OfficeMax Merger with Office Depot — Creative Destruction Wins Another One

Office Depot storeIf the press is correct, there is a very good chance that OfficeMax Inc. (NYSE: OMX) and Office Depot Inc. (NYSE: ODP) will merge, hundreds of stores will be closed and thousands of workers will be fired.

The financial pressure of the failure of a model that was based on the sales of office supplies to consumers and small businesses finally has broken the industry. Amazon.com Inc. (NASDAQ: AMZN) and Wal-Mart Stores Inc. (NYSE: WMT) will have pushed another portion of the retail industry to the brink of extinction.

And that is only the start of the destructive process that is a replay of what happened in the book and consumer electronics retail business. Too many companies in the retail arena refuse to admit to the reality of their problems before it is too late.

Office Depot has about 1,700 stores around the world, but most of them are in the United States and Canada. ­OfficeMax has approximately 900 stores in the United States and Mexico. The grisly details of the P&Ls of each company show the state of desperation. OfficeMax sales have been frozen at $7 billion for the past three years, and it hardly makes any money, based on its net income. Its stock price is down almost 60% in the past five years.

Office Depot shares are off by nearly 70% over that same period. Its sales have slipped in each of the past two years, to about $12.5 billion.

Between the two, the number of stores that will be closed are certainly well into the hundreds. Still left to determine is what happens to the leases on those locations and what sort of severance laid off people will get. The two companies are troubled enough that they will rush to a complete a deal and to slash expenses as rapidly as possible.

The extraordinary thing about the restructuring of the office supply store business is that it looks so much like what happened among book and consumer electronics stores. Executives and industry observers knew for years that Circuit City could not survive, and neither could Borders. But the ownership and management teams at those turned over - over and over again. For quite awhile, some set of investors was willing to take the 100 to 1 odds against survival.

The restructuring of Office Depot and OfficeMax has come much too late for shareholders. As far as employees are concerned, however, it comes too early, especially for those thousands who will lose jobs.


Filed under: 24/7 Wall St. Wire, Mergers & Acquisitions, Retail Tagged: AMZN, featured, ODP, OMX, WMT

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