Collating Companies : Retailers’ Merger Would Create 1,100-Store Office Supply Chain
In what would become the first consolidation of major office products retailers, Staples Inc. said Wednesday it plans to acquire rival Office Depot through a $3.5-billion stock swap that would create a chain of more than 1,100 office supply stores worldwide.
The merger plan is not expected to raise antitrust concerns because the combined company would still have only 5% of the fragmented U.S. office supply business. However, the combination of industry leader Office Depot and No. 2 Staples could reduce competitive pressures and result in higher prices for consumers, some industry analysts said.
Executives at the two companies disputed that argument, contending that the combined company would be more price-competitive, through cutting duplicative costs and buying merchandise more cheaply.
Staples, with 436 U.S. stores, will benefit by acquiring the resources and buying power of Office Depot, with 571 stores, analysts said.
“It’s a very good deal for both companies--particularly Office Depot,” said Dana Telsey, analyst with Bear Stearns in New York.
The proposed deal will probably prompt further consolidation as small chains and OfficeMax--the remaining giant--scramble to compete, said Bo Cheadle, an industry analyst at Montgomery Securities in San Francisco.
“Office products retailing has been a fragmented industry,” Cheadle said. “But the consolidation has begun and it will continue.”
Among those searching for acquisition targets is OfficeMax, the No. 3 office products retailer. With no other major chain on the scene, OfficeMax has been seeking smaller takeover candidates as well as contract partnerships with business services companies.
“We will continue to pursue acquisition candidates,” said OfficeMax spokesman Juris Pagrabs. “While Office Depot and Staples are bogged down integrating their operations, we will aggressively move ahead with our expansion plans.”
OfficeMax is already expanding its presence in Southern California. The company entered the Southland by opening eight stores in July. It will open 20 more stores in the region in the fall and plans to have 50 stores in the Southland by 1998.
*
Such an expansion pace would still give OfficeMax a smaller presence than the merged company, which would include Office Depot’s 30 Southland stores and Staples’ 71 stores here.
The merged companies’ stores would be renamed Staples the Office Depot. There are no plans to lay off any employees, company executives said.
“In this particular transaction, customers and every stakeholder wins,” said Thomas Stemberg, Staples chief executive. “The real challenge of this merger is to magnify savings. . . . For our customers, this definitely means more savings.”
Stemberg would become chief executive of the combined company, which would carry a corporate name of Staples/Office Depot. David Fuente, head of Office Depot, would become chairman of the merged company.
The merger would be completed in three to four months, barring any regulatory complications. The Federal Trade Commission sometimes objects to deals that would give a merged company dominance of markets. However, Stemberg and Fuente said, their companies currently compete in only 20% of their markets.
The size of a Staples/Office Depot would give it the clout to negotiate for lower prices from suppliers, which it could pass along to consumers in lower prices.
*
However, a Staples/Office Depot probably wouldn’t initiate a price war to beat back advances by OfficeMax for fear of being accused of engaging in illegal predatory pricing, said Keith Mullins, an analyst at Smith Barney in New York.
As for its competition with the many small chains and independents, Mullins said there won’t be pressure to cut prices.
“The small companies simply can’t compete on price,” he said. “They’ll have to compete by differentiating themselves by specializing in certain areas.”
Small companies have an opportunity to exploit certain service or product niches because Staples and Office Depot are the supermarkets of office product retailing, providing a broad range of products as well as equipment.
Such diversification has actually hurt Office Depot in recent years, analysts said. The company’s sales growth has been sluggish because it has spent too much time and resources trying to build up its computer sales business, against stiff competitors such as CompUSA.
“CompUSA specializes in computer sales and does very well competing against Office Depot because consumers believe they have lower prices and a broader selection,” Mullins said.
Under the terms of the planned merger, Office Depot shareholders would receive 1.14 shares in the merged company for each Office Depot share.
Shares of Office Depot soared $4.58 to $20.45 a share on the New York Stock Exchange on Wednesday. Staples share fell 75 cents to $18.75 on Nasdaq.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Staples to Buy Office Depot
Staples Inc. said it will buy rival Office Depot Inc. for about $3.5 billion in stock, a deal that would create the nation’s biggest retailer of office products. A look at the two companies:
*
Staples Inc.
* Headquarters: Westborough, Mass.
* Chairman: Thomas Stemberg
* Origin: The company was started in 1985 by supermarket industry veteran Stemberg, who developed the idea of generic brands, and Leo Khan, another supermarket executive. The first store was opened in a Boston suburb in 1986.
* Fiances: Net income of $73.7 million on revenue of $3.1 billion last year.
* Services: The company operates a chain of warehouse- style office product stores that sell deeply- discounted supplies to small and medium- sized businesses. It sells office products, business services, furniture and computers through more than 500 stores in the U.S. and Canada.
*
Office Depot Inc.
* Headquarters: Delray Beach, Fla.
* Chairman: David Fuente
* Origin: In 1986, the first Office Depot was opened in Lauderdale Lakes, Fla. The company was the first of the office superstores to turn a profit for four consecutive quarters.
* Fiances: Net income of $132.4 million on revenue of $5.31 billion last year.
* Services: The company buys high-quality, brand-name products in large volume and at steep discounts and then sells them in warehouse-style superstores. The company sells office products, business machines, telephones, fax machines, computers and engineering supplies through more than 500 stores in the U.S. and Canada.
*
Current Competitive Field
Office products retailing is a fragmented, highly competitive industry with three major players, many small chains and independent operators competing for $185 billion in annual sales.
Office Depot: 3%
Staples: 2%
OfficeMax: 2%
Other: 93%
Sources: Bloomberg Business News, Staples, Office Depot, industry estimates.
