If you had looked at Office Depot (NYSE:ODP) in 2014, the income statement would have shown some hope. The company managed to grow revenues from $11 billion to $16 billion. That hope would have been quickly dispatched by the fact that net income for the same year was a loss of over $350 million. 2015 wasn't much better. The company made $8 million in net income, but revenues fell in the process. This week, all hopes were crushed for the company as their proposed merger with Staples (NASDAQ:SPLS) was put to an end by the FTC.
In an area that is experiencing what can only be called drastic change, the retail office space that Office Depot and Staples both hold is being aggressively swallowed up by online sources. Can anyone say Amazon (NASDAQ:AMZN)? Both Staples and Office Depot needed this merger. The two companies quite simply cannot afford to compete with each other as well as outside sources such as Amazon (amongst other online sellers) and conglomerates like Wal Mart (NYSE:WMT).
Personally, I fail to see the anti-trust legitimacy in a segment that is getting dominated by ecommerce. The two companies may have been a monopoly in terms of retail stores for business products, but let's face it they wouldn't be the king of office shopping as a whole. The internet has taken hold of the arena. With Office Depot claiming to have closed over 300 stores last year, and eyeing 400 potential stores for closure this year, things don't look good for investors. Consider the revenue fallouts from those closings. The company lost 10% in its revenues in 2015. With over 400 more in the crosshairs, it's plausible that we could see 15-20% more in lost revenues this year.
A former Office Depot CEO Mr. Steve Odland has been quoted saying the two companies have no where to go from here, and they likely need to sell off assets. From the way the finances read, Office Depot really has problems. Their eggs really were in the merger basket. An irony of this merger getting blocked is prices likely would have actually fallen had it passed. Monopolies are bad because having only one seller means it can set the price; rather than the market. This is not that type of scenario. The companies needed to merge in order to compete with players like Amazon.
Retail and ecommerce are not different segments anymore. How do you compete with a competitor? You lower prices. It almost seems like the game is rigged on this one. Regulators are so concerned with blocking mergers that they're missing the fact that ecommerce stands to monopolize virtually every facet of retail. This would benefit the consumer. My opinion doesn't really matter though. What's done is done. Without the merger, it seems that you have two retail chains that are going to fight over falling marketshare while Amazon keeps gaining. Staples is still making money but the business isn't really growing. Office Depot on the other hand has real problems. The revenue losses are a real concern. If were one were going to consider buying some stock in one of the two companies, Staples seems like the better bet, though both seem like long term nightmares.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.