Brian Sozzi's 3 Reasons Why Staples And Office Depot Should Not Merge

Brian Sozzi of Belus Capital Advisors recently listed three reasons why Staples, Inc. SPLS should not merge with Office Depot Inc ODP.

Sozzi’s comments were prompted by an initiative from activist investor Starboard Value, which feels that the time is right for the two rivals to merge.

Restructuring

First, Sozzi notes, is that both companies are in a “serious restructuring mode.”

Staples closed approximately 170 North American stores in 2014. Office Depot closed approximately 165 stores in 2014 and plans to close another 135 in 2015.

“Were Staples to merge with Office Depot, it would create a retailer that might best be described as being in a full state of operational disarray. Several of the challenges include significant investments needed to rebrand Office Depot stores as Staples, two individual businesses continuing to strive to find an optimal number of U.S. stores and infrastructure in the age of digital shopping, and sizable overlap in executive positions and suppliers that likely would distract from the actual work of retailing,” according to Sozzi.

Related Link: Brian Sozzi On McDonald's Turnaround Attempt

Guidance

Second, “the office supply store of the future has not been created yet.”

Neither company has a “vision for reimagining huge physical stores that sell everything from cheaply priced pens to slow-selling office furniture to Tide detergent. That lack of creativity will leave a combined Staples/Office Depot vulnerable to online threats, where increasingly the lowest possible price can be had with a simple swipe of a tablet or smartphone.”

Disaster Waiting To Happen

Third, a “Staples-Office Depot merger resembles the disastrous Sears/Kmart tie-up.”

Sozzi felt that if Staples were to acquire Office Depot, “which includes legacy Office Max locations, it would still be mostly selling competitively priced office supplies in giant stores at well over 1,000 sites in North America. In effect, it would amount to the combination of two dying business models in the mold of the Sears/Kmart merger.”

Sozzi concluded that Starboard Value's "demands [for a merger] may be shortsighted, and rooted in a desire to bank a quick profit from two dying businesses rather than delivering longer-term value."

Staples closed Wednesday at $16.49, up 0.61 percent.

Office Depot closed at $7.66, down 0.39 percent.