot will still have plenty of competitors, all pressuring it to keep prices low, the company says.

In response to Hogan, Cary said he could not argue that Staples and Office Depot form a unique, insulated market if they were not so good at cutting prices.

But he added that the stores’ past success should not give them “a pass” from competing against each other in the future. After all, he said, no one would argue that all computer makers should be allowed to merge into one on the logic that computer prices have fallen.

Staples executives repeated Thursday that an adverse ruling from Hogan will stop the merger. If Hogan sides with Staples, however, the merger will proceed - even if the government appeals for an injunction Staples chief executive Thomas Stemberg said.