Office Depot and OfficeMax are lucky to have each other. Uniting the two retailers â€" purveyors of pens, paper clips and printer toner â€" is about as obvious as it gets in M.&A. The potential synergies could be worth more than the market value of the two companies combined. As the Internet ravishes retailing, at least this corner can cling to life by merger.
Consolidation is overdue. The encroaching power of the likes of Amazon and Target has been evident for years. Office Depot and OfficeMax are also good partners. Plenty of nearby stores could be closed and their own suppliers squeezed. Based on past deals, savings of about 2.6 percent of revenue, or some $450 million a year in this case, look realistic, analysts at Sanford Bernstein wrote in a prescient note on Friday, before news reports over the weekend of the two companies being in talks.
These cost cuts, taxed and capitalized, would be worth about $3 billion to shareholders. That’s an impressive sum given the two companies were onlyworth around $2.1 billion combined before the merger talks were reported. Investors initially added another $400 million on Tuesday as they anticipate details on a possible all-share combination.
There will be questions about competition, of course. The antitrust forces ordinarily take a dim view of two top players joining forces. In 1997, regulators scuttled a $4 billion deal that would have united the market leader Staples with Office Depot. Given the radically altered market dynamics 16 years later, however, it’s hard to see a merger between No. 2 and No. 3 in sales as a powerful monopoly in the making.
OfficeMax is on track to generate a net margin of just 0.9 percent in 2013, according to the average estimates of analysts collected by Thomson Reuters. Office Depot is seen struggling to eke into positive territory. Revenue at the top three chains is forecast to stagnate, but online competition could be harsher as other specialty retailers like Blockbuster, Circuit City and Borders l! earned.
While Office Max and Office Depot might together slow the decline, their industry is still bound to die a death of a thousand paper cuts.
Christopher Swann is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
