Shares of OfficeMax Inc. skyrocketed 21 percent Tuesday on speculation that the Naperville-based office supply retailer is in talks to merge with rival Office Depot Inc.
In the first day of trading after news of a potential deal was reported, OfficeMax shares closed up $2.25, at $13, while Boca Raton, Fla.-based Office Depot stock gained more than 9 percent, closing at $5.02. Archrival and market leader Staples' shares picked up more than 13 percent, closing at $14.65.
Neither OfficeMax nor Office Depot representatives are talking, but observers predict a deal as early as this week.
A marriage between the two is seen a natural progression in a crowded industry facing increased competition from forces such as Internet giant Amazon.com and the likes of big discounters such as Wal-Mart and Costco.
Not long ago, bets were that Staples might link up with OfficeMax. More recently, there was speculation that Office Depot and OfficeMax would team up to compete against Staples.
A merger would initially bump the combined companies ahead of Staples in store count. Together, OfficeMax and Office Depot operate about 2,653 stores, although analysts predict that at least 600 would be shuttered. Staples, which is based in Framingham, Mass., operates about 2,300.
Analysts say that Office Depot and OfficeMax have long lists of good customers and when put together could improve operating efficiencies and, therefore, profit.
"The basic challenge that both companies face is that they play in such a competitive space that they are forever locked in a battle to gain market share," said Tim Calkins, clinical professor of marketing at Northwestern University's Kellogg School of Management. "The truth is, when you have that much competition, it's very hard to maintain good margins; there's just relentless pressure."
Both chains have been working to reduce costs, closing underperforming stores and moving into smaller locations, but even if they team up, some analysts still give Staples the edge.
"We think there are a lot of things that Staples is doing better, that even after (Office Depot and OfficeMax) combine, they might not be able to match Staples immediately and maybe not ever," said Morningstar analyst Liang Feng.
OfficeMax is a little more than a year into a major turnaround plan led by CEO Ravi Saligram, an engineer by training who worked at Leo Burnett and was a top executive at Aramark International before he was tapped to lead OfficeMax in 2010. Saligram is largely credited with leading the company's improved performance last year, with its stock price climbing 99.6 percent, from a low of $4.89 to a high of $9.76, though sales in stores open at least a year remained flat.
Like many retailers faced with competition from the Internet, OfficeMax has aimed to shrink and become more nimble.
"We're beginning to gain some momentum," Saligram told the Tribune in a December interview. "It's a journey, but we'll do it very deliberately."
Industry analysts agree that Saligram's strategy is gaining traction. Credit Suisse analyst Gary Balter predicted Saligram likely would be tapped to lead the combined business.
Saligram said the company has focused on a "three-pronged" approach that began in late 2011 and included turning around the company's core business and continuing to boost its online business and shrink store size.
That included plans to cut 5 million square feet of space, expand product offerings to include janitorial and sanitation supplies, and court the small-business customer in its bricks-and-mortar stores.
"We are obsessed with the small-business customer," Saligram said. "That's our core."
The problem with that approach, according to Feng, is that while small-business customers are most profitable for office suppliers, they are also the most fickle.
That strategy also isn't far from Staples'.
For consumers, little would change after a merger, analysts say. Competition is so fierce for the office supply industry that the threat of higher prices is next to nothing.
But a marriage would help in one regard: Consumers likely struggle to distinguish between the two suppliers, Calkins said.
"The brands are so similar, it's hard for anyone to keep them straight," he said.
The Wall Street Journal reported Monday that the two companies were in advanced merger talks.
OfficeMax reports fourth-quarter earnings Thursday.
Wall Street is expecting sales to decline to $1.75 billion and adjusted earnings per share to drop to 27 cents per share.
crshropshire@tribune.com
Twitter @corilyns
