Office Depot, OfficeMax merger is about survival

The merger between Office Depot and OfficeMax is primarily about one thing: survival.

News of the merger between the two office supply companies came Wednesday as both companies reported declining sales for 2012.

Full-year 2012 sales were down 7% from the previous year for Office Depot; OfficeMax reported full-year sales down 2.8% compared with 2011. The fourth quarter, typically the retail industry's best, also didn't fare well. Office Depot reported same-store sales down 6% and OfficeMax down 4.1% from the fourth quarter of 2011. The results mark the sixth year of falling same-store sales for both companies, says Brad Thomas, an analyst for KeyBanc Capital Markets.

The all-stock merger would create a company worth about $1.2 billion. OfficeMax stockholders will receive 2.69 shares of Office Depot stock for every OfficeMax share they own.

With the rise of e-commerce and popularity of big-box discounters in a still-recovering economy, the office suppliers have struggled to keep up with the likes of Amazon and Walmart, which offer many of the same products for less.

Office Depot CEO Neil Austrian acknowledges as much in a press release about the merger when he says, "In the past decade, with the growth of the Internet, our industry has changed dramatically."

A merger is a smart move for both companies, says Van Conway, CEO of Conway MacKenzie, a restructuring and financial advisory firm.

"Nobody has a perfect crystal ball for the future, but given the similarity of products and the competition online, it's a very good conceptual transaction," he says.

The newly formed company will likely be able to cut costs and increase sales by closing stores that either aren't doing well or are in close proximity to each other, Conway says. Office Depot has 1,675 stores worldwide, mostly in the U.S. and Canada. OfficeMax has about 900 stores in the U.S. and Mexico. They will also be able to combine their online efforts.

"Together, we will have the opportunity to build on our strong digital platforms and to expand our multichannel capabilities to better serve our customers and to compete more effectively," OfficeMax CEO Ravi Saligram said in a press release.

Austrian of Office Depot and Saligram of OfficeMax will remain CEOs of their respective companies while a newly formed board of directors conducts a search for a new CEO. Both men will be considered, according to the companies' press release. Austrian has led Office Depot for less than two years. Saligram was appointed CEO of OfficeMax in November 2010.

A unified headquarters and name for the company will be chosen once a CEO is in place, the press release says. Office Depot is based in Boca Raton, Fla.; OfficeMax in Naperville, Ill. The deal is expected to be final by the end of the year.

Of course, that's as long as it doesn't face government opposition on antitrust grounds. The Federal Trade Commission is likely to take a close look, as it did when it opposed a merger between Office Depot and Staples in 1997, says Jim Langenfeld, managing director of Navigant Economics and a former director of antitrust for the FTC.

But because of the growth of the Internet since that deal was denied, the merger of two bricks-and-mortar office suppliers doesn't pose as much of a threat of reduced competition and higher prices, he says.

"So there'll still be some choice (because of online players)," Langenfeld says. "But the question is: Is that sufficient choice?"

While both companies' shares initially rose after the announcement Wednesday morning, Office Depot (ODP) finished the trading day down 17% at $4.18. OfficeMax shares (OMX) fell 7% to $12.09.

The all-stock deal would create a company with combined 2012 revenue of $18 billion.

Early in the day, there was some confusion. As The New York Times' DealBook said: "A press release announcing the merger of the two office supply retailers briefly surfaced on Wednesday, though it then disappeared from the Office Depot Web site. But negotiations haven't concluded, people briefed on the matter told DealBook."

Shortly after 9:30 a.m. ET, a press release announcing the "merger of equals" appeared on the company websites.

Analysts say if the deal closes it would likely benefit the largest office supply player, Staples (SPLS), because the combined entity will likely close some stores. Staples stock fell 7% to $13.60 Wednesday.

Contributing: USA TODAY's Ray Goldbacher; Associated Press