Office Depot’s Chairman and CEO Neil Austrian can point an accusing finger to Thomson Reuters for prematurely releasing a bulletin announcing that his company was in advanced merger talks with OfficeMax, but the real issue is one of content rather than timing. Good preparation and excellent communication are so crucially important throughout the M&A process, from the initial declaration of intent until the end of the integration process : the recent Office Depot & OfficeMax incident might one day become a business school case study of how some companies can get it so wrong.
Let’s forget for a moment the fact that someone at Thomson Reuters pressed a button a little too soon; the merger announcement had been drafted and was only awaiting Office Depot’s green light to be released, so it would only have been a matter of a few days before the news was officially scheduled to go public. Consequently, it is difficult to understand why Office Depot’s first reaction was to promptly delete the on-line announcement posted on their investor relations website before confirming its content just a little later: does this feel thought through and very professional?
Some might argue that a little drama around the announcement may add to the prominence of the news on the financial markets, but the sad reality is that there was not much to get excited about. A quick read through the announcement reveals the very generic nature of its content : apart from the usual verbiage about this being a “merger of equals”, there is no sign of a clearly articulated “reason why” the combined business will do better than if Office Depot and OfficeMax were to continue their own separate ways.
Out of the eight key strategic benefits mentioned in the announcement to justify the merger, the only one which is directly attributable to the merger is the expected synergy of USD 400-600 million in operating and G&A costs which the combined entity hope to achieve by the end of 2016. There is no mention of what the likely integration and rationalization costs will be in the meantime.
Neil Austrian states that “combining our two companies will enhance our ability to serve customers around the world, offer new opportunities for our employees, make us a more attractive partner to our vendors, and increase stockholder value”. How many people today still believe that “bigger” is necessarily “better”? In what way does the merger result in a more attractive partner to the vendors or offer new opportunities to the group’s employees (presumably excluding those made redundant as part of the cost synergies). Does it really take a merger to implement “best practices in sales, operations and management”, or will the post-merger integration effort be a huge distraction which will, to the contrary, hinder the roll-out of these much needed best practices?
Combining Office Depot and OfficeMax will provide the merged entity with approximately 2,000 outlets in the United States, slightly more than rival Staples’ 1,900, but as Christopher Matthews astutely remarks in TIME, “office supply superstores have been struggling to stave off competition from online retailers, while also dealing with the slow decline of paper products as offices become increasingly digitized”. In that context, one fails to understand how owning a greater number of outlets could possibly give the merged company a decisive competitive advantage.
A clearly articulated and irresistible business case is one of the fundamental prerequisites of any business transformation initiative, as anyone experienced in driving change in organizations will know. In the absence of such clarity, the post-merger integration of Office Depot and OfficeMax is most likely to abort.
Until the management of Office Depot and OfficeMax come up with some more compelling and credible arguments as to why they should merge, the market appears to have given the current merger proposal the verdict it deserves, with Office Depot’s shares dropping by more than 16% and OfficeMax by 7% whilst rival Staples enjoyed an upward blip. Clearly, some of the major shareholders cannot be very happy right now…
We learnt in last week’s announcement that “the parties have also agreed to form a selection committee made up of an equal number of independent Board members from each company that will oversee the search process for naming the CEO for the combined company”. Who knows : maybe this search process will unearth some remarkable candidates capable of creating value and growing Office Depot and OfficeMax in more innovative and effective ways than through the proposed ill-conceived merger.