- The Washington Times - Wednesday, February 4, 2015

Faced with rising competition from rivals such as Amazon.com and falling demand for staplers, desk calendars and personal computers in the age of smartphones, the nation’s two biggest office supply chains announced Wednesday a $6.3 billion merger in a bid to make themselves more competitive.

Market leader Staples confirmed that it would acquire No. 2-ranked rival Office Depot in a cash and stock deal to create a combined company with over 4,000 locations and annual sales of nearly $39 billion. Just a year ago, Office Depot took over OfficeMax in a $1.2 billion deal — an indication of the market pressures to cut costs and preserve market share.

Massachusetts-based Staples and Office Depot, based in Boca Raton, Florida, tried to merge once before, but a 1996 deal was blocked by the Clinton administration on antitrust grounds. The two companies said Wednesday that the changes wrought in the industry by both big-box retailers and online sales would make any antitrust concerns moot.

“Office Depot will make Staples bigger,” Ron Sargent, Staples’ CEO, said in a Wednesday conference call describing the deal, “and most importantly, we also believe Office Depot will make Staples better.”

The merger will need to be approved by the Federal Trade Commission but could be complete by the end of the year. The combined company will operate under the Staples name and will be led by Mr. Sargent.

Staples has agreed to pay Office Depot a $250 million termination fee in case the deal is rejected on antitrust grounds.

Staples and Office Depot entered the market in the 1980s as “category killers,” taking on much smaller local office supply chains. But now the hunters have become the hunted: The impact of technology on the U.S. workforce has dramatically shrunk the demand for items that were once their bread and butter, including personal computers, ink cartridges and printers.

In the 1990s, office supply retailers catered to the throngs of workers setting up home offices. But with the popularity of smartphones, people can work anywhere. They also are buying fewer PCs and other big gadgets in favor of small devices such as smartphones.

The bricks-and-mortar office supply chain business also has suffered as online sales grow. Office products sold online hit $9.2 billion last year, accounting for 24 percent of the overall office supplies category. That was up from $2.6 billion, or 7 percent of the market, in 2004, according to Forrester Research.

Meanwhile, Office Depot’s sales have been mostly on a downward slope since its fiscal 2007 year when they reached $15.5 billion, according to research firm FactSet. Sales rose in the latest year because of Office Depot’s deal with OfficeMax. Staples’ sales peaked in fiscal 2011 at $25 billion and have been down since.

Staples officials said the merged company could save at least $1 billion a year by 2017, although it is not clear how many stores would be closed and employees laid off after the merger. Staples previously announced plans to close 225 stores by the middle of this year, and Office Depot plans to close 135 stores nationwide. About half of Staples store locations are within 5 miles of Office Depot’s outposts.

David Marcotte, a retail industry analyst at the consulting firm Kantar Retail, said the combined footprint of both chains could be reduced by half in the next few years and combined sales will be trimmed by a quarter. He believes the future of the office supply industry will be small stores tied to the Internet.

“The physical will give away to the virtual,” he told The Associated Press.

Staples’ stock fell $2.28, or 11.99 percent, to $16.73 Wednesday as traders began digesting the deal. Office Depot’s stock was up 20 cents, or 2.21 percent, to $9.48.

This article is based in part on wire service reports.

• Hannah Crites can be reached at hcrites@washingtontimes.com.

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