With the slowdown in the office supplies industry in recent years, there has been wide speculation that OfficeMax (OMX) and Office Depot (ODP) would be forced to eventually merge. Both stocks are trading sharply higher today following a report from the Wall Street Journal that suggests the two companies are in the final stages of working out a deal that could be announced as early as this week.
The companies have been struggling in recent years, being unable to compete against rivals Staples (SPLS) and Amazon. Even Staples has been feeling the pressure of a shrinking market, recently exploring its options for taking the company private.
A merger of the two companies seems like not only a smart decision, but possibly the only way either company can survive. Many of their stores are located in the same market, so a merger would allow the newly consolidated company to close stores in some markets to reduce store numbers and employee counts.
While it would be able to lower the overall store count, it would still have more stores than either individual company, which will give it more leverage power with its suppliers.
Neither company has confirmed that a deal is about to be announced, but with OfficeMax scheduled to report earnings on Thursday, and Office Depot to announce next week, it would not be surprising to see a deal announced sooner rather than later.
While nothing is set in stone yet on this potential deal, it would be just another in a wave of mergers and acquisitions that we have seen as of late. 2013 has been a busy year so far, with American Airlines and U.S. Airways announcing a merger, Berkshire Hathaway and 3G Capital buying Heinz (HNZ), and a $24 billion buyout of Dell (DELL) by its founder Michael Dell and Silver Lake Partners.
According to Dealogic, there has already been $219 billion spent in 2013 on mergers and acquisitions. This is a sharp increase from the $85 billion that was spent all of last year. If things continue at the current pace, this will be the biggest year for M&A since 2000.
What makes the recent boom so unusual is that it is occurring with the stock market at such highs, raising the obvious question why are we seeing this boom now?
One reason is that, despite the strong market we are in, things are not as good as they appear on paper. Yes, the stock market is strong, but it would not be nearly as strong if we were not in a period of quantitative easing. The Federal Reserve is keeping interest rates at near-zero, and plans to continue to do so into next year. Because of low interest rates, investors are turning to the stock market, and in particular dividend stocks in order to find yields that are not available in the bond market.
We can, however, consider that the recent boom in M&A is indicating that corporate sector is starting to believe in the future of the economy. The stock market is really just an indicator of investor sentiment on the future of the economy, and a growing GDP. We have not seen GDP follow the stock market's lead, but perhaps this is about to change.
Up until now, we have not been able to read too much into the strong stock market, but if we continue to see heavy action in the merger and acquisition market we will have to start considering that the market is telling us that strong economic growth is on the horizon.