Staples to acquire rival Office Depot Merger would create largest such chain, with 1,100 outlets

Cost put at $3.49 billion

Deal likely to draw tough scrutiny from federal regulators

September 05, 1996|By Mark Guidera | Mark Guidera,SUN STAFF

Staples Inc., the chain of office-supply superstores, said yesterday that it will acquire its chief rival, Office Depot, for $3.49 billion in stock.

The deal, if approved by shareholders and regulators, would create the largest office-supply superstore chain in North America, with more than 1,100 outlets in the United States and Canada.

Revenues should top $10 billion once new stores are added this year. The two chains had combined revenues of more than $8 billion last year.

"This makes them the Toys R Us of the office-supply industry," said Mark Millman, head of Millman Search Group Inc., a national retail consultant firm based in Lutherville. "They are no longer just a category killer. They are the category."

Expect the deal to get tough scrutiny from government regulators, though, industry leaders said. The reason: its potential to put a big squeeze on small and mid-size competitors.

The new company, which will carry the name Staples: The Office Depot, would have buying power with manufacturers and vendors few other retailers could match and the ability to discount heavily to attract price-conscious customers.

For those reasons, the news should be met with a shudder from independent office and stationery supply stores, Millman said.

"I don't see how they can compete on price, selection, or service," he said. "This will allow Staples to clobber the competition. Buyers are focused on price and selection these days, not the old loyalties that used to be built between stores and customers. Those days are gone. It's unfortunate, but true."

But Kyle Goss, director of marketing for Beltsville-based Expert Office Services, which owns Towson Stationers and four other stores in Maryland and Virginia, doesn't believe the Staples deal will have that harsh an effect on independents. Staples and Office Depot, he said, haven't successfully plumbed his company's and other independent stores' big source of revenue -- servicing corporate accounts.

"Where this is going to hurt is on the manufacturing side," said Goss. "It's going to have a big impact on your bottom line if you're a vendor whose line isn't chosen by Staples/Office Depot."

The retail office-supply business is an estimated $90 billion industry. But the three market leaders -- Office Depot, Staples and OfficeMax -- have captured only about 10 percent of the market, with about 1,500 stores combined in North America.

All three super chains, though, have expansion plans.

Staples and Office Depot expansion plans in Maryland will largely be unaffected -- at least in the short term -- by yesterday's announcement.

For example, Staples plans to continue with construction of a $43 million distribution plant in Hagerstown, which is expected to employ 700 when it opens in 1998. The 840,000-square-foot plant -- the largest in Staples' distribution system -- will supply products to 370 stores across the eastern United States.

Also, Staples' plan to add six stores in the Baltimore-Washington region this year -- including one in Annapolis and one in Bowie -- remain unchanged for now, said Phyllis Wasserman, vice president for public relations and advertising at Staples.

But Millman and other industry analysts say it's likely the new company will close stores where obvious duplication exists. One prime example: Pikesville, where the two chains have stores just a block apart.

"Obviously we'll take a close look at stores really close to one another," said Wasserman.

Savings from the consolidation will come from closing stores where such situations exist, layoffs in duplicated administrative and corporate sales jobs, stronger purchasing power with vendors, and advertising costs, said industry analysts.

And it's the lure of such savings that is driving the deal, they said.

Cuts in administrative jobs will probably occur at Office Depot's headquarters in Delray Beach, Fla., said retail experts. The headquarters of the new company will be based in

Massachusetts.

Office Depot head David Fuentes will be chairman of the new company, while Thomas Stemberg, Staples' chairman, will become chief executive officer of the new company.

Staples' Wasserman said that the new company expects a net gain in employment from expansion plans.

"We have not saturated any of the markets we are in yet," she said.

"This is not going to be accomplished through layoffs. In fact our expansion has been held back by not being able to hire people fast enough."

Big savings, though, are expected in advertising costs, she said.

In large city markets, where the two superstores advertise against each other in newspapers and local television, advertising costs might be slashed by 40 percent, Wasserman said.

Office Depot shareholders would get 1.14 shares of common stock in Staples for each Office Depot share they hold. Office Depot stock was valued at $3.4 billion, based on today's closing price.

Staples also said it would assume Office Depot's debt, though officials declined to say how much that was.

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