Here in Greater Cleveland, where OfficeMax began, the deal should cause fewer store closings and job losses than in other markets, because the only Office Depot store in Ohio is in Marion, 98 miles away.
View full size
Office Depot Inc., the nation's second-largest office supply chain after Staples Inc., plans to merge with OfficeMax Inc., the third-largest chain, in an all-stock deal worth about $1.2 billion. Together, the chains have 2,575 stores and about 68,000 workers, but analysts expect considerable consolidation.
CLEVELAND, Ohio -- The merger of OfficeMax Inc. and Office Depot Inc., America's No. 2 and No. 3 office supply retailers, will enrich shareholders but may not turn out as well for employees or consumers.
As with last week's American Airlines-U.S. Airways merger, fewer competitors means shoppers will likely pay more for the office supplies and other services that Office Depot and OfficeMax used to compete for.
"Wherever the new OfficeMax-Office Depot is not competing with Staples directly, you can almost guarantee that prices will rise," said retail consultant Robert Antall, managing partner of Consumer Centric Consulting LLC in Shaker Heights.
Here in Greater Cleveland, the deal should cause fewer store closings and job losses than in other markets, because while there are 20 OfficeMax stores in the seven-county area, the only Office Depot store is in Marion, 98 miles away.
Staples Inc., the nation's largest office supply chain, has 13 stores locally.
Yet in other markets, stores will likely close where both retailers have locations close together, Antall said. The companies have said the merger will eventually save $400 million to $600 million per year by the third year.
Wednesday's $1.2 billion deal also marks the latest major expansion for OfficeMax, the upstart office supply chain that opened its first store in Mayfield Heights nearly 25 years ago.
"Candidly, when I sold (OfficeMax in 2003), I knew in my heart, my head and my gut that the world was changing and that big-box retailing was going to change radically because customers were time-pressed and time-stressed," said Michael Feuer, OfficeMax's co-founder and former chief executive.
He and his business partner started with a single store in 1988 and grew it into a 970-store national chain with 30,600 employees before selling it to Boise Cascade Corp. for $1.4 billion cash and stock.
Current OfficeMax Chief Executive Ravi Saligram characterized the deal as a "merger of equals," telling analysts on Wednesday that "this combination will create a stronger, more global, efficient competitor able to meet the growing challenges of our rapidly changing industry."
Yet analysts like Liang Feng of Morningstar said the combined company won't only face competition from Staples.
"The industry will face longer term structural headwinds with competitors like Amazon, Costco gaining ground and the decline in demand for secular office products like paper, pens and ink," he told the Associated Press.
Within the industry, valued at $21.2 billion by IBISWorld Inc., Staples has a 35-percent market share, followed by Office Depot with 26.1 percent and OfficeMax with 15.6 percent.
Office Depot, OfficeMax and Staples, all founded in the 1980s, helped usher in the big-box retail boom with their explosive growth in the 1990s.
But the rise of online competitors like Amazon.com and discount chains like Walmart, Target and Costco have cut into their sales. Office retailers suffered when consumers and small businesses cut back on supplies, and have taken longer to recover.
Analysts Sandler O'Neill + Partners, L.P. called the merger "a win-win" for shopping center real estate investment trusts, such as DDR Corp., because it will free up desirable space that will be attractive to prospective tenants such as T.J. Maxx, Bed Bath & Beyond, and Ross.
Paul Freddo, a senior executive vice president of leasing and development for DDR, which is based in Beachwood, agreed, saying in a statement that "we are excited about the opportunity presented by the Office Depot and OfficeMax merger, and we will maintain a close dialogue with both retailers to assist them in their transition and pursue opportunities to recapture valuable space."
DDR owns 50 OfficeMax stores totaling 1.2 million square feet, and 15 Office Depot stores totaling approximately 365,000 square feet.
The terms of the deal call for OfficeMax shareholders to receive 2.69 shares of Office Depot stock, or about $13.50 per share, for every OfficeMax share they own.
That's a 3.6 percent premium over OfficeMax's closing price on Friday, before rumors of a possible merger started leaking on Monday.
Office Depot, based in Boca Raton, Fla., has 1,675 stores worldwide.
The company said Wednesday that it lost $17 million, or 6 cents per diluted share, for the final quarter of 2012, compared to $12 million in profits, or a 4-cents-per-share gain, in the previous year. Its fourth-quarter sales were $2.6 billion, down 12 percent from the final quarter of 2011.
OfficeMax, based in Naperville, Ill., has 900 stores. It lost $33.9 million, or 39 cents per diluted share, for the fourth quarter of 2012, compared to a net gain of $2.9 million in 2011. Revenues for the quarter dropped 7 percent to $1.7 billion, from the previous $1.84 billion.
Together, both employ about 68,000.
The proposal still has to be approved by shareholders and undergo regulatory scrutiny. The Federal Trade Commission rejected Staples' offer to buy Office Depot in 1997, amid concerns that the combined company would control too much of the market.
But Saligram said there are so many competitors now that consolidation would help both companies compete.
"It's a totally different landscape," he said.
The parties still haven't decided who will be the next CEO, where the company will be based or what it will be called.
"I'm rooting for the OfficeMax name because it's more unique," Feuer said.
Plain Dealer Reporter Michelle Jarboe McFee and The Associated Press contributed to this story.