Staples and Office Depot Rumors - But What's Changed?

Office supply giant Staples (Nasdaq: SPLS) was up almost 2.5% pre-market on reports of advanced talks to merge with rival Office Depot (Nasdaq: ODP).  The latter was also up about 1.5%  on the rumor.  There are no details available regarding the proposed deal, so it's hard to say whether the current pricing is accurate. 

This is not the first time Staples and Office Depot have appeared at the merger altar.  The last time, however, was 1997 and federal regulars squashed that deal citing anti-trust concerns.  They had no such concerns in 2013, however, when they permitted the merger of Office Depot and Office Max.  Neither were required to divest any stores, and the FTC acknowledged then that the competition in that space had increased considerably.

There is never any assurance that deals of this nature will proceed, even without regulatory anti-trust concerns.  Trading on rumor of merger is always speculative, and unless you play in the after-hours market, you're typically looking at the taillights of that price movement.  That's likely the case today, although there may be more room in the Office Depot price as details are revealed.

The question, though, is what's changed since 1997 that would allow such a merger?  The answer is simple: the entire industry has changed.  In 1997, Staples was primarily a stationary store.  Today, stationary is still a large part of their business, but they are also a major technology store, selling laptops, desktops, and virtually every component imaginable for a device in that space.  They are into the tablet space, the cell phone space, the office furniture space, and the software space.  Staples is no longer your neighborhood stationary superstore.  Neither, for that matter, is Office Depot.

As Staples' focus has adjusted to the changing times, so, too, has their competition.  In addition to similar box stores (like Office Depot,) Staples is also in the same market as technology giant Best Buy.  Wal*Mart and Target also offer a similar array of products at equally competitive prices.  Staples and Office Depot are both, however, dwarfed by Amazon, especially when you consider the wide spider web of Amazon marketplace partners. 

With the stunning growth of online sales in that industry, and with Amazon emerging as a global retail force, fears of anti-trust in a deal between Staples and Office Depot are greatly diminished.  Of course, you can never truly predict what the FTC will do in these situations, but thinking globally, it is safe to say that the prospects of this merger being approved are significantly greater today than at any time in the past. 

Trading on this type of rumor remains speculative, at least if your objective is quick price action profit, but longer term it's likely that Staples will emerge as a much stronger, more profitable company once the efficiencies arising from the merger are realized.  That's the way I'm looking to play this.  I like the wide range of products offered by Staples, and I like the convenience of having their brick and mortar presence for those "emergency" purchases.  I also like the efficiencies that would be gained by merging these two companies, and the potential benefits that will bring into their online sales space.  So this will be one to watch, but outside of short term trades, I'd like to see the details emerge before determining a good entry and longer-term price target.