Is a Staples-Office Depot Merger in the Cards?

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Is a Staples-Office Depot Merger in the Cards?

 news 2014-12-16 at 1:26:49 pm Views: 371
  • #41658

    Is a Staples-Office Depot Merger in the Cards?
    By Motley Fool,

    Staples and Office Depot have actually tried to merge before. In April 1997, the Federal Trade Commission found that a proposed Staples-Office Depot merger would violate antitrust laws, despite a plan to sell 63 stores to OfficeMax — the other large office-supply chain at the time. Accordingly, the FTC blocked the merger.

    However, the market for office supplies has changed significantly since then. Mass merchants like Wal-Mart have become more substantial players in retail office supply market. The rapid growth of e-commerce has made an equally strong competitor in office supplies.

    Office supply pricing varied widely between different cities in 1997 based on how many office supply superstores were competing in each market. However, the FTC found last year that this was no longer the case. As a result, it had no objection to Office Depot's recent merger with OfficeMax.

    Merger speculation has started (again)

    The FTC's finding that office supply superstores now face competition from a wide variety of other kinds of retailers has catalyzed a new round of merger speculation.

    Credit Suisse analyst Gary Balter has been particularly forceful in arguing that based on the FTC's analysis of the Office Depot-OfficeMax merger, it would be likely to approve a Staples-Office Depot merger, too. He claims that the cost savings from merging and slimming down the combined retail network could exceed $1.4 billion annually .

    A successful Staples-Office Depot merger would clearly be great for both stocks. Both companies have experienced comparable store sales declines recently, driven by a combination of outside competition and secular declines in some key office supply categories.

    This has led to significant margin pressure at both firms — although Office Depot has managed to boost earnings this year thanks to big merger-related savings. Staples and Office Depot are both executing plans to close hundreds of stores in order to better match demand. A merger would allow them to further rationalize the store base while also unlocking lots of back-end synergies.

    Antitrust concerns still loom large

    Starboard Value may try to push Staples and Office Depot to look more closely at a merger. However, such a deal would raise much bigger antitrust concerns than the Office Depot-OfficeMax merger.

    A Staples-Office Depot merger would still raise major antitrust concerns

    First, even after merging with OfficeMax, Office Depot is still smaller than Staples. The merger made Office Depot a more viable competitor to Staples, whereas Office Depot and OfficeMax would have struggled to survive as separate companies in the long run.

    By contrast, a Staples-Office Depot tie-up would create a $38 billion office supply giant. This could give it pricing power in the retail market despite ongoing competition from the likes of Wal-Mart and Amazon.

    However, the bigger potential antitrust concern would be the commercial market, where Staples and Office Depot supply businesses and other organizations under long-term contracts. Staples and Office Depot are by far the biggest players in that market and compete fiercely for business today. A merger would probably lead to higher prices for commercial customers.

    As the retail and commercial office supply markets evolve over the next few years, the antitrust concerns surrounding a potential Staples-Office Depot merger could dissipate. For now, America's top two office supply stores will probably have to forge ahead separately.