Lawyers for Staples (SPLS) last month made the surprising decision not to call any witnesses in the trial over the company's planned $6.3 billion acquisition of Office Depot (ODP) - Get ODP CORPORATION Report . Instead the company's lawyer, Weil, Gotshal & Manges LLP partner Diane Sullivan, simply said the Federal Trade Commission in its lawsuit against the deal "failed utterly" to identify any specific market that would be harmed by the merger and called on Federal District Judge Emmett Sullivan to let the merger proceed.
The bold mike-drop by Staples and its legal team abruptly ended testimony in the case and now appears to have been a mistake.
Tuesday evening Judge Sullivan effectively killed the merger by granting the FTC's request for a preliminary injunction that would have put the merger on hold while a full trial to permanently stop the deal was underway before one of the commission's in-house administrative law judges. Rather than wait for that potentially year-long process to play out, the companies terminated the deal a few hours later.
A number of factors contributed to Judge Sullivan's decision to halt the acquisition, including uncertainty about how strong a nascent rival Amazon (AMZN) - Get Amazon.com, Inc. Report will be in the near future, a lousy remedy offered by the companies and some convincing witnesses who supported the government's case. And finally, there was the simple fact that Sullivan wasn't presiding over a full-blown trial on the merits of the FTC of the case--he was charged with ruling over only whether the merger should be stopped temporarily while a full trial is underway.
The outcome came as a surprise to some who took to heart Sullivan's frequent criticism of the government's merger investigation process, especially his expression of deep concern about pre-written declarations about the merger's harm that FTC lawyers presented to potential witnesses. During the trial Sullivan said it was "very disturbing" to him that the FTC presented Amazon executive Prentis Wilson a prepared declaration that may have overstated Amazon's estimates on the future growth of its new business supply unit. Upon reflection, however, Sullivan appeared not to been all that disturbed by a tactic that the government routinely undertakes during merger investigations. Witnesses are not obligated to sign the declarations, prepared in advance as a starting point for getting ready for trial, and the subjects are free to amend them as they see fit.
During the closing statements for the trial on April 19, Sullivan warned the parties that the nature of a preliminary injunction case restricted his options.
"He said in closing that his role is limited," noted Andre Barlow, a partner at Doyle, Barlow & Mazard PLLC, "This was not a full trial on the merits" of the FTC case, Barlow said. "All he was trying to determine was whether the FTC met the burden for a preliminary injunction, which is lower than full trial."
Barlow said that earlier in the trial it may have appeared that Sullivan's ruling would be influenced by his criticism of the FTC's investigation process, but it became clear during the past two weeks, starting when the companies began wrapping up their defense and the day of closing comments, that he had taken time to reflect and "dialed it back."
"Staples' risky decision not to put on a defense was a huge mistake," Barlow said. "I think they probably read too much into the judge's initial reaction to some of the witness testimony."
By not testifying, Barlow said the companies may have created doubt in Sullivan's mind about their executives' ability to defend the deal.
Only a short order granting the FTC's preliminary injunction request was made available Tuesday. Sullivan was scheduled to enter a sealed version of his longer opinion explaining his decision into the docket Tuesday. A public version with confidential corporate information redacted will be released in the next couple of days.
Also there was sufficient testimony to give benefit of doubt to the FTC's argument that the deal would harm large businesses customers because they would face a monopoly in the provision of some critical office products.
For instance, Allen Wright, the vice president for contracting and acquisition management at HealthTrust Purchasing Group LP, a purchasing organization for healthcare providers, told the court, "We'll be in a noncompetitive environment" if the merger went forward.
Sullivan also seemed to get over his initial reservations about how the FTC defined the market that would be affected by the merger. The FTC excluded ink and toner cartridges from its definition of the market because companies such as printer makers provide ink and toner cartridges as part of "managed print services" contracts and are therefore different from other consumable office supplies. The companies argued that those products were excluded in order to drive up the market share that Staples and Office Depot have in the consumable products category and make the deal appear more harmful than it actually would be.
"Clearly the judge during the trial did have issues with the product market definition," but the FTC was able to bring him around, Barlow said.
The companies appeared to gain little benefit from their plan to addresses the FTC's antitrust concerns by selling more than $550 million in large corporate contract business and related assets to Essendant (ESND) - Get Essendant Inc. Report . The assets to be divested are primarily accounts in which Staples and Office Depot act as wholesalers to minority and woman-owned office supply resellers. The FTC argued that the business to be divested is a niche service that helps customers satisfy state or federal minority contracting requirements or meet customers' diversity goals, so the spinoff wouldn't help general business customers.