Can Activists Save the Office Products Business? No

Can the activist Starboard Value L.P. fund run Office Depot Inc. (NYSE: ODP) better than its management or the managements of competitors Staples Inc. (NASDAQ: SPLS) or Office Max Inc. (NYSE: OMX) have been able to run their firms? No. The industry lost its chance to be viable a long time ago.

Starboard Value has taken a 13.3% piece of Office Depot, according to The Wall Street Journal. Starboard believes that the company can make more cuts than it already has over the past several years, and that these actions will help earnings.

What Starboard has not admitted to itself is that the independent office products retailers have been ruined by their own overexpansion, but more importantly by larger retailers, including the Sam’s Club division of Wal-Mart Stores Inc. (NYSE: WMT) and Costco Wholesale Corp. (NASDAQ: COST). These two companies have built large operations that cater to small business owners. Each has marketing muscle and balance sheets that the three relatively small office products companies can only dream about.

In addition, the present and future of the office products industry have been undermined by Amazon.com Inc. (NASDAQ: AMZN), which has hurt the prospects of almost every bricks-and-mortar retail chain in America. Amazon sells tens of thousands of office products. Office Depot and its peers probably suffer from the new shopping technique of buyers finding products in stores and then purchasing them on Amazon.com for lower prices, as well as free shipping. And Amazon rarely has to put anything on back order.

Public companies may be able to fool all investors some of the time and some investors all of the time, but they cannot fool all investors all of the time. Staples is the largest of the three office products companies by far. It should have the advantage of scale. Its shares are down 38% over the past two years while the Nasdaq is higher by 35% for the same period. This stock price decline is an indication that investors see how unlikely is a recovery in the sector. Office Max and Office Depot shares are off as much as Staples, but would be down more if it were not for rumors of institutional investment and M&A activity.

The store-based office products business, at least as far as the pure play companies go, lost its ability to be more than marginally profitable long ago.

Douglas A. McIntyre