Office Depot, OfficeMax talk merger

The big-box office supply business may be about to get smaller.

The Wall Street Journal reported Monday that OfficeMax (OMX) and Office Depot (ODP) are discussing a merger that may be announced later this week.

The deal would probably be a stock swap, but, the Journal said, the terms weren't clear. Odds are that costs would be cut sharply, with payrolls trimmed and a number of stores closed.

Investors and analysts have been talking for some time about how a merger of the two companies might be a natural, if only because the shares of both have been so badly damaged in recent years.

Office Depot shares lost nearly 98% of their value between May 2006 and the market bottom in 2009.OfficeMax shares lost 96% of their value between February 2007 and the 2009 bottom. OfficeMax shares closed at $10.75 on Friday, up 40% this year; OfficeMax closed at $4.59. The shares are up 10.1% this year.

Their market capitalizations of the companies are a combined $2.2 billion, $1.3 billion for Office Depot and $900 million for OfficeMax. In 2006, the market caps totaled $13 billion, according to Wikinvest.com.

Both companies have struggled against industry leader Staples (SPLS), and all three have struggled against competition from Costco Wholesale (COST), Wal-Mart Stores (WMT), Target (TGT) and Amazon.com (AMZN).

In addition, Office Depot has been under pressure from activist investor Starboard Value, its biggest shareholder, to boost returns. Starboard, which has a 14.8% stake in Office Depot, has called for a deal with OfficeMax.

The office supply chains are casualties of the digital age, The Journal noted. There are "too many stores carrying too much inventory in spaces that are too large for the new marketplace."

Office Depot has some 1,600 stores and 39,000 employees; OfficeMax has 900 stores and 29,000 employees. Staples has around 2,000 stores but has committed to close some 46 locations, mostly in Europe, and end its European special delivery business.

The trio have danced around each other for years. Staples and Office Depot, in fact, negotiated a merger that the Justice Department blocked in 1997.

OfficeMax shares are up 94% over the last year thanks in part to speculation about a deal. Office Depot shares are up 50.5% over the last year. 

Staples shares are down 15.9% in the last year. Bain Capital, a company founded by former Republican presidential candidate Mitt Romney, helped get Staples started in 1986.

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