Cramer’s comments on CNBC’s “Squawk on the Street” Wednesday, followed an announcement Tuesday that the Federal Trade Commission had decided to block the $6 billion merger between Office Depot and rival Staples Inc. (NASDAQ:SPLSC).
Calling the proposed deal between the two office supply chains a “Merger that had to happen,” Cramer said he was somewhat puzzled by the FTC decision since the merger would have provided some real competition to e-commerce giant Amazon.com (NASDAQ:AMZNC), which has gobbled up much of the business that formerly went to Office Depot and Staples.
Pointing out that Amazon.com had made stores like Office Depot and Staples “nearly obsolete,” Cramer added, "This Amazon quarter was a tipping point quarter where you just realize this is a whole generation of people who will never go to Office Depot."
Cramer said he was not sure how Office Depot would stay in business now.
Tale Of The Tape
Office Depot closed down more than 40% Wednesday at $3.63. Staples fared better but was still down more than 18% at $8.46 at the bell.
This was the second time in 19 years federal authorities raised concerns about a merger involving the two companies.
Cramer’s concerns aside, Staples is considered to be in better shape than Office Depot. For one thing, Staples is more profitable. The company is expected to generate about $600 million in free cash flow in 2016 and the balance sheet looks decent showing $1 billion in debt and $825 million in cash at the end of Q4.
Profit-wise, Office Depot looks a lot worse. During 2015 the company posted a $37 million free cash flow loss. Despite being smaller than Staples, Office Depot has about $1.3 billion in debt. All this helps explain Cramer’s “merger that had to happen” comment.
The Amazon Factor
Both Staples and Office Depot tried to make the case the merger would not deter competition given the presence of Amazon.com in the office supplies space. The FTC did not buy that argument.
Not everyone agrees. According to BB&T senior equity research analyst, Anthony Chukumba, Tuesday’s FTC decision was "just plain wrong, nonsensical and ludicrous." Chukumba specifically cited Amazon Business and the growth it has had recently.
Others, including M&A attorney Frank Aquila suggest online competition in general was ignored by the FTC.
On CNBC’s Power Lunch Aquila said, “There is a need for regulation, there's need to protect consumers but it has to be done in way that looks at the reality of competition today.”
Jim Cramer’s TheStreet suggested that patient investors may find a buying opportunity with Staples at lower entry levels that may be soon to come.
Given the fairly solid position the company has, TheStreet advises investors to watch the stock if it nears the $8 price point. If it holds that could provide a base – if not, the stock could continue to show volatility until that base develops, according to TheStreet.