As the Princess Bride movie famously proclaimed, “Mawwage is what bwings us togeva today.” (Translation: “Marriage is what brings us together today.”) Office Depot Inc (NYSE:ODP) and OfficeMax Incorporated (NYSE:OMX) are planning on merging in order to better challenge industry rival Staples, Inc. (NASDAQ:SPLS) and indirect rivals Amazon.com, Inc. (NASDAQ:AMZN) and Costco Wholesale Corporation (NASDAQ:COST). OfficeMax CEO Ravi Saligram, in a conference call with analysts, appropriately commented: “It takes two to tango. Lo and behold, [Office Depot CEO Neil Austrian] and I have decided to tango.” In the proposed $1.2-billion all-stock deal, OfficeMax shareholders will receive 2.69 Office Depot shares for each OfficeMax share, valued at $13.50 each.
Why the Marriage (Supposedly) Makes Sense
OfficeMax and Office Depot have suffered declining sales since the most recent global recession and are struggling to generate a 3% profit margin, compared with a margin of 8% or more at Staples. A merger between the two chains “has made sense for years,” Credit Suisse analyst Gary Balter wrote.
Why would a merger between the two companies be a potential boon for investors? Office Depot and Office Max will be able to do more together than duking it out against each other in the market. Combining efforts, striving to reduce costly redundancies, and pooling revenues can make a more powerful industry competitor for Staples. Also, when looking at leasing deals on properties the two companies currently own, a merger works much better for both Office Depot/Office Max and landlords.
…and Why the Marriage Doesn’t Make Sense
The current market leader, Staples, would benefit from the merger, even though Office Depot and Office Max are seeking to knock Staples from of its number one position. Because Office Depot and Office Max are planning on closing hundreds of stores if the merger goes through, Staples would have fewer stores to compete with and be able to more effectively market Staples products.
There are many questions that remain unanswered about the deal. Issues regarding who will lead the new company, required federal approval, as well as mishaps in the announcement of the deal could pose some pitfalls.
Industrial Trends and Why This Deal Shouts “Run” Long Term
As previously noted, OfficeMax and Office Depot have suffered declining sales since the global recession and are struggling to generate a 3% profit margin, compared with a margin of 8% or more at Staples.
The office retailing sector is facing many attacks on several fronts. Online retailers like Amazon as well as big retailers like Costco are invading the office supply market’s turf – and are pretty successful in doing so.
Amazon has exploded in exponential growth over the past few years because the company has effectively tapped into the growing online retailing business. Costco has been able to grow because of its fairly simple business model and vast variety of products that the company’s large warehouse stores offer. Office Depot, Office Max, and Staples are comparatively undiversified. Amazon and Costco have massive empires relying on several different sectors. Office supply stores rely on more outdated models of revenue generation.
Conclusion
The new marriage between Office Depot and Office Max does make smart business sense. However, with the ever-increasing acceptance of online sales and big box retailers, the traditional brick-and-mortar chains of both Staples and the merged Office Depot/Office Max company will most likely struggle to grow significantly for the long term.
The article Office Depot and Office Max are Tying the Knot originally appeared on Fool.com and is written by Evan Buck.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
