The Latest Merger... and the Big Lie of the Obama Recovery

This week’s business news concerns yet another high profile corporate merger. Less than two years after office supply and computer retailers Office Depot and Office Max were forced into a merger, it now looks like Staples will be acquiring them. Where once there were three retailers, soon (or eventually, since such consolidations do take time), there will be only one.

The Resident of the White House, no doubt remembering that the success of Staples was an early credit to his rival Mitt Romney’s storied career as an investment wizard, lost no time in taking pot-shots against Staples for its employee compensation, typical work hours, and benefits… characteristically, getting every detail wrong in the process.

But the public in general reacted with the mixed feelings that one expects from any merger… because this isn’t really all that different from technology mergers, restaurant chain mergers, airline mergers, or the many other mergers and acquisitions that take place nowadays, as businesses struggle to find a way to survive in an ever-more hostile business climate.

To the question “is this merger good or bad?,” there is no absolute yes-or-no answer. But to the question “does this merger tell us anything?,” the answer is a resounding yes.

On the bright side, there are a lot of people who make money on a merger between competitors. The stockholders of both Staples and the office duo will likely do well, as several different key issues will happen as a result, with both immediate and long term benefits.

While there are no guarantees, it’s certainly likely that stock prices of each of the merging parties will rise, in anticipation of the many benefits to come. This will help both individual and industrial investors, as pensions and 401Ks, as well as all other classes of investment accounts, hold these stocks either directly or through mutual funds.

Management costs will fall. Where today, each company has a full suite of corporate officers, regional directors, and other upper executives, only one set will be needed in the future. The reductions don’t even have to be done immediately; it can be slow attrition or the quick axe, depending on how quickly the Street expects results, and how quickly current employees depart on their own, removing the need to be forcibly canned.

Real estate costs will fall. Where today, these businesses often have two or even three locations in the same mall, intersection or neighborhood, the combined firm will only need one. This takes time; if you can’t get out of a lease, you may as well keep two locations alive until you can, rather than paying for an empty space. But eventually, they’ll presumably save lots of money on locations.

Employee costs will fall. Those same neighborhoods that see real estate costs (and utilities, and property taxes too!) cut by half or two thirds will also see their headcount shrink. One day-manager rather than three, six clerks rather than eighteen. Save a mint on benefits too, as the bigger company is able to command better investment options for 401K plans, better insurance options for the employees who remain. It will definitely be a better place for those who remain after the consolidation.

Advertising costs will plummet. The same community that receives a mailing from Office Depot, another from Office Max, and a third from Staples will eventually receive only one from Staples. The same goes for the Sunday newspaper and its stack of ads. Today that paper includes three booklets, but eventually all they’ll sell is the one. So these three companies will save a lot of money pooling these weekday flyers and only printing and placing the one survivor’s. Again, this is a savings of half or even two thirds.

And before we leave this subject, think of the cost savings on the products they sell! When a company buys more, it can usually get a price break. So too, the fully merged entity will like have the power to cut a better deal from every vendor or supplier they resell, from the pens and paper in the office supply section to the laptops and monitors sold in the technology section. Lower costs on purchases means much better profitability than before.

So, yes, there are good reasons to cheer. If you hold stock in these companies (plural), soon to become this company (singular), you may indeed be a happy camper this week. The news will make that investment a stronger one than it was before. The prognosis is good, particularly in terms of market share, for the consolidation of a company in a challenged market.

But, all that being said, what about when one considers the bigger picture? What does this story mean to the economy at large?

No company is an island unto itself, and while this particular merger may indeed be the right thing to do for the companies in question, the news of this merger might be different from the perspective of someone other than the stockholder. Consider:

The greatest misconception in the American economy is the idea that the stock market is a measurement of the quality of the economy – the idea that high numbers in the stock market mean a strong economy, and low numbers in the stock market mean a weak economy. In fact, the stock market is a measurement only of the companies being traded, and even for that, it’s a measurement only against each other, or against other huge investments such as bonds. The best thing for a publicly traded conglomerate may in fact be a very bad thing for the rest of the economy.

As the members of the merger save money in management and employees, this is at the expense of the many who are being terminated as redundant. You don’t need two or three of everything; in the new world, the company is right to reduce staff to meet the number of outlets that the chain will soon be down to. But this does mean that lots of jobs – from entry level all the way up to senior management – are being eliminated; there will be less employment in general, and less advancement opportunity in particular, for America’s workforce after the merger than there was before. To handle an event like this, the nation needs to be encouraging the creation of new and different jobs so that those flung loose may have a place to land.

