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Staples, top rival agree to unite as sector convulses

Deal would create an office-supply giant

Like many retailers, Staples has struggled in recent years.
Like many retailers, Staples has struggled in recent years.Joe Raedle/Getty Images

It’s happened to booksellers and retailers of consumer electronics. Now the country’s once-booming crowd of office-supply superstores may be reduced to a lone survivor with an uncertain future in the digital era.

Staples Inc. of Framingham agreed Wednesday to buy rival Office Depot Inc. for $6.3 billion. The merged company would follow the same path as Barnes & Noble Inc. , America’s last big brick-and-mortar bookseller, and Best Buy Co. Inc., the only big-box chain of electronics stores still standing.

Consumers have more places to shop as the online giant Amazon.com Inc. and other imposing brick-and-mortar retailers have increased their inventory of office supplies.

Retailers such as Walmart Stores Inc. and Costco Wholesale Inc. have become formidable competitors to big-box specialty stores like Staples, once so successful they were known as “category killers.”

“Now add in online and the entire world becomes a competitor to any so-called dominant retailer,” aid Marshal Cohen, chief retail analyst with the NPD Group of New York.

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In the case of office supply stores, technology and innovation have created an additional business challenge.

The industry faces a long-term decline in core products such as paper, ink, and toner in the digital age.

Analysts and retail specialists caution that the proposed merger of Staples and Office Depot will only serve as a temporary fix to the struggles of the two companies because the industry faces more competition and waning demand for basic goods.

Staples is the largest office-supply superstore. Over a year ago, Office Depot merged with the industry’s number three competitor, OfficeMax Inc., to consolidate and save on costs but still remained smaller than Staples.

This isn’t the first time Staples and Office Depot tried to merge. The Federal Trade Commission rejected their buyout plan in 1997 because it would be anticompetitive. But analysts said the makeup of the business has changed so dramatically that they expect the deal to have a better chance this time.

The combination of the two companies would create a sprawling international retail business — with $39 billion in annual sales and more than 4,000 stores. Staples said the deal will save at least $1 billion in annual costs by the third year after it closes, but it will also require a one-time cost of approximately $1 billion to combine the two companies.

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“The strategic and financial benefits of Staples’ acquisition of Office Depot are compelling,” said Staples chief executive Ron Sargent in a conference call. “The combined company is better positioned to provide value to customers and compete against a large and diverse set of competitors.”

But Staples stock slumped 11.99 percent to $16.73 on the merger news Wednesday. Office Depot shares rose 2.21 percent to $9.48.

The deal was announced about two weeks after a well-known activist investment firm with stakes in both companies began to publicly pressure Staples to merge.

Starboard Value LP, which previously persuaded investors to replace the entire board of Olive Garden’s parent company, owns about 6 percent of Staples and nearly 10 percent of Office Depot. The firm wrote a letter to Sargent arguing that the deal would lead to billions in cost savings and threatened a “significant leadership change” if he didn’t heed its advice.

Analysts have largely applauded the idea over the last few weeks, saying it would increase buying power, cut costs, and reduce the number of competitors.

“Now that you’re one company, you can look at the whole picture of every single market, close more stores and keep the ones you really want,” said Oliver Wintermantel, a Staples stock analyst with Evercore ISI. “From that perspective, it really makes a lot of sense.”

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Rajiv Lal, a retail professor at Harvard Business School and coauthor of “Retail Revolution: Will Your Brick & Mortar Store Survive?,” said that if the deal is approved, Staples’ future will remain uncertain.

The merger will allow Staples to cut costs and give it greater buying power. But the company is also inheriting another 2,000 stores and will have to shutter underperforming locations quickly to avoid losing money. Comparable store sales in North America haven’t grown at Staples or Office Depot since at least 2007.

Lal said Staples will have to dramatically change the existing stores to operate a profitable brick-and-mortar business. He said the company should strictly sell products and offer services aimed at small- to medium-sized businesses and move away from the everyday consumer.

“It’s a short-term solution and might give them breathing room for a while,” Lal said of the merger. “It’s not clear that this is a category that will continue to be viable. If I were asked to start an office supply chain today, I don’t think I would.”

Wintermantel doesn’t expect the FTC to have a problem with a proposed merger because there are more competitors in the market now. But Staples and Office Depot control at least half the business-to-business office supply market serving very large companies, he said.

Regulators could question whether the merger would hurt competition in that market. “From a retail side, the FTC should have no objections whatsoever,” Wintermantel said. “Among the Fortune 100 and Fortune 500 companies, it’s really just the two of them.”

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Taryn Luna can be reached at taryn.luna@globe.com. Follow her on Twitter @TarynLuna.