Not So Easy Route for the Office Depot-OfficeMax Merger

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The world has changed a lot since 1997, the year the Federal Trade Commission blocked a merger between Staples (NASDAQ:SPLS) and Office Depot (NYSE:ODP) over concerns about how the deal would affect competition in the office supply sector. Today, Bill Clinton is no longer in the White House (though some may wish he still was), Staples is the top office supply retailer, and the biggest threat to the office supply industry comes from digital and online.

Now, Office Depot is seeking a merger with OfficeMax Inc. (NYSE:OMX), and again, competition and costs are at the heart of the matter. Florida’s Sun Sentinel reported that Office Depot CEO Neil Austrian said questions raised by the FTC during merger discussions have pertained to pricing. Office Depot and OfficeMax, the No. 2 and No. 3 office supply retail chains in the country, respectively, are trying to prove that a merger is a logical way to increase competition with Staples.

Signs of the merger look favorable, and stocks for the companies rallied last week when the deal appeared to be gaining speed, according to MarketWatch. But sales for both companies trail drastically behind office supply giant Staples. If the merger is approved, Staples would still out-earn the combined efforts of the two, raking in $25 billion compared to $18 billion for Office Depot and OfficeMax combined.

The Sun Sentinel sees the possibility for Staples to further ratchet up its sales performance over Office Depot and OfficeMax before the merger takes place. On Thursday, Staples announced it would price match Amazon.com Inc. (NASDAQ:AMZN) starting on November 3. Staples’s press release announcing the new policy says it “is making it easier to shop and save this holiday season.”

Customers who show that an identical item has a lower price on Amazon will then be offered the product at Staples for the same price. When the Sun Sentinel asked Brian Levine, a spokesman for Office Depot, if the company planned to offer price matching as well, Levine replied, “No comment.”

With the ubiquitous nature of smartphones allowing customers to constantly look for deals and compare pricing, price matching is becoming a popular feature of the holiday shopping season. Staples offering the service against Amazon is a way to stay competitive, especially if Office Depot and OfficeMax do not participate in their own versions before the merger takes place.

The merger could bring quick savings to both companies, according to MarketWatch, by reducing the number of stores existing in the same market. MarketWatch interviewed David Strasser, an analyst at Janney, who said that Office Depot and OfficeMax currently have 300 stores within a two-mile radius of one another. By closing stores, the companies will be able to channel money into other areas to grow their newly combined business.

Rating agency Fitch sees little long-term gain from such a deal. In early October, the firm released an analysis on all three office supply companies, concluding that the proposed merger did not address fundamental issues facing office suppliers. In a press release, Fitch said immediate gains in competition for the industry due to a merger are undeniable, but business and customers will continually move online, a problem not only for Office Depot and OfficeMax but Staples, as well.

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