There’s another side to the real estate savings as well. While Office Depot, Office Max, and Staples will together pay far less in real estate costs, this does mean that the beneficiaries of those leases will suffer the loss of some large clients as a result. Hundreds more empty sites means that many real estate investments will suffer a drop in revenue over the coming years - these huge sites tend to sit vacant a very long time before finding a new tenant. And these are big spaces, not tiny offices or snack bars. They take up a lot of space, and are often the anchors in their respective strip malls. Their disappearances will not only deprive the landowners of profit, their absence may remove a stream of potential customers that the other stores and restaurants in the mall depended upon. Closures of large stores may make their competitors cheer, but they do hurt their other neighbors.

When brands disappear and advertising is consolidated, who loses? Billboard rentals and radio/tv ads may have had three streams of business until now; this merger means that number will shrink to one as well. One third the billboard rentals, one third the Sunday and holiday flyers in the newspaper, one third the mailings. Look for fear in the paper business, the printing business, the direct mail houses, the ad agencies. Yes, the new business will have bandwidth for a lot of advertising, but it won’t be as much as the three businesses used to buy on their own.

And what of the products they sell? Three stores could sell a lot of brands between them; there was business for plenty of competition between paper companies and pen manufacturers and envelope makers and computer assemblers. But will one final company offer to sell as many individual lines as the three used to sell on their own? The odds are that this merger will result in great trauma for some producers in the areas of computer equipment and office supplies.

In case it sounds like the truth is the opposite of what we first assumed, that’s not really correct either.

The fact is, all this can (or should) have a good side in a free market. Competition is a good thing; the challenges of a competitive market make everyone work harder and become more productive. Many of the employees cut in a merger were the ones who had stopped giving the job everything they had; many were burned out, just going through the motions. They’ll be more focused when they land in their next job, again thrilled by the newness of the environment and challenge. It might be the best thing that ever happened to them... as long as they have a place to go.

Same with the real estate, and the vendors and the customers. Maybe this shock to the system will spur a mall manager to redecorate, to the benefit of all his tenants. Maybe the vendors cut by the consolidation will launch new products and make the most of it.

But only if the rest of the economy is strong enough to create the conditions for such benefits. A merger in a good economy can refocus everyone affected by it; a merger in a bad economy might leave people and businesses struggling for their very existence. And if so, that’s not the fault of the companies being merged.

The Staples merger, like every other merger and acquisition that hits the headlines, is a story of its own, not THE story of the economy itself. If two or three companies are so troubled by the economy that they find they must merge in order to survive, then the right thing to do is indeed to let them merge. Government has no business condemning them to a long slow death in an economy in which they find themselves uncompetitive, for whatever reason. Unless the merger creates an unfair monopoly, the government ought to let them go ahead with it.

But government should dig into the question and examine WHY these companies found it necessary to merge. WHY did they determine that they could not long make it on their own? Why wasn’t there enough business in a growing economy for all of them to prosper?

This is the core of it all: we are told that the nation is in recovery; that the recession hit bottom at the beginning of the Obama years, that it was all “Bush’s fault,” and the Obama presidency has turned it all around. We are told that the growth has been frustratingly low, but at least it IS growth, so we ARE in a recovery. We just need to understand that the booms of the old days aren’t possible now, that this – whatever this is – is the new normal. And we should like it.

If the economy had indeed been growing for the past four or five years, there would be enough new businesses – enough new private consultants, enough startups setting up offices and enough existing businesses expanding into new locations and growing the offices they already have – to keep Staples and Office Max and Office Depot and lots of others as busy as we can imagine.

If the economy were strong, as a doubling of the Dow Jones average is said to mean, then there would be so much activity that office supply stores and computer retailers would be the biggest boom business in the country, not a weak industry struggling to stay afloat. If this economy were strong, we would see new office supply stores popping up everywhere.

When a new factory, or hospital, or office building goes up, there’s a boom in restaurants and shops and bars; the new clientele have money to spend. But how much of this has the current economy produced? Precious little indeed.

Instead, hospitals are closing, factories are moving abroad, and hotels close as business travel contracts. Oh, there are always some new ones coming up, so you will see some construction as you travel the land… but the net result is 93 million Americans outside the labor force. You don’t get a 93 million non-participation rate in a growth economy.

A nation bleeding manufacturing, bleeding offices, bleeding services, bleeding retail, cannot support a booming office supply business; that’s the reason why these office supply companies find that they must consolidate to survive.

So now we have our answer: The merger may be the right thing for those parties to do, but only because the economy is so bad. The news of this merger tells the tale of the American economy far better than any other statistic, certainly far better than the Dow Jones Industrial Average at the end of a trading day.

People spun free after a merger can have a soft landing; they can even prosper in the right economy.

But the American economy today is so over-regulated, so over-taxed, so crippled by the burdens of federal, state, and local regulators, that it can no longer produce the broad variety of startups and expansions that a nation needs, especially when there are suddenly unemployed workers and vendors to put to work.

