Office Depot-OfficeMax Merger May Mean Higher Prices for Consumers
Shares of the two meandering office supply chains soared on Tuesday after Bloomberg reported that the two retailers are in advanced merger talks.
The combination makes sense. Office Depot and OfficeMax have been struggling lately, and joining forces would afford the combined superstore operator some economies of scale. It would also turn two fierce competitors into allies -- and that makes it likely that consumers and small business operators may be paying more for office supplies in the future.
What's Good for Wall Street Isn't Always Good for You
The stock market is loving the merger chatter, but largely because it will mean that Office Depot and OfficeMax won't have to compete with one another on price.
Firming prices mean healthier profit margins. That will be great for the combined entity's bottom line, but the same can't be said for customers in line buying fax machines and pen refills.
The airline industry cheered when US Airways (LCC) agreed to join forces with American Airlines earlier this month, but passengers aren't getting excited about the prospects of higher fares. Teaming up means one less carrier forcing the industry to match lower airfares.
Office Depot and OfficeMax aren't the only names in office supplies, naturally. Staples (SPLS) is larger than both companies combined. We also can't forget Amazon.com (AMZN), as small business owners turns to online retailers to save money on everything from printer toner cartridges to file cabinets.
However, there are plenty of geographic pockets in the country where customers count on OfficeMax keeping Office Depot pricing honest, and vice versa. It will be interesting to see how things play out if the deal does go through.
Beyond the Ledger
The merger probably can't come soon enough for either company. OfficeMax and Office Depot are set to report quarterly results later this month, and both chains are eyeing slightly lower sales for 2012. Analysts aren't holding out for any top-line growth in 2013.
It wasn't supposed to be this way. As the economy began showing signs of life the two retailers should've been buzzing with entrepreneurs and business operators loading up on office essentials. Even market leader Staples has struggled to grow sales in this so-called recovery, announcing a humbling restructuring last year.
Some may argue that the merger is necessary. If the two superstore chains don't pair up it's always possible that one of the concepts will falter on its own. Borders could've probably used a merger with Barnes & Noble (BKS) -- or Circuit City could've used a deal with Best Buy (BBY) -- before those giants closed their doors forever.
A merger of OfficeMax and Office Depot makes sense, and if anyone should know that, it should be these two retailers that depend on business for a living.
Motley Fool contributor Rick Aristotle Munarriz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Staples. Try any of our Foolish newsletter services free for 30 days.