More Merger Talk: Staples/Office Depot?
Chain Store Guide’s two most recent Discount Insights focused on the roller coaster ride that was begun when Family Dollar agreed to be purchased by Dollar Tree for $8.5 billion. Just two Insights ago we cautioned that this agreement to merge would have to leap over several natural barriers, including approval by at least two federal agencies stockholders with considerably conflicting agendas.
Shortly after the agreement was announced, Dollar General upped the bid to $8.9 billion, only to be rejected by Family Dollar on grounds of fears of potential government intervention for restraint of trade. Subsequently, Dollar General balked at the rejection of its offer and then slightly upped its bid. Even so Family Dollar continues to favor a Dollar Tree connection. Walmart, the big box in the room, continues to lurk in the background.
The drama continues!
Now there are well-founded stories circulating, of the positive effects of another possible acquisition, that of Staples purchasing Office Depot. Yes, the Office Depot which acquired OfficeMax just late last year.
These stories are based on sound economic thinking produced by prominent international financial institutions looking out for Wall Street. The basis of this possible merger is twofold. First the Depot/Max merger doesn’t seem to have produced the early positives in terms of sales and store traffic for which the companies had hoped. Second, Staples is continuing to experience declining same store sales and customer traffic results, while its extremely popular, long third-ranked website continues to sport impressive growth.
Should such a proposed acquisition process commence, no matter how logical or clear a positive result might be (obviously nothing is certain), the same barriers any Family Dollar deal might face must be cleared and then some. In addition to approval by at least two federal agencies and two feisty groups of stockholders, featuring activist several parties which control high-stake investments, there will likely be an added burden for Staples and Office Depot to overcome. This refers to the fact that the ink on Office Depot’s acquisition of OfficeMax has hardly had time to figuratively dry.
When the Depot/Max merger was completed late last year, the new company began to schedule closings of ‘redundant’ and underperforming stores. Much of the timing behind the closures was based on the dates respective leases are scheduled to expire, along with the completion of analyses of competing intra-market stores after the merger. Thus the entire process of such store closings was expected to last at least three years. Office Depot is looking to close 165 stores in the U.S. this year and 400 by the end of 2016.
If Family Dollar truly feared federal antitrust interference, a company combining Staples and Office Depot so soon after the giant Depot/Max merger, would likely face legal objections even before government agencies could research antitrust concerns.
Then there is the question of competition. How much will eating the new Office Depot aid Staples competitively? Wall Streeters estimate that this merger would reduce company costs by nearly $1.5 billion, while more than doubling operating profits. However both retailers have been victims of declining store traffic and average ticket sales. This is not due only to cross-competition between the two.
As market channels blur, these national chains face increasing pricing challenges from Internet based companies such as Amazon, discount giants such as Walmart and Target, dollar stores, the increasingly ubiquitous presence of Walgreens and CVS and even grocery chains with their strong back to school promotions.
Recently, Office Depot issued its first campaign of back to school ads, co-promoting its brand alongside OfficeMax. The highly polished ads featured children shouting the praises of both the Office Depot and OfficeMax brands as having the latest in what they need.
Despite this, the company found the low-price promotions of the many aforementioned retail types simply daunting. Each of the leaders within these competing retail categories is constantly seeking new products to expand their scope and their profits. Whatever becomes of the Staples and Office Depot chains in terms of structure, the sources of competition are increasingly likely to chip away at virtually any profitable product category in which they ‘specialize’.