Office Depot and Staples said last night that they are scrapping plans to merge after regulators opposed the combination. Analysts are responding today by downgrading one or both companies and cutting their price targets.

Office Depot Inc, Staples, Inc. Tank As UBS Says Thesis "Shredded"

Office Depot/ Staples merger blocked… again

The Federal Trade Commission won the court’s approval for a preliminary injunction to keep Office Depot and Staples from merging, making this the second time a combination of these two office supply chains was blocked. The first time was in 1997. The court ruling said that there was “reasonable probability” that a merger between the two would “substantially impair competition” and that it would have increased prices and lowered the quality of customer service for big companies that purchase office supplies.

Evercore ISI analyst Greg Melich was not surprised that the merger was blocked. He and his team noted that the FTC said late last year that together Office Depot and Staples sell 79% of all the core office products and consumables to Fortune 100 companies.

Office Depot, Staples downgraded by Jefferies

Jefferies analyst Daniel Binder downgraded both office supply chains to Hold because his ratings had been base on the merger being successful and bringing with it more than $1 billion in synergies. He believes that remaining separate, both companies are vulnerable to the ongoing decline in office supply sales and increased competition in the space.

However, he sees Staples as being stronger because it has been focusing on its “beyond office supplies” business. The retailer intends to hire 100 sales specialists for this part of its business. Further, Staples hasn’t had the 15-month disruption Office Depot has had as it deals with its acquisition of Office Max. He believes Staples could even take share from Office Depot, which is struggling to regain its footing as it integrates Office Max.

Goldman Sachs analysts seem to agree that Staples is the stronger of the two as they cut their price target for Office Depot from $7.75 to $5.80 while leaving their Staples target the same at $11 per share.

“Our thesis has been shredded”

UBS analyst Michael Lasser summed up the widely held view on Office Depot and Staples this morning in his note on Staples, saying that his thesis “has been shredded.” He downgraded the retail chain from Buy to Neutral and cut his price target from $14 to $10.50 per share. He also praised the company for diversifying its business as non-office supply categories make up about half of its sales now.

However, he doesn’t think this is enough to push sustainable growth because it hasn’t gotten to the point where sales in categories that are growing more than offset those in categories that are declining. He also doesn’t believe the initiatives management is planning to help it move ahead past the merger’s failure will help. For example, he doesn’t expect a buyer for Staples’ European business to come forward, and he believes the retail chain will fully reinvest the $300 million it plans to save over the next three years in price and sales personnel.

Lasser also downgraded Office Depot, but he moves from Neutral to Sell and cut his price target from $5.50 to $4 per share.

Office Depot shares dived 38% to $3.77, while Staples stock plunged 16.12% to $8.69 per share.