Office Depot, the shrinking retailer, is considering a merger with OfficeMax, a rival that’s also struggling.
The Wall Street Journal reported the talks Monday, citing unnamed sources. Neither company would comment on the report.
It’s unclear whether the companies will move forward with a merger, or how a marriage would help the two also-rans close the gap with Staples, the leading office-supplies seller.
While Staples’ revenue has grown over the past four years, sales at Boca Raton-based Office Depot (NYSE: ODP) and Naperville, Ill.-based OfficeMax (NYSE: OMX) have shrunk in that time. The two retailers are saddled with too many stores, too many employees and too much competition, said Erik Gordon of the University of Michigan’s Zell Lurie Institute for Entrepreneurial Studies.
“Each of them has problems. Do they combine and fix their problems? Maybe. Or do they combine and double their problems? Maybe,” Gordon said. “If all they do is merge two weak companies with two sets of management that aren’t doing very well, you have a worse mess.”
Despite its struggles, Office Depot remains a flagship company for Palm Beach County. It’s one of only two Fortune 500 companies based there. (NextEra Energy is the other).
It’s unclear where a combined company would be based, but Office Depot has more sales, more employees and a larger stock market value than OfficeMax. Kelly Smallridge, president of the Business Development Board of Palm Beach County, said the Office Depot’s five-year-old headquarters on Military Trail would be a selling point.
“We believe that Office Depot, if merged with OfficeMax, would stay here in Palm Beach County,” Smallridge said. “I cannot imagine that they would vacate that facility.”
There’s also the matter of taxes. While Florida has no personal income tax, Illinois has temporarily raised its personal income tax to 5 percent from 3 percent.
Office Depot built its $210 million headquarters after landing $15 million in tax breaks and incentives from the state and county. But the incentive package has been trimmed as Office Depot has scaled back its hiring plans.
Adding employees hasn’t been in the cards for a company whose sales have steadily declined. Office Depot reported more than $14 billion in revenue in 2005 but was on track to do less than $11 billion for 2012.
OfficeMax also has been losing market share. It was on pace for $7 billion in sales in 2012.
Staples, on the other hand, is still growing. It brought in significantly more revenue than Office Depot and OfficeMax combined last year, with fewer employees.
Meanwhile, Office Depot has been feeling pressure from shareholders. New York hedge fund Starboard Value has amassed nearly 15 percent of the company’s shares.
The office supply stores occupy an unusual corner of the retailing world, Gordon said. While retailers of clothes, coffee and electronics rely on brand building to tap into consumers’ emotions, shopping for pens and paper is a utilitarian decision.
“These office chains all have the same stuff in them,” Gordon said. “You can advertise the dickens out of yellow pads, and they’re still pads that are yellow.”
If the companies combine, he said, the new retailer would need to hire a CEO who’s brave enough to close stores, try different strategies, generally tear up the old playbook.
“What neither Office Depot nor OfficeMax has had is a real visionary,” Gordon said. “Sometimes, you need somebody to take a step back and blow up the business model.”