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"The only limits are, as always, those of vision."

-James Broughton

Office Depot and OfficeMax to Merge in Stock Swap Valued at $1.2 Billion

The #2 and #3 retail office supply chains have been struggling for years to compete with the sector leader, Staples. At the same time, all three are suffering from increased competition from web retailers and discounters.

 

That’s one reason why the market reacted favorably to the news that Office Depot and OfficeMax intend to merge, creating a $18 billion retail office chain company that could potentially be a stronger competitor to the #1 market leader, which posted revenue of nearly $25 billion last year, and to the myriad new competitors in the space.

 

Staples Easy ButtonOf course, the new management team of the combined company would need to execute on the merger. There are early signs that neither company has yet thought that through, which has given some investors pause. After the merger was announced, the stock prices of all three companies rose, but have since retracted somewhat.

 

But the economics of the merger are compelling.

 

None of the three companies has managed to increase enterprise value in the last decade — despite the fact that Staples grew its revenue 140 percent and OfficeMax increased its gross margins from 19 percent to 26 percent. Key financial metrics for Office Depot have remained essentially flat.

 

Still, with cost efficiencies possible by combining Office Depot and OfficeMax, the new company could emerge at twice the level of profitability the two companies delivered combined between them in 2012. Shareholders would be very happy if that happened.

 

Beyond the financials, a combined new entity could be in a strong position to move up the value chain, offering its small-to-medium-sized customer base new products and services. It could also be an attractive partner to technology solutions providers seeking new channels — in much the same way Apple anointed Staples over Office Depot and OfficeMax.

 

For a more complete analysis of the financials and future prospects of a new kid in the neighborhood, read Marty Wolf’s article on the proposed merger, published in Yahoo! Finance on February 21, 2013.

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