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Should Office Depot merge with OfficeMax?
The two companies are considering joining forces in the face of an existential threat from Amazon
 
Can two struggling companies become one successful one?
Can two struggling companies become one successful one? Justin Sullivan/Getty Images (2)

Shares of Office Depot and OfficeMax surged on Tuesday, following a report in The Wall Street Journal that the two companies are in the advanced stages of merger talks. A deal would theoretically help both companies grapple with a host of challenges, from flatlining revenue to Amazon's metastasizing clout within the retail industry.

Analysts have long expected Office Depot and OfficeMax — the second- and third-largest office supply chains in the world, respectively — to join forces. A deal would allow the combined company to cut costs by shuttering overlapping stores and laying off redundant workers. A combined company would also have more buying power over suppliers. And all this could be accomplished without losing many customers or raising prices.

The two companies have struggled mightily since the recession, which at one point in 2009 pushed Office Depot's share price to less than $1. At the same time, like all brick-and-mortar retailers, they have seen one-time customers drift to Amazon and other e-tailers that offer more competitive prices. Furthermore, the two Offices have failed to gain traction against Staples, the industry leader. Indeed, the only question may be whether an Office Depot-OfficeMax merger is coming too late. According to The Wall Street Journal:

Office Depot and OfficeMax and their larger rival, Staples, have all been struggling to adapt amid changing shopper habits and a slow economic recovery. They have been closing stores, downsizing others and trimming overhead, but investors and Wall Street analysts argue the changes haven't occurred fast enough — and aren't significant enough — to reverse the sector's diminishing financial results. [The Wall Street Journal]

And as Mary Beth Quirk at Consumerist notes, it's not like OfficeMax and Office Depot are all that different: "When's the last time you realized which retailer you were actually visiting? Was it Max or Depot?"

There is one drawback to a merger, which is that one of the main beneficiaries would be Staples. As more OfficeMax or Office Depot stores close, Staples stands to gain more customers. As Andria Cheng at MarketWatch writes:

[Staples] stands to pick up lost sales from any store closings and any merger-related disruptions, analysts said.

If Office Depot or OfficeMax "failed to execute well, Staples could benefit more significantly," said Nomura analyst Aram Rubinson, adding that Staples also could pick up sales to business and contract customers…

Some analysts said Staples could also buy stores that close in markets that are dominated by Office Depot and OfficeMax, and it could also hire some departing sales staff from the combined entity.

"We see three winners," said Credit Suisse analyst Gary Balter. [MarketWatch]

In the end, though, all three companies could soon face an even larger existential threat than Amazon — the rapid digitalization of a workforce that has grown less reliant on notepads, pens, and printers. And that may be a trend no merger can solve.

 

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