Staples’ bid for Office Depot creates a $15 billion web merchant
Research Director
Staples announced today a $6.3 billion deal to acquire Office Depot, a deal that would create a $39 billion company generating about 40% of its revenue online. Regulators will weigh whether competition from online retailers like Amazon and discounters like Wal-Mart can justify the merger of the two remaining national office supplies chains.
In the world of office supplies in the end there was one big one—and a giant one at that, online as well as offline.
Staples, No. 3 in the Internet Retailer 2014 Top 500 Guide announced today a stock deal valued at $6.3 billion to acquire rival Office Depot Inc. (No. 9). The move completes the consolidation of what were once the three national office supply chain retailers. In November 2013, Office Depot acquired OfficeMax in a deal valued at $1.17 billion.
Staples will acquire all outstanding shares of Office Depot for $11 per share. The deal has been approved by both companies and their boards of directors and the transaction is expected to be complete sometime in 2015. A final date wasn’t announced.
Staples suggested it will close stores and reduce headcount. “Staples expects to generate at least $1 billion of annualized cost synergies by the third full fiscal year post-closing and the majority of these synergies would be realized through headcount and general and administrative expense reductions, efficiencies in purchasing, marketing, and supply chain, retail store network optimization, as well as sharing of best practices,” the company said in announcing the deal. “Staples estimates one-time costs of approximately $1 billion to achieve its synergy target.”
The combined Staples and Office Depot would create a company with combined total sales of $39 billion and Internet Retailer-estimated web sales of $14.5 billion. Those sales still would have ranked the combined organization No. 3 on the Internet Retailer 2014 Top 500 behind Amazon.com and Apple Inc. Before any bricks-and-mortar locations are closed the combined entity would have a base of 4,244 stores.
The merger will enable Staples to “invest in pricing, service, product assortment, e-commerce capability because these companies are very complimentary companies and we think there’s a lot of opportunity in combining the two,” Ron Sargent, Staples’ CEO, told analysts on a conference call this morning.
“It’s going to give us this one time opportunity to accelerate all the things we’re doing,” Sargent told analysts. “We still have a ways to go to become even more competitive particularly among some of the online competitors. 46% of our sales were beyond office supplies this year.”
As customer demand continues to shift online, Staples is going up against a wider set of retail and online competition, Sargent said. “We are now selling over a million SKUs through our online business,” he told analysts. “That’s an opportunity to expand that product assortment to Depot customers. We have invested very heavily in e-commerce over the last couple of years as we’ve tried to reposition the company.”
Sargent says he will stay on as CEO of Staples after the acquisition closes. Over time, Staples expects to consolidate the Office Depot and Office Max brand names and get to one global brand, Staples.
The burgeoning Staples won’t necessarily be any more of a frightening competitor to smaller e-retailers than it was before, says Seth Newman, president of Envelopes.com, No. 519 in the Internet Retailer 2014 Second 500 Guide. “The big keep getting bigger and that’s not necessarily a bad thing for smaller merchants. Many times the larger companies are slower to react to changes in the market and new opportunities while smaller firms can adapt quickly,” he says.
Envelopes.com serves a niche left behind by the “big guys” as they rationalize their inventory offerings to only the most popular items in a category, Newman says. "We counter that by offering the long tail of all sizes, styles and colors of envelopes and paper products and offering value-added services such as printing, addressing and fulfillment that these traditional firms do not,” he says. Through the Staples/Office Depot transition Newman says he will pay close attention to what the combined companies offer and try to fill the gaps left when they discontinue items that customers are still seeking.
The proposed deal is certain to be scrutinized by regulators. The Federal Trade Commission approved the 2013 merger of Office Depot and OfficeMax largely on the basis that the combined companies would provide stronger competition to Staples. “Office Depot will have to convince the government of its claim that eliminating the competition with Staples poses no threat to prices because of competition from Wal-Mart and Internet players,” says Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “That won’t be easy.”
Staples tried to buy Office Depot in 1997, but that deal was killed after the FTC sued. However, the rise of the Internet and e-mail has dramatically changed the office supplies business in the 18 years since.
With businesses and consumers buying fewer pens, envelopes and staplers in the digital age, Staples has been moving aggressively to expand into new categories and to beef up its online business. The retailer announced in late 2013 plans to expand into such product categories as restaurant and medical supplies and gardening equipment. The retailer unveiled in December 2014 a new online marketplace called Staples Exchange, a service that lets suppliers offer their products on Staples.com and then drop-ship orders to customers, a move to compete more effectively against Amazon. Staples has also said it wants to bring more of its e-commerce technology in-house in order to keep up with web rivals.
In 2013 Staples opened an e-commerce and engineering “Development Center” in Seattle. That followed the late 2012 launch of its e-commerce-focused Velocity Lab in Cambridge, MA. Both were designed to help the retailer develop e-retail and mobile commerce programs.
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