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Breakingviews: Office Depot Photocopies M&A Flop

Office Depot is photocopying past M&A flops. The $2 billion seller of everything from printers to paperclips is jumping into IT services by forking over $1 billion for CompuCom. But similar attempts at diversification have a bad track record: others have already tried their hand in the sector and failed.

The retailer admitted earlier this year that sales were suffering under an onslaught from Amazon. That appears to be worsening. At the same time as announcing the acquisition on Wednesday, Office Depot also admitted that same-store sales declined by 4 to 6 percent in the third quarter. It pinned the blame partly on hurricanes.

Office Depot has pulled the M&A lever multiple times. Four years ago it bought rival OfficeMax for about $1 billion. Last year’s $6.3 billion planned merger with Staples was abandoned after a judge blocked it. The firm’s continued desperation has pushed it to look for salvation further afield.

The price it’s paying Thomas H. Lee for CompuCom values the target at about 10 times adjusted EBITDA. That’s roughly in line with where rivals like Accenture and Infosys trade, according to Eikon. But it strips out about $30 million of restructuring and other costs. If these sorts of charges keep cropping up, as is often the case for under-stress companies, they would eat up most of the $40 million in projected cost savings.

Office Depot is betting that it can “capitalize on minimal customer overlap” and sell more of each business’s products to the other’s customers. Chief Executive Gerry Smith only has to ask Dell, Hewlett-Packard or Xerox how hard that actually is. Each company trotted out a similar rationale for buying IT-consulting firms. The only problem was, customers weren’t convinced. So all three threw in the towel and offloaded the business.

Smith reckons he has an ace up his sleeve. He wants to put kiosks in its stores and staff them with CompuCom consultants – essentially copying the Geek Squad model employed by electronics retailer Best Buy. No big company has had much success, however, in selling IT services to small businesses. A 16 percent fall in Office Depot’s stock implies investors don’t think Office Depot will either.


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