The just-announced merger of Office Max and Office Depot has some unfortunate signs that the deal was not ready for prime time.
The most glaring reason is the botched deal announcement.
The terms of the deal were prematurely released, buried in an earnings announcement that briefly emerged on Office Depot’s Web site on Wednesday. The release was quickly taken down.
The earnings â€" and the details of the deal â€" were apparently released too early. Office Depot had a conference call for its earnings scheduled for next week. OfficeMax was set to report its financials on Thursday.
In any event, these things happen and people make mistakes. But it would seem that the inadvertent releae pushed up the announcement of a merger that hadn’t been fully negotiated.
Both ended up releasing their earnings, as well as the announcement of the deal, shortly after the opening bell rang on the New York Stock Exchange on Wednesday.
There are other troubling signs.
Instead of announcing a merger where the governance of the newly combined company was clearly established, the companies punted. OfficeMax and Office Depot said they would split the board equally, drawing directors from each side and have “governance rights from each of the two companies,†whatever that means. In other words, they split the governance, but offered few additional details. The parties didn’t even appear agree on where the headquarters, since they didn’t announce the location.
The par! ties also couldn’t agree on a chief executive. Instead, a selection team will be formed drawing from an equal number of independent board members from both companies. They will then select the chief executive.
Don’t conclude that Neil Austrian, the chairman and chief executive of Office Depot, and Ravi Saligram, the president and chief executive of OfficeMax, are out. Instead, they will be interviewed by this board as part of the process. In other words, if they want to head the combined company, they will have to audition.
This could be a recipe for disaster. Without a clear path on governance or even leadership, the combined company risks severe in-fighting as the two chiefs battle it out for the top position. And don’t think this won’t happen. Just look at what happened in the merger between Duke Energy and Progress Energy.The chosen chief executive from Progress, William D. Johnson, was ousted in a boardroom coup in favor of the head of Duke, James E. Rogers.
In truth, OfficeMax and Office Depot may not have named a chief executive as a way to paint the deal as a merger of equals. On the conference call on Wednesday morning, Mr. Austrian went out of his way to correct news releases, which had depicted the deal as an acquisition of OfficeMax by Office Depot.
And who can blame outsiders for casting the deal in that manner Like in an acquisition, OfficeMax shareholders will get a premium of 25 percent to the stock closing price last week. In a true merger of equals, neither side gets a premium.
There’s another big point that makes the deal appear to be half-baked: the issue of antitrust. The deal announcement is haunted by the specter of Staples‘s fa! iled bid ! to buy Office Depot. That deal was blocked back in 1997 when the Federal Trade Commission claimed there was a special market for big box office superstores. Consequently, the combination was viewed as anti-competitive.
In the new merger proposal, Office Depot has 19.2 percent of the office supply market and Office Max holds 15.7 percent, according to figures reported by Bloomberg from Euromonitor. Staples is the industry heavyweight with 29.9 percent.
No doubt, this combination will be reviewed with that earlier transaction in mind. The companies are likely to argue that their competitive position is declining, and that the real threat is coming from outside the traditional big-box retailers from players like Amazon.com and Costco.
The two office supply retailers may be right. But it is puzzling that the announcement did not address this issue. In most deals with potential antitrust issue, the parties issue copious presentations about the risk and how they have dealt with this. But it was only in response to a question on the conference call that the companies disclosed that there was no termination fee, in case the deal was blocked by regulators.
On that conference call, a few analysts did ask about antitrust issues, and Mr. Austrian said that the companies were “confident the market has changed sufficiently rapidly that this shouldn’t be a problem here.†Later on, Mr. Austrian outlined the changing competitive landscape, including developments in technology.
In response to other queries about the deal terms, the companies repeatedly stated that this would be disclosed later in regulatory filings.
That may very well be the case, but the uncerta! inty over! the issues of governance and antitrust is puzzling, even with the sudden release. It is too bad that OfficeMax and Office Depot couldn’t have waited a few more days to get the disclosure for the deal and the deal itself in order.
