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Office Depot Acquires CompuCom IT Services for $1 Billion

Office Depot is acquiring CompuCom Systems for $1 billion, the struggling office supply retailer confirmed today. Office Depot claims the deal will pivot the company toward unique technology business services. But the combined company will face major challenges as Office Depot’s core retail sales continue to weaken, ChannelE2E believes.

Investors appear concerned as well. Office Depot shares fell about 8.5 percent after hours amid the deal news and a reduced 2017 financial forecast from Office Depot, which is unrelated to the M&A transaction.

Updated 6:31 p.m., Thursday, October 12, 2017:

Updated 9:53 a.m., Wednesday, October 04, 2017:

  • Shareholder Concerns: Office Depot’s stock is down about 18 percent today as investors react to the deal and a financial warning from the retailer.
  • Buyout Valuation: Office Depot paid a lofty 10 times EBITDA for CompuCom, sources tell ChannelE2E. But post-deal synergies will improve that math for Office Depot, the sources assert.

Office Depot also faces an uphill battle against industry history. Best Buy acquired and then sold mindSHIFT. Staples acquired then sold Thrive Networks. In both cases, the large retailers never quite mastered or understood the managed IT services market.

Office Depot and CompuCom: Why This Could Be Different

Still, the Office Depot-CompuCom deal could be different. The reason: Office Depot’s core business has weakened so quickly that the company truly needs to pivot to a new business model. Amid that challenging reality, Office Depot hinted more M&A and dramatic moves could be coming — essentially describing the CompuCom deal as a first step in a larger pivot.

If approved later this year, the deal will give Office Depot:

  • Approximately $1.1 billion of revenue
  • Expected cost synergies of over $40 million within two years (ChannelE2E doesn’t know what that means in terms of staff cuts)

Speaking about the deal, Office Depot CEO Gerry Smith said:

“Technology is the office supply of the future. Today marks a significant milestone as we move to provide a unique business services platform for our current and future customers. Acquiring CompuCom is the first step in this new strategic direction. The combination of CompuCom’s enterprise IT services with our millions of customers and approximately 1,400 distribution points gives us the credibility and scale to build a sustainable platform and stand apart from the competition. The company will create value for shareholders from a diversified revenue base with a clear opportunity to grow higher value services and business-to-business revenues.”

Office Depot essentially acquires CompuCom from Thomas H. Lee (THL) Partners for $1 billion, while THL will gain an 8 percent equity stake in Office Depot. The deal, which values CompuCom at less than 1 times annual revenues, is expected to close by the end of the year.

Deal Highlights: Reality Check

Office Depot mentioned the following deal highlights. ChannelE2E’s perspectives are added in selected areas.

1. Expertise & Size

  • Office Depot and CompuCom say: CompuCom, founded in 1987, has approximately 6,000 licensed technicians providing remote and onsite technology support. CompuCom procures, installs and manages the lifecycle of hardware and software for businesses, and offers IT support services including remote help desk, data centers and on-site IT professionals. The company serves six of the top 10 Fortune 500 companies, and many SMBs.  ChannelE2E Says: Facts are facts. And those are facts.

2. Big Opportunity

  • The companies say: Together, Office Depot and CompuCom will be positioned to capture market share in a $25 billion, highly fragmented market as the first company to provide a nationwide, comprehensive network of enterprise-level tech services and products. ChannelE2E Says: We raise a skeptical eye toward Total Addressable Market (TAM) predictions, especially since so much of the traditional IT services market is in flux as dollars shift to public cloud services.

3. Boosting Store Profits

  • The companies say: CompuCom’s established SMB offering, Tech-Zone, will be placed within Office Depot’s nationwide retail footprint, providing immediate scale and driving traffic into Office Depot stores. Added services revenue and increased foot traffic will improve per-store profitability. ChannelE2E Says: Here again we’re somewhat skeptical. On a somewhat parallel note, Geek Squad hasn’t exactly made Best Buy a giant in IT services nor did it necessarily boost Best Buy’s retail success.

4. Cross Selling Opportunities

  • The companies say: Both Office Depot and CompuCom sales teams can capitalize on minimal customer overlap to quickly begin cross-selling a full suite of products and services, with an incentive structure focused on driving services revenue. ChannelE2E Says: True, but Office Depot’s core sales opportunities have been shrinking. This deal doesn’t suddenly reverse that reality — does it?

5. Enterprise Opportunities

  • The companies say: CompuCom will be the technology services platform for Office Depot, expanding CompuCom’s reach and enabling further efficiency initiatives in its core enterprise business focused on automation and innovation. ChannelE2E Says: Makes sense but careful of the hype. M&A execution at this scale is never easy.

6. Management Team:

  • The companies say: Since the arrival of Gerry Smith, who brings in-depth expertise in the technology sector, Office Depot has added several senior leaders, including chief marketing officer, Jerri DeVard, chief legal officer, N. David Bleisch and chief merchant and services officer, Janet Schijns, who collectively bring proven experience in services and demand generation, in order to unlock the full value of this combination. ChannelE2E Says: No doubt, that’s a talented braintrust. But again, merging an IT services giant with a retail giant won’t be easy…

Office Depot’s Own Shrinking Revenues

Take a closer look at Office Depot’s business and you see just how much pressure the company faces. For its Q3 2017, the company expects total reported sales to decline of about 7 percent to 8 percent including store closures.

The company has also also lowered its pre-M&A outlook for 2017, blaming recent hurricanes; lower back-t0-school store traffic; professional fees and other costs related to developing a strategy and transition to a broader omnichannel business services platform; and more.

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