Does a Staples/Office Depot merger now make more sense?

Discussion
Photos: Wikipedia/Mike Mozart, Lizsummers
Jan 18, 2021
Tom Ryan

Staples for the third time is seeking to acquire rival Office Depot as the accelerated shift to online shopping and work-from-home culture recasts the opportunity in office supply retail.

Staples, under the corporate name USR Parent Inc., last week made an unsolicited proposal to acquire Office Depot for $40 a share in a deal valued at $2.1 billion. The purchase price presented an 8.2 percent premium above Friday’s close and a 61 percent premium over Office Depot’s average closing price over the previous 90 days.

The deal, however, is well below 2016’s $6.3 billion offer that was called off due to antitrust concerns. The Federal Trade Commission had argued the merger would drive prices higher for big companies that buy office supplies in bulk. In 2017, Staples was taken private by Sycamore Partners.

In its letter to Office Depot’s board, Staples committed to selling Office Depot’s commercial-business unit, which Staples expects would satisfy “any reasonably anticipated regulatory objections.”

Office Depot said it is “carefully reviewing the proposal” with advisers.

Since Staple’s last takeover effort, Amazon.com has cemented its position as the dominant online player in office supplies. In 2018, Amazon Business, its B2B marketplace that supports large companies, hospitals and schools, had sales of $10 billion. In December 2019, RBC Capital predicted Amazon Business’ sales would reach $31 billion by 2023, with the business expanding faster than Amazon’s Retail and AWS segments.

Prior to the pandemic, supporting large and small businesses was the prime growth area for the office supply channel with Staples and Office Depot recently broadening offerings to include software and services.

Office Depot’s revenue has taken a hit this year, however, as heightened demand for work- and learn-from-home products has been unable to offset lost sales from the closure of many corporate offices and restrictions at schools. Sales were down 17 percent in the second quarter and nine percent in the third. Office Depot’s CEO Gerry Smith told analysts on its third-quarter call, “Obviously, COVID is not good for us from a structural perspective.” 

DISCUSSION QUESTIONS: Does a Staples and Office Depot merger make more sense in a post-COVID environment? Are Staple and Office Depot in better positions to compete with Amazon and other online players in the B2B or B2C space?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"There is no discernible difference between them so they do need to merge to have a hope of competing with Amazon."
"Even if COVID-19 were a non-factor, this merger makes sense and the FTC would be wise to approve it. E-commerce has redefined the meaning of “antitrust” for the last decade..."
"In this instance, the FTC has a legitimate role to play regarding the reduction of consumer choice if Staples/Office Depot/Max become one."

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30 Comments on "Does a Staples/Office Depot merger now make more sense?"


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Neil Saunders
BrainTrust

Both Office Depot and Staples haven’t done all that much with the B2C parts of their businesses. Their stores lack inspiration, excitement and interesting products. As such, they are used mostly for convenience rather than for indulgences and browsing. Improvements have been made to B2B services, and both chains have solid offers in this space. However, to compete more effectively it makes sense to merge the two businesses to improve economies of scale. In my view, the FTC erred when it prevented the previous merger because it looked at the office supplies market in a very narrow way and did not account for the rise of Amazon and the multitude of other smaller suppliers in that space.

storewanderer
Guest
3 months 3 days ago

Office Depot and Staples are very heavy in government supply contracts. Numerous government agencies (State, Local, Federal) have purchasing contracts to obtain office supplies from these two companies. This may cause the government to look at this merger with more scrutiny than would be expected for a typical retailer merger.

Scott Norris
Guest

Ah, but those smaller suppliers, as well as many online merchants, depend on the office-products distribution pipeline which is a duopoly: one network is Sycamore-owned/Staples-controlled Essendant, and the other network is S.P. Richards. Regional B2B players will still be constricted as none of them (except perhaps W.B. Mason) have the clout to buy direct-from-manufacturer efficiently enough to stand up to Amazon.

There has also been significant consolidation on the office-supply manufacturing side as well, often as Gene points out, driven by investment firms, and in reaction to the distribution-side consolidation that has already taken place.

At a minimum the FTC should demand Essendant be spun out with enough resources to remain a viable and vibrant distributor, as this will help preserve some degree of free-market competition.

Jeff Weidauer
BrainTrust

The FTC needs to be more holistic in its review of proposed mergers like this. The Office Depot/Staples combination should have happened years ago, but even if it gets done this time there’s a lot of work to do. They need to take a page from the supermarket industry and learn how to create interest and engagement in-store. Otherwise this will only be a stop-gap before turning the page to Chapter 11.

Gene Detroyer
BrainTrust

Chapter 11 will eventually be in the offing.

Di Di Chan
BrainTrust

Makes sense if they are trying to IPO again. It’s the fastest way to acquire a bigger market share and boost valuation.

storewanderer
Guest
3 months 3 days ago

Office Depot is still publicly traded, and the stock has gone up considerably in the months leading up to this merger announcement.

Suresh Chaganti
BrainTrust

I believe antitrust concerns are moot. Lots of things have changed since 2016. But I always thought the antitrust concerns here were overblown. The office supplies category is not in the same league as utilities or airlines in terms of impact on consumers.

Ian Percy
BrainTrust

Office supply retailers are heading down the same road as bookstores. Very few will survive even with so many of us working out of our homes. There is no discernible difference between them so they do need to merge to have a hope of competing with Amazon.