We know what needs to be done. The historical record is full of examples. We lowered tax rates in the Kennedy tax cuts of the Jack Kennedy administration; we lowered tax rates again and cut regulations in the Kemp-Roth tax cuts and Grace Commission of the Ronald Reagan administration.

Both events caused economic booms; the Reagan boom, in fact, is the very recovery that created the conditions for the founding of all of the three office supply chains under discussion today, back in 1986 and 1988!

All we need to know is in this one statistic: These three companies were all born when Ronald Reagan lived in the White House... and then they were forced to consolidate – just to stay alive – during Barack Obama’s residency there.

The Resident really doesn’t have much to show for himself, does he? When your “recovery” is one that leaves people out of work for so long they drop out of the labor force, that’s not much of a recovery in ANYONE’S book.

John F. Di Leo is a Chicago-based Customs broker and trade compliance lecturer. He was an officer of local chapters of the Illinois Right to Work Committee, Young Americans for Freedom, and the Illinois Small Business Men’s Association in the 1980s, and has now been a recovering politician for some 17 years. His columns are found regularly in Illinois Review.

Permission is hereby granted to forward freely, provided it is uncut and the IR URL and byline are included. Follow John F Di Leo at LinkedIn or Facebook, or on Twitter at @johnfdileo, or find archived columns on his own page at www.johnfdileo.com.

I believe there to be a number of other reasons why this merger is taking place:
These Office supply box stores have outlived their novelty, usefulness and sell overpriced goods.
Example: a leather Daytimer portfolio calendar appointment briefcase that sells for $96 at the Office box store, sells for $56 at Amazon.

Their computer technology business profits have been affected by plummeting prices of PC’s, laptops and tablets.
Commercial and retail consumers often first shop online and when needed, go to Walmart, Target, Costco, Sams, FedEx, BJ Warehouse, Bestbuy, and Fryes for immediate office and computer supplies.
I do agree that there is major belt-tightening occurring during this Obola recovery.

The author entirely misses - does not discuss, MANY supplemental factors.

1. Are the items in a Staples, Office Depot or Office Max inventory sold ONLY at Staples, Office Depot and Office Max. No. Many other retailers have expanded their offerings, and inventory volume of, items traditionally found mostly at “office supply stores” and now offered by all sorts of retailers, and/or in larger volumes than before.

2. Did the office supply store industry move into retailing additional lines of business, like computers? Yes. Is the state of that and their place in it what they were when they were at their height? No. Most “computers” are not sold at one of the office supply stores and they have not supplemented that fact by grabbing a big chunk of wireless phone cell sales.

3. Two words - Internet retailing.

4. Paper and printing and everything related to them is a shrinking % of making, communicating and saving business and personal communications, and a substantial part of inventory for an “office supply” store.

Those factors question “the economy is bad” theme as the only logical reason for the merger.

I don’t entirely disagree with you, Wuli, but your argument implies that an article about the merger of multibillion dollar conglomerates has to be exhaustive. In fact, an exhaustive treatment of such an issue would take a lot more space than I have (my columns are already two to three times longer than a normal newspaper columnists’ output... I try to stay under 3000 words no matter what)...

I don’t disagree, for example, that competition from Walmart and Target had an impact on the office supplies portion, and that online competition hurt them the same as online competition hurts ALL brick-and-mortar retailers, but these weren’t part of the point I was trying to make. (besides, Staples and OfficeMax actually HAVE done a decent job at their own online business).

And I think that the competition from online retailers and Walmart and Target actually argue in favor of why this merger isn’t an antitrust problem today, though it was in 1997... but again, that wasn’t the issue that I was addressing.

My point was that the merger is good for some people in some ways, and very bad for others, in other ways, but mostly, it’s a telling example of a fundamental challenge in our economy.

If our nation were in a boom cycle, like in Reagan’s second term when these companies were born, then there would be a boom of startups, exactly the kind of companies that need to shop at Staples, OfficeMax, and Office Depot. Startups aren’t yet able to negotiate huge online contracts or invoice their customers on EDI. Startups still buy desks and file cabinets (office supply stores are at least one-third furniture stores), Startups still buy paper and folders and paperclips... Startups still need to buy computers at a store where they can try them out because they don’t employ an IT guru to pick them or an IT buyer to negotiate the best price on a thousand of them from the manufacturer.

My argument is that it’s the lack of startups that’s killing these stores... and making life such a nightmare for the employees cut loose by these kinds of mergers.

I didn’t think I needed to create an exhaustive analysis of all aspects of the merger to make that case; perhaps I did.

Oh well; live and learn!

Cheers,
JFD

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