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Staples-Office Depot Merger Falls Through; Stocks Plunge

In a highly unfavourable development for investors of both Staples, Inc. SPLS and Office Depot, Inc. ODP, U.S. District Judge Emmet Sullivan has ruled out the merger of the companies. The companies had taken several steps to get a clearance from the Federal Trade Commission (“FTC”) after the regulatory body rejected the revised offer from Staples for the purchase of Office Depot. However, those efforts were not sufficient to change FTC’s decision.

Following the news, share price of both the companies plunged. While Office Depot nosedived 40.4%, Staples tumbled 18.3% yesterday. The companies are now planning to terminate the merger on May 16, 2016. Per the merger agreement, Staples will compensate Office Depot with $250 million as merger break-up fee.

According to the FTC, the deal would lower competition nationwide and result in price hikes and fewer options for large corporate houses that usually make bulk purchases. However, had the merger materialized, the two companies would have created a retail chain with approximately $36 billion in annual revenues and thousands of stores.

Earlier, both Staples and Office Depot had stated that the merger would help generate net synergies in excess of $1 billion over the three-year integration period. Contrary to the FTC’s opinion, the companies added that the deal would instead have helped to lower prices, make product and technological advancements, and drive growth in categories beyond office supplies.

In Feb 2015, Staples had announced that it will acquire Office Depot for $6.3 billion. After the rejection of the revised offer in December, Staples and Office Depot had decided to take a few more months to clear all the hurdles related to their merger. Both the companies postponed their merger date to May 16, 2016 from the initial Feb 4, 2016.

In an effort to get FTC clearance, in February Staples and Office Depot announced an agreement to sell a large corporate contract business as well as allied assets that generate above $550 million in sales to office-supply wholesaler Essendant. However, this transaction would have been effective if the FTC would have approved the merger between Staples and Office Depot. Staples is now planning to terminate the agreement.

What’s Next for Staples & Office Depot?

Following, the verdict on the merger, Staples has outlined certain plans to increase long-term value. In order to acquire new customers, the company intends to increase its offering of products as well as services beyond office supplies. Staples expects to improve its supply chain capabilities through the addition of more than 1, 000 associates to its mid-market sales team.

Since 2011, Staples has closed more than 300 stores in North America. The company is planning to close minimum of 50 stores in North America in 2016. The company not only intends to increase productivity but also hopes to preserve profitability in North America by expanding its services, increasing customer base, shutting down underperforming stores and decreasing fixed costs.

The company plans to initiate a new cost-saving program to garner nearly $300 million of pre-tax cost savings annually by the end of 2018. The company will also resume share repurchase during the second quarter of 2016 and intends to return roughly $100 million in 2016 to shareholders.

On the other hand, Office depot will lay down its plan after the merger gets formally terminated on May 16, 2016.

Conclusion

Notably, the companies have been interested in the deal for a very long time. In fact, the merger was first proposed 18 years ago when it was rejected by the FTC on grounds of being anticompetitive. In the past one year, shares of both Staples and Office Depot have declined 49% and 60.6%, respectively.

We suggest investors to contemplate properly before investing in the stock right now and wait for the Zacks Rank to improve as currently both the companies carry a Zacks Rank #4 (Sell).

Some better-ranked stocks from this sector include Marinemax Inc. HZO and Cabela's Incorporated CAB. Marinemax sports a Zacks Rank #1 (Strong Buy), while Cabela's hold a Zacks Rank #2 (Buy).

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OFFICE DEPOT (ODP): Free Stock Analysis Report
 
STAPLES INC (SPLS): Free Stock Analysis Report
 
CABELAS INC (CAB): Free Stock Analysis Report
 
MARINEMAX INC (HZO): Free Stock Analysis Report
 
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