Office Depot Inc (ODP) and OfficeMax Incorporated (OMX) are Tying the Knot

As the Princess Bride movie famously proclaimed, “Mawwage is what bwings us togeva today.”  (Translation: “Marriage is what brings us together today.”) Office Depot Inc (NYSE:ODP) and OfficeMax Incorporated (NYSE:OMX) are planning on merging in order to better challenge industry rival Staples, Inc. (NASDAQ:SPLS) and indirect rivals Amazon.com, Inc. (NASDAQ:AMZN) and Costco Wholesale Corporation (NASDAQ:COST). OfficeMax CEO Ravi Saligram, in a conference call with analysts, appropriately commented: “It takes two to tango.  Lo and behold, [Office Depot CEO Neil Austrian] and I have decided to tango.”  In the proposed $1.2-billion all-stock deal, OfficeMax shareholders will receive 2.69 Office Depot shares for each OfficeMax share, valued at $13.50 each.

The merger would unite the No. 2 company in the stationery and office supplies industry, Office Depot, with the No. 3 company, OfficeMax.  The announcement has closed a chapter on years of rumors about a potential deal, and the “marriage” of Office Depot and Office Max presents an important question to consider.  Should investors jump in feet-first into this new deal, or should investors hold back?  Market movements indicate that investors should hold back from this new deal, as the office supply industry as a whole is in decline – although the merger will produce some short-term benefit, which gives investors a chance to lock in some gains.

Why the Marriage (Supposedly) Makes Sense

OfficeMax and Office Depot have suffered declining sales since the most recent global recession and are struggling to generate a 3% profit margin, compared with a margin of 8% or more at Staples.  A merger between the two chains “has made sense for years,” Credit Suisse analyst Gary Balter wrote.

Why would a merger between the two companies be a potential boon for investors?  Office Depot and Office Max will be able to do more together than duking it out against each other in the market.  Combining efforts, striving to reduce costly redundancies, and pooling revenues can make a more powerful industry competitor for Staples.  Also, when looking at leasing deals on properties the two companies currently own, a merger works much better for both Office Depot/Office Max and landlords.

…and Why the Marriage Doesn’t Make Sense

The current market leader, Staples, would benefit from the merger, even though Office Depot and Office Max are seeking to knock Staples from of its number one position.  Because Office Depot and Office Max are planning on closing hundreds of stores if the merger goes through, Staples would have fewer stores to compete with and be able to more effectively market Staples products.

There are many questions that remain unanswered about the deal.  Issues regarding who will lead the new company, required federal approval, as well as mishaps in the announcement of the deal could pose some pitfalls.