Office Depot and OfficeMax Announce Merger of Equals

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Feb 21, 2013
Rumored for some time, Office Depot and OfficeMax announced that the companies would be merging with the goal of creating a stronger and more efficient combined company. While retail has been the office superstores primary and original mode of business, the three top chains, Office Depot, OfficeMax, and Staples, are all finding that their business has been evolving away from retail towards the Internet and business to business (B2B). As a result, the chains have been altering their strategy towards smaller stores and making greater investments in e-commerce initiatives. We believe that for electronics and high value supplies like ink and toner, Internet is creating great stress on retail. The truth of the matter is that with the proliferation of tablets and smart phones, people are spending more time with their devices and less time visiting a store. Also, adding to the competitive pressure for the superstores, Walmart and other mass merchandiser types are a one-stop-shop and now carry wide range of office supplies.

So while this merger is a merger of equals (54% Office Depot and 46% OfficeMax), the combined company’s name, marketing brand, and corporate headquarters will be determined following the appointment of the new CEO which will happen closer to the closing by the end of 2013. From now until the potential closing, both companies will continue to operate independently and still compete with each other. This seems like a unique time in the companies’ histories. To get the merger done, both would have had to “open the vest” to each other during merger meetings and get to know what each company is working on in terms of programs and initiatives but now they must keep moving forward independently despite this knowledge.

The companies wanted to make it abundantly clear that one company was not acquiring the other but that it is indeed a merger of equals. The question is that while Office Depot and OfficeMax spend inordinate amounts of time focusing on the merger and running their business simultaneously, how much ground will they lose to Staples and companies like Amazon that can continue to put full focus on their business and improving the customer experience without the added distraction of a major merger which can take considerable time to complete?

Both companies stated during the investment call that they are confident that the deal will move forward and pass the necessary FTC scrutiny. In 1997, this was not the case when Staples and Office Depot announced plans to merge leaving OfficeMax as a distant third position player. At that time, the FTC deemed that the merger of the two companies would be anti-competitive. Fast forward 16 years, this merger is now between the second and third position player and would still not equal the #1 Staples player. A wider range of companies compete with office supply superstores than ever before including mass merchants, consumer electronic stores, and of course, the ever-growing Internet. During the 1996 and 1997 timeframe, the Internet was not a significant supplies and electronic force it is today. The Amazon of 1997 is very different than the Amazon of 2013 and in fact now Amazon has Amazon Supply which is a separate platform from the company’s traditional website to better serve the business customer. Now the Internet is significant and retail has a hard time actually competing with the Internet on some items. So for these reasons, it seems more likely that the FTC will let this merger happen as opposed to the failed Staples/Depot merger in 1997.
Table: Relevant Statistics for Three Major Office Supply Superstores
  Staples OfficeMax Office Depot
# of Stores 1,578 (U.S.)   339 (Canada)

329 (Int’l)
3Q 2012
900 (U.S. and Mexico)YE 2012 1,112 (North America)   123 (Int’l)  

YE 2012
# of Employees
87,782 (2011)
29,000 39,000
Total Sales $25 Billion (2011) $6,9 Billion (YE 2012) $10.7 Billion (YE 2012)
Sales: Contract Stationer Division $10 Billion $3.6 Billion $3.2 Billion
Sales: Retail $9.75 Billion $3.3 Billion $4.5 Billion
Sales: International $5.3 Billion   $3.0 Billion
International Countries 24 countries in Europe, Australia, South America, and Asia Mexico (retail), Canada, Australia, and New Zealand (contract) 60 countries including Mexico, Germany, UK, Asia, Sweden, Hungary, France, South Korea
Merging Office Depot and OfficeMax will take some time as there will likely be site and product rationalization. The outcome will be a reduction in redundant stores and employees while working on increasing the purchasing power and marketing clout of the new company. We suspect the new larger company will expect better pricing and other concessions as a combined force than as two separate companies. However, the combined store counts will go down as the market is saturated with stores and the new company will want to reduce costs for the new combined company by closing stores that are in each other markets.

While the discussion has focused on the details of the merger despite the many unknowns at this time, vendors that supply both companies with products including private label are left wondering what will happen to their business. Both OfficeMax and Office Depot have strong private label programs in place which will be changed once the new company is finalized in terms of name and brand. This can mean changes in vendors and certainly packaging as everything is rationalized on the new identity upon the potential closing. In the meantime, vendors must concentrate on putting their best foot forward with both companies to secure consideration with the new combined company in the future.

The analyst community had mixed comments about the proposed merger. All three of the office superstores’ stock increased as a result of the merger but all have settled back down one day later. So while it is clear that the new company will gain synergies and efficiencies, it will have to create innovation for customers and improve the shopping experience since margins will not likely improve. Also, it was pointed out that other retail mergers of similar size did not work out well with strong returns, i.e. Kmart and Sears. The other factor is that Staples is viewed as a well-managed company and just because player 2 and 3 merge will not necessarily automatically close that gap. Amazon is also a strong competitor in this space and has the ability to be more nimble and aggressive than other players. In addition, suppliers are losing distribution options especially in the consumer electronics space i.e. Circuit City and this merger might add to this constriction especially if there many store closures.

So while many people continue to purchase their printers and MFPs from retail locations (a recent InfoTrends primary research study, for example, indicates that around 30% of laser devices within businesses are purchased from traditional retail or store locations), it is important to understand the factors that are driving people to purchase where they do. Our research indicates that while pricing is an important consideration for customers of print equipment, convenience is also an overriding factor. With this in mind, it might make sense for OfficeMax and Office Depot to focus their joint business model and value propositions around these themes–at least when it comes to print equipment.

For imaging markets, the potential new company will likely retain its relationships with its major vendor partners where there is likely overlap between them but may reconsider relationships with other vendors as it will want to seek to simplify and reduce any unnecessary redundancy. The unnamed new company will expect to gain more marketing power since it will be buying product for its new combined retail store count, even though that will drop in numbers, and other combined business divisions. For supply vendors, the good news is that supplies such as ink cartridges, toner cartridges and paper are very important product lines to all the superstores but there is also tremendous competition in the market on both the supplier and buyer side of the market which initially my create some challenges. So while the new, potential private brand from the new company may have a built in following based on previous customer experience, suppliers of any type of product from printers, cameras, to supplies will want to pitch their capabilities and strength of product line to secure or retain product position in the new stores.

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