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Shares of Staples fall on $6.3B bid for Office Depot

Office-supply chain Staples agreed to buy its sole remaining competitor, Office Depot, in a $6.3 billion deal that would create one mega-office-supply chain. But shares of Staples dropped 10% on the news amid concerns of anti-trust opposition to the deal. Office Depot bought OfficeMax, another competitor, in 2013. The Office Depot deal, which vows cost synergies of $1 billion after closing, must be approved by the Federal Trade Commission. Cost synergy is the savings in operating costs expected after two similar companies merge.635552428340520337-GTY-492478745-64375902

“I think they have to fight it,” Staples co-founder and former CEO Tim Stemberg said of the FTC’s potential view of the merger. Staples faces “potentially a long and nasty legal skirmish” to get it done, Stemberg said on CNBC. Shares of Staples dropped 10% to $17.10 a share. Office Depot shares rose 1.4% to $9.41 a share, below the proposed merger value of $11 a share. Staples agreed to acquire all of the outstanding shares of Office Depot for $7.25 in cash and 0.2188 of a share in Staples stock. That values Office Depot at $11.00 per share, or a premium of 44% over the closing price of Office Depot’s shares as of Feb. 2, before the Wall Street Journal reported on the impending deal.

The two companies will boast pro forma annual sales of approximately $39 billion, Staples said. That compares to pro forma sales of $17 billion for Office Depot. Staples reported $23.1 billion in revenue in 2013, a drop of 5.2% drop over its 2012 revenue. “This is a transformational acquisition which enables Staples to provide more value to customers, and more effectively compete in a rapidly evolving competitive environment,” said Ron Sargent, chairman and chief executive officer of Staples.

The merger, which was approved unanimously by both companies’ board of directors, is expected to close by year’s end if OK’d by the FTC. Activist hedge fund Starboard, which has been pushing for a merger, owns a 6% stake in Staples and 10% in Office Depot. Starboard is still in the black on its investment, however, as it bought its Staples stake at between $12 and $14 a share last year, according to regulatory filings.