By William A. Foster, IV
In business, the competition will bite you if you keep running; if you stand still, they will swallow you. — Semon Knudsen
Life between a rock and hard place is a place many individuals and organizations try in principal to avoid at all cost. At the moment the rock and hard place exist on the landscape of the internet and traditional brick and mortar space, with Amazon being the retail rock on the internet and Wal-Mart the retail hard place of brick and mortar. Leaving other major retailers scrambling for cover and being squeezed mercilessly like fresh oranges during a summer morning in the Hamptons.
Office Depot and Office Max in February agreed to a $1.17 billion merger. It was essentially a move for survival. However, if the two assumed this in itself would be enough to survive, then they were simply extending life support not getting off it. To get off and compete they are going to have to be bold to the point of it becoming a great success or great disaster. If they are going to do so they need to act fast because the moment Amazon is able to completely implement its plan to deliver products within hours of online ordering the game is over. Therefore, let us look at the strategic acquisitions that would make sense immediately for this company that could rival Amazon and Wal-Mart’s scale presence.
Barnes & Noble would at the top of my list for the company’s next acquisition. Books are Amazon’s core business still. They are on pace to control almost one-third of the e-book sales market and probably already control at least this much if you combine e-book and print book sales which makes Barnes & Noble a key acquisition. It would give Office Depot/OfficeMax a key foothold onto Amazon’s turf. Currently, Barnes & Noble barely has a market capitalization above $1 billion making it a prime takeover target and affordable. The key part of Barnes & Noble is the Nook, which is the company’s e-reader to rival Amazon’s Kindle. It has struggled to challenge the Kindle primarily because Barnes & Noble simply does not have the R&D or marketing to encroach on Amazon with its current financial situation. Folding it into the new company would allow it to close a number of stores and make other necessary cuts to free up capital it could reinvest into the aforementioned areas. The book inventory of Barnes & Noble would also allow Office Depot/OfficeMax to make real inroads on Amazon’s turf.
The next acquisition will prove to be a bit more difficult but just as vital and that is Best Buy. Their market capitalization is hovering around $10.5 billion and would require Best Buy to be the acquiring company but regardless of how the merger/acquisition happens it needs to happen. Again, we would see a number of stores closed and other cuts. It would also allow the new company to create its own retail front with retail experience that could be reinvented to be more consumer friendly. Now, the new company could feature the Nook even more and block the Kindle’s presence. A move that Wal-Mart has already done to slow down Amazon’s encroachment. Best Buy’s Geek Squad could be further developed as a business service through Office Depot/OfficeMax commercial accounts to integrate customers deeper with the company. The electronics aspect of Best Buy then would have more cross sell opportunities between commercial/retail consumers. Wal-Mart has already established a strong foothold in electronics and Amazon is coming on fast. The casualty that was Circuit City was simply a foreshadow of what will happen to Best Buy if it does not find a dance partner and soon.
An examination of the past five years shows just how bad things are getting for Best Buy and Barnes & Noble as Amazon continues its expeditious growth. In the graph below we see over the past almost five full years Amazon’s stock price has risen almost 300 percent, while Best Buy and Barnes & Noble are down almost 30 percent over the same period. This is saying something given that most stocks have benefited greatly from the quantitative easing of the Federal Reserve as the chart also shows even the S&P 500 up over 20 percent over the same period.
The proverbial ground is shifting under retail. It is shifting so fast that we may have passed the point of no return but I believe they still have a chance if they can pull off a merger and acquisition of this magnitude. There is no doubt that bringing together four companies, two which are commercial focused and two which are more retail oriented will be no easy task. The possibility of culture clash is heightened in this type of unification. Especially, given that time is of the essence and there is risk for not properly vetting through making sure the t’s are crossed and i’s dotted. However, there is no doubt what awaits this group of companies if they try and remain independent niche companies. Instead of standing still as they are now and in danger of being swallowed whole, maybe they can get into sprint mode and start to bite back at the competition.
Disclaimer: There is no ownership of any companies mentioned in this article by myself, my business, or my family as of this article’s publishing.
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