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Malcolm Berko: Efficiencies of scale in merger of ODP, OMX

Updated: June 2, 2013 2:09AM



Dear Mr. Berko: What are your thoughts about the merger of Office Depot and OfficeMax? Is this a good investment? I bought 50 shares of Wal-Mart at $64 in 2002. Should I sell the stock?

— C.M., Vancouver, Wash.

Dear C.M.: I recall that in 1997, the pudding-heads at the Federal Trade Commission put the kibosh on a proposed merger of Office Depot (ODP-$3.95) and Staples (SPLS-$13.25) because it feared the power of these two big-box stores. ODP and OfficeMax (OMX-$11.69) is a merger of two weak companies with a decade of declining revenues, cash flows, book values, earnings and share prices.

Merging two losers is like doubling the size of the sewer. When two companies with declining numbers merge it creates a larger company with bigger numbers to decline. As of today, they still haven’t decided who will be the alpha male, the name of the merged company or where the headquarters will be.

Internet chatter between middle management of both companies indicates that the Big Boys at ODP and OMX have yet to prepare a merger strategy. The merger is expected to be completed by early fall. Still, both ODP and OMX continue duking it out amongst themselves in a very unforgiving economy and in an increasingly difficult business environment.

Some folks are glad ODP and OMX are merging because their names have been confusing each other’s customers for years. Both companies purchase the same products from the same suppliers at the same prices then retail them at similar prices, in many of the same cities from big-box stores with almost identical ambiance.

However, the big shots that run both companies, from the executive suites to the boardrooms, have very different management styles, different personalities but the same sensitive egos. And because there’s going to be serious overlap at the executive level, there’s some serious infighting among executives who believe they should be the survivors.

And because 50 percent of their unit locations overlap, this translates to multiple store closures with lots of good people losing their jobs. It appears that medium-level managers are spending more time trying to maintain jobs than maintain their territories. However, when the dust and egos settle, there should be efficiencies of scale.

Still, this is a fiercely competitive business. Amazon sells the same product, delivers it curbside the next day and charges lower prices. Twenty years ago, Wal-Mart/Sam’s and Costco devoted about 200 square feet to office supplies. Today, they have miles of aisles of the same stuff sold by OMX and ODP including printers, copiers and the like, at better prices.

Together ODP and OMX have 68,000 employees, some 17,000 of whom may lose their jobs. That’s a tragedy. The merged company may improve its performance for the short run, but I doubt the merged company will be a good long-term investment.

Every year during the past 11 years, Wal-Mart (WMT-$74) has increased its store locations, produced higher revenues, generated higher earnings, increased its dividend, grew its cash flow and improved its book value. And in that time frame the company repurchased 1.2 billion shares.

Meanwhile, WMT’s important net profit margins are expected to rise to an all-time high of 3.8 percent. But results for WMT’s fourth quarter were disappointingly higher as same store sales rising only 1 percent. However, this year WMT will again grow revenues, earnings and its dividend while continuing to reduce costs to lower its prices and attract more customers.

Your purchase at $64 in 2002 has a meager eight-point gain because it was poorly timed. You bought WMT at its yearly high and you should note that WMT usually has a 10-point trading between its high and low each year. Don’t sell.

Rather, place a good-till cancel, open-stop order to buy 50 shares between the $55 and $57 level when the market has a sell off. Then when WMT moves sharply above the $70 level you should be able to sell your shares at a swell profit. But I’d prefer to keep the stock because I think it will continue to grow.

Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or e-mail him at mjberko@yahoo.com.



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