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Staples to buy Office Depot for $6 billion

Hit by weak sales and competition from other retail players, the two office supply chains will become one.

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Office Depot will become one with Staples. Office Depot

Staples is scooping up Office Depot to the tune of $6.3 billion.

Combined, the two companies own around 4,000 stores and see annual sales of more than $35 billion. But the pair have been hit by greater competition from online retailers such as Amazon as well as chains such as Target and Wal-Mart, which also sell office supplies and consumer electronics.

Staples expects to achieve $1 billion in cost reductions by its third full fiscal year following the closing of the deal. Most of these reductions would be the result of layoffs and reductions in administrative expenses; greater efficiency on the purchasing, marketing and supply chain end; and retail store optimization, which surely means closing some outlets.

The two companies announced the deal Wednesday following reports from the Wall Street Journal that the two were discussing a merger in an increasingly competitive marketplace. Staples said that it began acquisition discussions with Office Depot in September 2014.

"This is a transformational acquisition which enables Staples to provide more value to customers, and more effectively compete in a rapidly evolving competitive environment," Staples CEO Ron Sargent said in a press release. "We expect to recognize at least $1 billion of synergies as we aggressively reduce global expenses and optimize our retail footprint. These savings will dramatically accelerate our strategic reinvention which is focused on driving growth in our delivery businesses and in categories beyond office supplies."

Known primarily as office supply stores, Staples and Office Depot also sell computers, tablets and other personal technology products. So they not only compete with department store chains such as Target and Wal-Mart but also with Best Buy and a host of online tech retailers, such as Newegg, Fry's, and Rakuten (formerly Buy.com). Joining forces will give Staples and Office Depot more leverage. But the combined company will still face a challenging retail market in which consumers increasingly buy office supplies and tech items online.

The changing dynamics of retail have also taken a toll on the venerable consumer electronics retailer RadioShack, which reportedly is looking at selling off some of its shops to companies including Sprint and Amazon, and closing the rest.

Under the terms of the deal, Staples will acquire all of the outstanding shares of Office Depot, giving Office Depot investors $7.25 in cash for each share owned and a small percentage of Staples stock. Based on Tuesday's closing price of Office Depot stock, the transaction values Office Depot at $11.41 per share, or $6.3 billion.

The deal, which is expected to close by the end of 2015, has already been okayed by each company's board of directors. Until the deal is done, Staples said it will focus on its "strategic reinvention plan," while Office Depot will continue to focus on integrating the OfficeMax chain, which it purchased in 2013.

The merger also needs a thumbs-up from Office Depot shareholders as well as the necessary regulatory approval. In 1997, Staples and Office Depot attempted a similar merger, but that one was blocked by the government. Could the same thing happen again this time?

Not likely.

In 2013, Office Depot received unanimous approval from the Federal Trade Commission to acquire OfficeMax. In announcing its decision at the time, the FTC cited the changes in competition faced by office supply stores in 1997 versus 2013.

"Customers now look beyond office supply superstores when buying office supplies," the FTC said. "Non-office supply superstores such as Wal-Mart and Target, along with club stores like Costco and Sam's Club, have expanded their office supply product offerings and now compete with office supply superstores. Additionally, Internet retailers of office supplies, most prominently Amazon, have grown quickly and significantly, and compete with office supply superstores."