Staples, Office Depot and the New Competitive Landscape

Nearly 20 years ago, Staples tried to acquire Office Depot to find the deal rejected by regulators.  Fast forward to today and we see the two largest office supply stores again seeking to combine.  What has changed and will the deal still be anti-competitive in the eyes of regulators?   How does the market see the prospects of the deal? What are the lessons to be learned?

To answer the last question first, there are many elements that make this an interesting story.  First is the role of activists (hedge fund Starboard Value).  Second, we have noted that a wave of consolidation in an industry is often sparked by some catalyst.  Note the Office Depot and Office Max combination of two years ago reduced the number of main stream office suppliers to two.  This merger would reduce that number to one.  Ironically, although the catalysts here are multifaceted, they led by a string of new competitors with competition for Staples and Office Depot ranging from the big box stores (Walmart and Target) to online behemoth Amazon. 

So will the deal be seen as anti-competitive?  That depends on how regulators view the market for Staples and Office Depot.  To be sure, there is considerable overlap in the geographic location of stores and the closing of duplicate stores is undoubtedly a central factor in any synergies from the deal.  But the question of market is much more complex.  For example a sizable component of the sales of the two firms comes from large quantity orders from businesses.  In addition, we have the big box and online competitors to consider.

Regulators measure anti-competitive behavior by a number of factors, including the 4-firm concentration ratio and the Hirfindahl index.  As we have noted before, the key to determining concentration is defining the market and in today's landscape, that market is widespread but the jury is out on how the regulators will view the world.

As for the market, it seems to be expressing skepticism over completion of the deal.  Office Depot closed yesterday at $9.49 a significant gap below the deal value of $10.91.  That is a quite sizable speculation spread.

(See also Comcast, Time Warner and the Myth of the Cable Industry, Concentration Ratios, the Case of Anheuser Busch and Modelo, and Speculation Spreads and the Market Pricing of Proposed Acquisitions)

All the best,

Ralph

Social Terms in Mergers, US Air, American, Office Max and Office Depot

We've noted before on this blog the importance of negotiating on all aspects of the deal, not just price. (See, The Interrelated Nature of Deal Design.) The recently announced  mergers of US Air and American Airlines and also Office Max and Office Depot  are good examples of the importance of social terms.  

Social terms include things like the name of the merged firm, where it will be headquartered, who will be the CEO and how the board of directors will be constructed.

Consider the US Air - American Airlines merger.  Although US Air pursued this deal vigorously and is the acquiring firm, the combination retains American's name and will remain headquartered at its Fort Worth location.  Doug Parker, CEO and Chairman of US Air becomes CEO and board member of the new firm and after one year, Chairman of the Board.  Thomas Horton, Chairman, President and CEO of American Airlines will be Chairman of the Board for only one year.  

The Board of Directors of the combined firm will consist of 12 members, three from American Airlines,   four from US Air, and five from the creditors of American Airlines.   I'm a bit surprised that US Air doesn't dominate the board.   

Think that board composition isn't important?  Recall the merger of Duke Energy and Progress Energy that closed in July 2012.  Bill Johnson, the former CEO of Progress was to be CEO of the new firm, but was fired within 24 hours.  Replacing him was Jim Rodgers, the former CEO of Duke.  Under the merger terms, Rodgers was supposed to have been Chairman of the Board.  Reportedly, both of these CEOs had suffered errors in their stewardship as CEO.  Why did Rodgers survive?  One possibility has to do with board composition: the combined firm had 18 board seats, 11 from Rodger's Duke Energy and 7 from Johnson's Progress Energy.  

And then there is the merger of Office Max and Office Depot announced yesterday.  According to the announcement (which was, incidentally inadvertently leaked on Wednesday) the name and headquarters will be announced after the company appoints a CEO?

Huh?  Social terms are important components of any deal determined in the give and take of normal negotiations.  And social terms are costly - they involve real changes with real economic effects.  But not knowing the social terms?  That, would seem to be even more costly.  Not knowing these items as a deal is announced does not seem like the start of a prudent, coherent strategy.  Integration is fraught with uncertainty in the best of deals.  Starting out without  knowing the basic game-plan can only increase integration costs.  

Knowing your social terms? Important.  

Not knowing your board (if you are a new CEO)?  Courageous or some other adjective. 

Not knowing your CEO or name or headquarters? 

Priceless.  (Not.)

Just a thought,

Ralph