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Can Staples Survive in the Digital World if New Buyout Talks Fail?

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Staples, Inc.’s stock is skyrocketing Tuesday amid reports that the office supply giant is once again seeking a merger.

The Wall Street Journal first reported early Tuesday that the Massachusetts-based retailer is exploring the possibility of diving into a potential buyout. Since the report was published, Staples’ stock was up 10.22% to $9.55 per share in morning trading Tuesday. Staples is currently a Zacks Rank #3 (Hold).

Staples is currently in talks with private equity firms regarding a possible buyout. The Journal noted that the struggling office supply company is only speaking with a few firms. There is also still potential that these initial talks don’t lead to a deal.

Despite the ambiguity of the report, Staples shares saw their biggest one-day gain in over four years. The company’s stock was down 4.3% this year prior the report. Staples current market cap is nearly $6.3 billion, but the Journal noted a buyout could be worth $7 billion.

The company’s stock was trading at an all-time high of $26.70 per share in December 2006. Since then, increased competition and the rise of online retailers have forced Staples to close store after store as its stock price has vanished.

A buyout could help Staples survive. However, if the office supply chain doesn’t land a deal, its current tailspin could end in a crash.

Steady Decline

Staples reported its fifth-straight year of decreased annual sales in 2016. The steady decline in sales prompted the company to close stores and try to revamp its business.

According to its website, Staples operates over 1,900 stores worldwide, with 1,300 in the U.S, but the company has been closing tons of its massive retail locations over the last few years.

The company closed nearly 250 locations in the last two years. Staples plans to close at least another 70 stores in 2017 as it continues to try to restructure its business. The company sold a controlling stake in its European business for $53.65 million in December 2016 to the private equity firm Cerberus Capital Management LP.

Increased competition from online shopping giants such as Amazon Inc. (AMZN - Free Report) have put a huge dent in Staples sales. On top of increased online competition, businesses, schools and people have digitized. The simple fact is that people use less paper, pens and other office supplies today, and this trend is unlikely to reverse its course.

Staples tried to fight back by merging with a fellow office supply giant. However, in May 2016, Staples and Office Depot Inc.’s (ODP - Free Report) potential $6.3 billion merger was blocked by a federal judge based on antitrust concerns. At the time, Staples’ shares were trading at roughly $16. Since then, its stock price has fallen dramatically.

The blocked Office Depot deal came nearly 20 years after the Federal Trade Commission denied the two office supply giants’ first merger attempt in 1997.

Office Depot’s stock was at an all-time high of $41.99 per share in October 2006, but by February 2009 it was trading at roughly $1.05 per share. In 2013, Office Depot bought OfficeMax Inc. for $1.17 billion. The move consolidated the second and third largest office supply chains.

Office Depot’s stock is up 2.35% to $4.80 per share, and is a Zacks Rank #3 (Hold).

Is There Hope?

The company is still the number one office-supplier despite the Office Depot and OfficeMax merger. Staples posted sales of $21.06 billion in 2015. But the industry is changing.

According to market research firm Euromonitor International, overall sales at brick and mortar office supply locations fell from $17 billion a decade ago to $8 billion in 2016.

According to a Bloombergreport, in 2016, over two-thirds of Staples’ $18 billion annual sales came from online orders. Staples is now the fifth-largest seller of online goods, behind only Amazon, Apple Inc. (AAPL - Free Report) , Dell Technologies Inc. and Wal-Mart Stores Inc. (WMT - Free Report) .

Based on the same report, Staples was second behind Amazon in market share for online office products sales. However, Amazon owned nearly 65% of the online office supply market in 2016, while Staples held only 6.7%.

Staples has closed stores and pivoted to become a major player online. But the office supply giant faces the tough task of selling reams of paper and packs of pens in an ever-more digital world.
 

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