Office Depot/OfficeMax Merger Is a Win-Win for Everyone

Natalie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Two companies to watch are Office Depot and OfficeMax (NYSE: OMX).  These two companies will soon be on the rise after a report that the two parties are in advanced merger talks. This could be a win-win situation for everyone, as the merger will prove itself to be beneficial to both companies.  

A Look at the Catalyst

According to the Wall Street Journal, there have already been talks about Office Depot and OfficeMax merging together, which are now being called “advanced talks.” If this merger goes through, the combined synergies could be as high as $700 million in additional sales (according to the Wall Street Journal. As of now, this merger would provide additional sales of more than a third of their combined market cap, adding significant value). 

The news of a potential deal was released recently. Already, both stocks have seen very strong starts to 2013 after having very bad performances during a five year period. The reason is due to stability, as both companies have recently saw slowing sales declines.

A Great Opportunity

Both Office Depot and OfficeMax have been under-the-radar due to the gains accumulated by other fallen stocks such as Nokia, Research in Motion, and Best Buy. These are perhaps two of the most undervalued companies in the market that have very similar business models. At the time, OfficeMax is a profitable company, while Office Depot has been unable to achieve profitability. Yet the combined market cap of these two companies is greatly misleading, and a merger could present a great opportunity for investors who take notice.

Office Depot and OfficeMax have a combined market cap of $2.3 billion, and revenue of $18 billion (last 12 months), giving a price/sales ratio of just 0.12! This shows that these two companies are remarkably cheap, yet because margins are so tight, Office Depot with operating margins of 1.54% and 1.70% for OfficeMax, the market has placed a very low valuation on these two companies.

As online retail has grown in size both of these two companies have felt the effects, and have lost revenue, and have been forced to cut costs to the bare minimum. The industry low rates from companies such as Wal-Mart, Costco, Best Buy, and Amazon have drastically affected both retailers. However, this merger will create a more efficient business, as the two companies have been fierce competitors in the past. In fact, many of their combined 2,575 world-wide stores are close in proximity; some are even next to each other in shopping centers. As a result, a merger would allow for a consolidation of stores and workforce, which would cause fewer stores, less employees, more inventory, and greater profits.

 

Final Take

If a merger occurs, individual stores will receive more business that would have been previously split between two different stores, due to the consolidation. And because both companies sell many of the same products, the increase in inventory from the consolidation will lead to boosts in operating margins. Therefore, any way you look at it, this merger will be great for both companies, shareholders, and ultimately consumers. It’s a win-win situation for all parties involved.

 

                


Brake1Stone has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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