Dick Seesel
BrainTrust

Regulators’ views of proposed mergers like this one need to evolve faster. There is plenty of market share data to show that a combined Staples/Office Depot would still lag behind Amazon. (And big-box omnichannel retailers like Walmart and Target do plenty of office-supply business too.) The traditional brick-and-mortar office supply market has also declined for years as e-documents displace paper.

Even if COVID-19 were a non-factor, this merger makes sense and the FTC would be wise to approve it. E-commerce has redefined the meaning of “antitrust” for the last decade or so.

Richard Hernandez
BrainTrust

This merger should have happened a long time ago. It really makes sense for both companies to merge now. The FTC must review their rules which hampered the last try at this.

Bob Amster
BrainTrust

I worry about the antitrust aspect of this merger. Aside from that, these two companies are not very successful businesses vying for a larger share of a good market. Does the sum of two fraught businesses add up to a more healthy single company? Not necessarily.

Gene Detroyer
BrainTrust

Does the sum of two fraught businesses add up to a more healthy single company? How about NEVER!

Dr. Stephen Needel
BrainTrust

My only question is, what does Staples get for $2 billion if it’s giving up the commercial business? That said, let them merge.

Gene Detroyer
BrainTrust

Again, as we see so many times (especially in retail) it isn’t about making a better company, it is a financial play to line PE pockets.

Gene Detroyer
BrainTrust
First of all, while we talk about “mergers” — there is no such thing as “merger.” Even a 50/50 combination leads to one company or its management coming out on top. Historically in M&A, almost 80 percent fail in terms of increasing stockholder wealth. For horizontal combinations, which this is, the data suggests that the results are even worse. Here is the choice for USR, they can take their $2 billion and invest it into Staples and forget about Office Depot. If there is a market there, they can better beat it with a “new and better” Staples than a combination of two weak sisters with no money left to improve the situation substantially. But that is not the objective here. This is a PE firm that is making a financial play. USR will make their money back and boatloads more on fees and ultimately a restructure IPO. Everybody except USR will lose and five years from now when we think of these retailers we will say, “once upon a time.” With regard to anti-trust,… Read more »
Ian Percy
BrainTrust

I was going to say “You can say that again!” but it looks like you did! 🙂

I’ve never understood why people don’t get your point about there being “no such thing as a merger.” One party always takes over everything from systems to marketing to product development and especially culture. Even in acquisitions it often happens that the acquired entity is killed off for exhibiting the very value for which it was acquired. E.g., too much creativity, free thought, innovation, etc.

Gene Detroyer
BrainTrust

There are a multitude of examples of “it often happens that the acquired entity is killed off for exhibiting the very value for which it was acquired. E.g., too much creativity, free thought, innovation, etc.”

Gene Detroyer
BrainTrust
First of all, while we talk about “mergers” — there is no such thing as “merger.” Even a 50/50 combination leads to one company or its management coming out on top. Historically in M&A, almost 80 percent fail in terms of increasing stockholder wealth. For horizontal combinations, which this is, the data suggests that the results are even worse. Here is the choice for USR, they can take their $2 billion and invest it into Staples, and forget about Office Depot. If there is a market there, they can better beat it with a “new and better” Staples than a combination of two weak sisters with no money left to improve the situation substantially. But that is not the objective here. This is a PE firm that is making a financial play. USR will make their money back and boatloads more on fees and ultimately a restructure IPO. Everybody except USR will lose and five years from now when we think of these retailers we will say, “once upon a time.” With regard to antitrust,… Read more »
Jeff Sward
BrainTrust

If I were pressed to identify the difference between the two stores, I would say — uhmmm, the spelling of their names? The stores are interchangeable, one offering no discernible value over the other. So yes, merge and extract every ounce of synergy and efficiency possible. Wring out every duplicative cost possible. I don’t need a Genius Bar to buy paper and pens, but the emerging importance of the home office has surely given rise to the opportunity for expanded product and services in that arena. Even when merged, the new company must identify those products and (mostly) services that will differentiate it from Amazon.

Mohamed Amer
BrainTrust

A merger is the only path forward for the two companies. Further pains in rationalizing store counts will follow. Eventual reckoning with the changing landscape will call for a much different retailing model in the office supply segment. Competition, online retailing, and the characteristics of the categories do not bode well for the two companies.

James Ray
Guest

The FTC was wrong about a proposed merger of these two back in 1997 and I don’t see them changing their mind this time either.

Ken Lonyai
BrainTrust

In 2021, I don’t see too much issue in a merger. I loathe shopping Staples due to their limited inventory in many product areas and high prices in most of the store. As one entity, Staples and Office Depot are going to have to find a value proposition that makes them a viable competitor to Amazon and execute on it amazingly, before the FTC has to worry about antitrust realities.

Ryan Mathews
BrainTrust

It wouldn’t be a merger, it would be an acquisition, and likely one intended as a relatively short investment as opposed to trying to lay a solid foundation for a viable business. Does it make “more sense” post-COVID-19? I guess from an antitrust standpoint since both companies are weaker. From a retail perspective, I’m not so sure. After all, two failing companies do not one healthy company make. As to the last question, it seems that the B2B business is a fairly lost cause at this point since e-tailers can obviously service that business better than brick and mortar operators. So, the future looks to be B2C — which probably explains the willingness to jettison it in order to make the FTC happy. Is there a future for a large footprint chain of B2C only office superstores? It will take some real innovative thinking, thinking we haven’t seen any of to date.

Gene Detroyer
BrainTrust

If merger/acquisition is the answer, surely we haven’t seen “real innovative thinking, thinking we haven’t seen any of to date.”