Tuesday, February 19, 2013

OfficeMax and Office Depot Merger

The Wall Street Journal reports that OfficeMax and Office Depot are in advanced discussions regarding a potential merger.   The article, by Anupreeta Das, Ryan Dezember, and Ann Zimmerman cites many of the benefits of the deal.  For instance, the authors note that experts estimate roughly $500 million in synergies may emerge from the deal.  The article also cites Staples founder Tom Stemberg, who says, ""This should have happened a long time ago.  It's healthy for the industry. It takes out excess capacity.''  (note: I worked at Staples in the mid-1990s, when Stemberg served as CEO). 

I would agree that the merger will yield some significant cost synergies, provided merger integration is  managed well (a major caveat).  Moreover, the industry does have excess brick-and-mortar capacity.   Online players such as Amazon have taken a significant bite out of the traditional office supply industry in recent years.  The companies have closed some stores in response to the shift toward e-commerce, but more rationalization of the store base needs to occur.   The article points out that many experts think the three major office supply retailers have not downsized their brick-and-mortar footprints fast enough. 

I do have some concerns though.   I would ask the following question: Why will a merger drive out more excess store capacity than otherwise should have been eliminated by the companies individually?   The answer: Perhaps the merger's promises of cost synergies will create the public accountability that will drive necessary rationalization.   In other words, maybe you need the merger to push management to do what they otherwise have been slow to do. 

I also have a second question to pose:  How about the issue of taking on the e-commerce challengers?  Does the merger make these companies more formidable competitors relative to the Amazons of the world?  Perhaps, but I'm not so sure.  Again, the question for management is clear:  Why will a merged entity do the things to be successful against online competitors that the two firms have not otherwise been able to do to this point?  

Finally, I would offer one other concern.   In many industries, mergers that drive out excess capacity can help prop up prices.  When excess capacity exists, price wars often occur as firms try to fill that capacity and cover fixed costs.  However, in this industry, removing excess capacity may not yield major price gains.  Why?  The competitors setting the price level are not the brick-and-mortar players;  Amazon and other e-commerce players are pushing down prices.  That pressure won't change due to this merger.

No comments: