The landscape of the office supply industry is set to be significantly altered by the announcement of the merger between Office Depot and Staples. As is usually the case with company mergers and acquisitions, the purchase of Office Depot by Staples brings significant questions for both investors and customers.
These questions have arisen in large part simply because company mergers aren’t always successful. In fact, some large company mergers and acquisitions result in drastically negative outcomes for the resulting company and its customers.
What Have we Learned From the Past?
Kmart and Sears
In 2005, Sears Chairman Eddie Lampert decided to merge with Kmart in an attempt to diversify the company’s offerings. Unfortunately, the move didn’t end up working the way Lampert and shareholders planned: The New York Times reported that Sears’ revenue dropped over 10% in the four years after the merger. During the same time period, major competitors like Target and Wal-Mart were able to sustain double-digit revenue growth.
AOL and Time Warner
The 2000 merger between major media company Time Warner and America Online, the ISP king of the 1990s, was expected to create a media powerhouse with the resources needed to deliver content to people in more places than ever before.
Unfortunately, the two companies never meshed well together, and the results were disastrous. Shareholders lost some $200 billion in revenue, and Time Warner decided to drop AOL from its name. AOL has spun off as its own company beginning in 2009. Today this merger is known as one of the worst in media history.
Quaker and Snapple
In 1994, major foods company Quaker acquired the fruit drink company Snapple for $1.7 billion. Snapple had performed well during the early part of the 1990s, and Quaker was hoping to capitalize on the growing juice market. However, after botching distributor relationships and making some serious marketing missteps, Quaker sold Snapple less than three years later for just $300 million.
As you have already noticed, some mergers have disastrous outcomes. But why do cases like these occur so frequently? There are a few common elements of company mergers and acquisitions that cause negative outcomes for customers at the resulting company.
What are the Drawbacks of Big Company Mergers and Acquisitions?
The biggest issue with the merging of two large companies is that it results in an even larger entity, which ends up magnifying some of the problems that customers at larger companies face. These issues include:
1. Higher Prices
In a commodity market in which most products are the same, like office supplies, stores have little choice but to differentiate based on price. However, when the industry has fewer players and is no longer competitive there is less pressure for cheaper prices. As such, it is very common for prices to increase in a less competitive industry. In the case of Office Depot and Staples, there is already some concern among business customers that the merger will result in higher prices for corporate accounts.
2. Lost Information
As two companies merge and data is shifted around, it is not surprising that important customer information can be lost when systems are replaced. For example, things like rewards points or loyalty discounts that were once honored could no longer be valid by the new conglomerate company. This could equate to a big loss for some accounts that may have heavily relied upon their bonus points for expensive orders.
3. Weakened Customer Service
The joining of two large companies often means many departments will get shifted around. Personalized service or strong relationships with account managers are often severed during this churn, which causes a headache, as customers have to completely re-educate their new representatives about their business model. Also, after the consolidation process one account manager could now be responsible for a much larger territory, reducing the one-on-one time once received.
4. Closing Locations
There is often redundancy when two companies merge. The most customer facing redundancies are overlapping store locations. During the consolidation process, brick and mortar locations may close. With the once convenient storefronts gone, customers will face a much longer trip to the closest alternative, costing more time and money.
It’s too early to tell what will come of the Staples & Office Depot merger, as the deal is yet to be approved by governing bodies. Customers of large entities like these that are merging or will be soon should keep in mind the serious risks that come with doing business with these kinds of companies and prepare for a very different customer experience.