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 August 6, 2013
Firms announce lackluster earnings
For OfficeMax and Office Depot, It's Back to School

One line in today's news release announcing second quarter 2013 earnings for OfficeMax read, "Total sales were $1,533.0 million in the second quarter of 2013, as compared to $1,602.4 in the second quarter of 2012."  The decline in sales resulted in a net loss of $10 million, or 12 cents a share.

 

In late July, Office Depot reported that its second quarter 2013 sales had dropped 4 percent to $2.4 billion. It, too, reported a loss - in its case, $64 million, or 23 cents per share.

 

Back to School These lackluster results were reported just as OfficeMax and Office Depot have cleared all the mandatories for their proposed merger, which was announced in February.

 

Marty Wolf wrote at the time that the merger was a no brainer. Office Depot and OfficeMax have been the #2 and #3 retail office supply chains struggling to compete with the sector leader, Staples. Combining the two companies could immediately result in more than half a billion in cost savings.

 

It's worth noting that both OfficeMax and Office Depot stocks are up from a year ago. The 12-month range of OfficeMax stock was $4.84 to $14.92 per share. For Office Depot, it was $1.51 to $6.10 per share.

 

However, both stocks made their big moves before the announcement of the Office Depot-OfficeMax merger. Since then, the companies are barely hanging on to their enterprise value. Market cap for Office Depot today is $1.25 billion and for OfficeMax, $976 million.

 

Many watching this possible merger of equals are asking if Office Depot and OfficeMax combined can even reach the sum of its parts, let alone exceed them.

 

And then there is the question of how they will become a stronger competitor by combining. Cost cutting and realizing efficiency advantages are just starting points.

 

The market, of course does not ask, "What have you done for me lately?" It asks, "What will you do for me tomorrow?"

 

So, what are the questions for tomorrow?

 

First, once the merger is complete, will Office Depot and OfficeMax agree to a strong combined leadership team that can execute on this merger?

 

Second, how will the new company compete with Staples - a proven leader with a third again the revenue of the combined companies and a market cap of $11.4 billion, 5 times larger?

Then there is the fact that the office-supply retailing race is a no longer a 3- soon to be 2-horse race. Web retailers and discounters such as Amazon, Costco and Wal-Mart are giving traditional retailers a serious run for their money.

 

Further, IT solutions providers with catalog and online businesses, and strong relationships with small to medium sized business customers, are also shaping up as future competitors. These are companies such as CDW and Softchoice, which started out as resellers and moved up the value chain to offer formally packaged, sold and supported managed services.

 

So a third question for the future is this: How will the new company compete with the likes of Amazon and Costco, with their respective market caps of $137 billion and $52 billion, as well as a host of other new, agile competitors?

 

The answer to all three of these questions is not clear.

So, as Office Depot and OfficeMax prepare to merge, each is doing so just in time for back to school: good timing, because the company will need to go to school on a new strategy quickly to evolve, change and thrive.

About martinwolf    

 

                
             San Francisco, CA                                                Bangalore, India

With offices in San Francisco and Bangalore, India, martinwolf is a leading middle market M&A Advisory focused on companies with services-based business models. Since 1997, our team has completed more than 115 transactions in six countries. We are a five-year member of the Merrill Lynch PS Referral Network, and were selected as ICICI Bank's (India's leading private bank) exclusive strategic partner for acquiring U.S. IT companies. martinwolf is a member of FINRA and SIPC. For more information, visit www.martinwolf.com.

 

To learn more about martinwolf, contact Matthew Putzulu at mputzulu@martinwolf.com.

 

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