Can Mergers Help Office Depot Max Out?

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

Office Depot (NYSE: ODP) and Staples (NASDAQ: SPLS) tried merging in 1997, but the Federal Trade Commission (FTC) blocked the merger fearing it would decrease competition and consumers would see an increase in prices. I highly doubt the FTC is worried about that problem today. However, Staples is not the company considering a merger anymore. 

Office Depot and OfficeMax (NYSE: OMX) are in serious talks about a potential merger. Staples is huge when compared to the potential mergers. Staples, Office Depot, and OfficeMax have market caps of approximately $8.7 billion, $1.3 billion, and $933 million, respectively. Revenues have decreased four of the past five years for Office Depot and OfficeMax, while revenues have increased annually for over a decade for Staples. In fact, Staples generated $6.4 billion more than OfficeMax and Office Depot combined in 2012. With only three revenue increases in the past decade for OfficeMax and five for Office Depot, it may be wise to work alongside one another with the hope of success. 

An announcement could be made as early as this week if talks don't fall apart in the meantime. Details could then be released that would ease the anxiety of shareholders wondering what percentage of the new stock they would acquire. Before I get carried away on how Staples has outperformed both Office Depot and OfficeMax, it should be noted that Staples had far and away the worst performing stock in 2012. In the past year Office Depot and OfficeMax's stocks have increased nearly 47% and 92%, respectively. Staples, on the other hand, has headed the opposite direction, decreasing by nearly 15%. 

The chances of a merger are far more likely for these two office supply chains than before because of the continued success of companies like Costco (NASDAQ: COST) and Wal-Mart (NYSE: WMT)Wal-Mart and Costco's stocks have increased by approximately 15% and 21%, respectively, in the past year. While Costco boasts a market cap of approximately $44.5 billion and a FCF yield of 4.2%, Wal-Mart's are $231.8 billion and 6.2%. Obviously with these companies posting numbers this large, a merger whose combined market cap of approximately $2.2 billion won't do anything but drive competition. 

Wal-Mart and Costco post Forward P/Es of 10.5 and 19.7, while Staples measurement is just 7.9. Even with over $25 billion in 2012 revenues, Staples is minimal compared to Wal-Mart and Costco's 2012 revenues of $446.9 billion and $99.1 billion. Here is why I believe that a merger would actually benefit OfficeMax and Office Depot. As large as they are, Staples, Wal-Mart, and Costco aren't the biggest threat to the office supply retailers. Amazon is completely dominating on the retail front. The company has grown from $0 in revenues to $61.1 billion in just over 18 years.

Amazon's revenues have increased 1,150% in the past decade compared to OfficeMax and Office Depot's declines of 4% and 2.8% respectively. Amazon boasts a market cap of $120.5 billion and has experienced a stock that has grown over 45% in the past year. The chart below allows us to zoom out and see how these companies have performed in the past five years.  

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SPLS data by YCharts

The Foolish Bottom Line...

I think it becomes obvious why OfficeMax and Office Depot are looking to potentially merge. Revenues have decreased, stocks have plummeted, and the competition has become more than either rightfully want to face. It will be interesting to see how or if the details get ironed out with these companies. The Federal Trade Commission might reconsider their stance on competition simply because if there aren't mergers, there will likely be fewer competition due to fewer companies in the next several years. 

tlwofford has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale and Staples. 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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