The True Winner in the OfficeMax Inc (OMX)/Office Depot Inc (ODP) Merger

Page 1 of 2

Recently, OfficeMax Inc (NYSE:OMX) and Office Depot Inc (NYSE:ODP) announced a $1 billion merger in an effort to consolidate businesses in a struggling industry. Let me get straight to the point: This was a merger for survival … period. Does anyone remember Hewlett Packard buying Compaq? It’s eerily similar, with two inferior competitors banding together out of desperation. I was actually expecting one or both to eventually go under (i.e. Circuit City,) but the merger is just a painful deferment of the inevitable. Consolidation in a stagnant industry benefits the market share leader: Staples, Inc. (NASDAQ:SPLS).

In my opinion, Staples was an attractive investment opportunity prior to the announcement, but the merger announcement only strengthens my conviction. Staples is a misunderstood story, which generally leads to attractive valuations. The pain of integrating two established (and weaker) franchises will only create more opportunity for the company to add to their market share lead. Integration of disparate store bases and corporate systems is a very difficult task, even for market leaders (which they clearly are not.)

Let me first begin by addressing the most common bear case arguments against Staples, which are as follows;

1. The office supply industry is in secular decline.

2. Amazon.com, Inc. (NASDAQ:AMZN) with steal market share and ultimately destroy the competition within the industry similar to books and consumer electronics.

3. Staples is a value trap.

A struggling industry:

First, there is no question that the industry has faced some serious headwinds. The industry has struggled to grow over the past 5 years – while this is true, it hasn’t shrunk dramatically either. Of the combined $42 billion in sales for these three competitors, Staples is by far and away the market share leader generating more revenue than OfficeMax Inc (NYSE:OMX) and Office Depot Inc (NYSE:ODP) combined. According to IBIS World, Staples controls 35% of the office supply market. Much like the rest of retail, office supplies was over-stored with too much excess capacity. The merger will help to address this problem (estimating closing 600 stores.) Furthermore, Staples has embarked on their own effort to shutter unprofitable stores reducing the the glut of locations. As for industry dynamics, one factor to consider is the pricing environment. Is it commodity-like and is it irrational? I don’t believe that’s the case in this situation. While office electronics and other hardware is indeed a commodity, this represents a smaller portion of the overall mix. Pricing on copy paper, for example, is quite firm and favorable.

Secondly, the Amazon threat:

I don’t believe that Amazon is as much of a threat as is commonly perceived. Bulls on Amazon seem to be under the delusion that the company can simply enter any market without regard of profits. This strategy cannot sustain itself.  I will definitely admit Amazon has done a tremendous job at disrupting incumbent players in many categories, executing on pricing and great service. However, this formula doesn’t work in every market. In my opinion, Amazon bulls are incorrectly extrapolating their past success with books and consumer electronics (and other categories) to office supplies. A large part of Staples mix is contracts with the corporate and government market. While pricing is important, reliability and service are primary drivers to the large scale office supply business. Staples continues to defended this territory well.

Furthermore, Staples is a formidable player in its online delievery business in its own right with over $1billion in revenue and growing significantly.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

The 10 Biggest Outlet Malls in USA

The 5 Most Popular Rap Songs of All Time

The 10 Countries that Eat the Most Meat

The10 Most Expensive Countries to Fly To

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!