Office Depot IncODP

Office Depot may be able to realize significant synergies in a merger with OfficeMax, since it could accelerate the closure of competing/unproductive outlets, increase scale, and consolidate distribution infrastructure.

Office Depot can cross-sell new items to its existing customers, which could accelerate growth in non-adjacent categories such as break-room, janitorial, and sanitorial supplies. These products are higher-margin, and could ease the excess supply in the industry.

Office Depot's contract business has relatively little exposure to medium-sized businesses. If Office Depot can successfully tap into this market, the company could dramatically increase its gross margin mix and increase capacity utilization.

Even though Office Depot is far behind office supply competitors in the United States, it owns a 50% stake in the largest and most profitable office supply retailer in Mexico and Latin America. Read more 

The unification of OfficeMax and Office Depot could concentrate too much share in the B2B market for office supplies, so the FTC could move to block the merger.

Nontraditional office competitors operate with lower cost structures, and are increasingly targeting the profitable B2B market for small- to medium-sized businesses.

Traditional office supplies are experiencing a secular decline, which may damage the already unhealthy supply-demand balance. If demand continues to decline, industry participants may attempt to lower prices in order to increase capacity utilization, which could instigate an industrywide price war.

From peak-to-trough, annual revenues fell 31% from 2007-12, one of the worst results among the OSSs. Even after extensive cost cuts, the firm is barely profitable, so another recession could push the company into negative cash flow territory. Read more