It has been one week since a federal judge blocked the merger between Office Depot(ODP) - Get Report and Staples (SPLS) and at this point, it doesn't appear either company has a chance to survive over the long-run.
After attempting to merge for 15 months, the Federal Trade Commission got what they wanted, two separate office supply companies. But Office Depot is in terrible shape, and could go bankrupt in the near future. Staples should be able to last a little longer than its rival. Revenues have been falling for both companies. Staples has dropped half its share price over the past year; Office Depot has fallen by two-thirds.
The federal judge stated that there was a high likelihood that the merger between the two would lead to higher prices and lower competition. That would be true, if the companies operated in a vacuum. But they operate in a capitalist economy and in an industry with fierce competition, including Walmart and Amazon.
For some time, Office Depot has been struggling to keep pace with its rivals. In most bankruptcy cases, debt plays a large role. Office Depot currently has $1.47 billion in debt with $879 million in cash, plus the $250 million breakup fee coming from Staples. If it can sell some of its European operations, it will end up with possibly as much cash as debt. That would be great, but this is a bandage for a gushing wound.
It is not selling enough of products to grow revenues and profits.
Currently the company has an operating margin of 3.1% and a profit margin of just 0.06%. Its return on assets sits at 4.36% while its return on equity is only 0.55%. Its most recent quarterly revenue growth was a negative 8.6%, and the book value of one share is just over $3, while ODP stock currently trades at $3.38.
Staples, is in the same boat but is in just slightly better shape. Staples revenue declined by 6.9% last quarter. The company has operating margins of 4.3%, profit margins of 1.8%, return on assets at 5.53%, and return on equity of 7.09%. Its debt sits at $978 million with cash of $825 million, but one of those will go up or down depending on how Staples funds the $250 million merger buyout.
To be sure, the nature of the office supply business has changed. Consumers are often purchasing fewer paper-based products and more electronics.
But the bigger problems for Home Depot and Staples stem largely from the costs of being a brick-and-mortar business.
Amazon doesn't have the same overhead. It can offer lower prices and still be profitable. The same way Amazon killed off a number of book store chains, it is going to kill off office supply chains: Office Depot will be first and Staples will follow.
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This article is commentary by an independent contributor. At the time of publication, the author held stock in Amazon.