Why Office-Supply Shares Surged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of office-supply retailers surged today on a report that OfficeMax (NYSE: OMX  ) and Office Depot (NYSE: ODP  ) are in merger talks.

So what: Citing unidentified sources close to the matter, The Wall Street Journal said an announcement may come as early as this week, triggering plenty of excitement over the cost synergies a deal could create. Both OfficeMax and Office Depot have struggled in recent years to compete with industry king Staples (NASDAQ: SPLS  ) , as well as increasing online threats from the likes of Amazon.com (NASDAQ: AMZN  ) , but a merger could at least save roughly $500 million in expenses, according to analyst estimates.

Now what: I'd be cautious about buying into this buyout buzz. Back in 1997, the Federal Trade Commission blocked Staples' attempt to gobble up Office Depot on anti-competitive concerns. So an OfficeMax-Office Depot combo is far from a sure thing even if the rumors are true. While the FTC is more likely to allow a deal between the No. 2 and No. 3 players than if top dog Staples was involved, the risk/reward trade-off at this point -- particularly after today's huge surge -- doesn't seem all that attractive.


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