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Merger between office supply stores confirmed

February 28th, 2013

rger that initially leaked out as a mistake was deemed official shortly after. Office Depot had accidentally leaked news of the deal in an earnings report and quickly erased the announcement.

Within a few hours, an official notice of the $1.19 billion dollar transaction was released. The office supply behemoths Office Max and Office Depot will fuse together to create a new company with $18 billion in revenues.

Many investors cheered on this deal as it was seen as a necessary consolidation in the office supply industry. Yet some are confused to the simple details of the new firm such as what it would be called, who would lead it and where it would be headquartered.  The shares of Office Depot and Office Max initially rose 9.4 percent and 21 percent respectively, but in within a day they had tumbled by 16.7 percent and 21 percent.

There are several key reasons as to why this joining of forces was desirable.

The two firms are the second and third biggest office supply retailers behind Staples. The merger helps the combined company battle challenging changes to the industry such as too many stores, more technology in the workplace and increased competition.

The new company would aim to do more online business and close overlapping stores. The deal would save the new company roughly $400 to $600 million per year.

The fate of other stores had been factored into the rationale of this deal. Office Max’s CEO Ravi Saligram cited the fate of Borders and Circuit City who both ended up bankrupt due to their inflexible business models. Saligram believes that “this is not about incremental progress,” implying that the company had to be ready to consolidate and change.

Leadership has not been clearly defined for the new company, but will be selected before the deal closes. The boards of both Office Max and Office Depot will put together a committee to select a new CEO.  In the running for the position are Saligram and Office Depot CEO Neil Austrian. Saligram is expected to emerge as victor, since he is roughly 20 years younger than the 73-year-old Austrian.

The transaction was almost halted the night prior to the announcement. The parties had to decide on what would happen to the preferred shares of the private equity firm BC Partners, which happened to hold a large portion of Office Depot. Office Max wanted to find a fair way to open the door for the BC to reduce their stake. Ultimately BC decided to convert some of their preferred shares and maintain a five percent stake in the company.

The new office supply powerhouse has an intriguing future ahead. Both Office Max and Office Depot posted losses in the fourth quarter of 2012, and it will be interesting to see how their financial performance plays out through 2013.

It would not be surprising if at least in this year the company struggles as it works through restructuring costs. But perhaps this merger will create a stronger and more formidable player in the office supply market.

Information from The Wall Street Journal was used in this report.