OfficeMax, Office Depot Plunge After Merger Details Announced

What a difference a day makes. Yesterday, news of the merger between OfficeMax (OMX) and Office Depot (ODP) was enough to send their stocks soaring, rising 21% and 9.4%, respectively.

Today, with the official announcement, both stocks are in the red, with OfficeMax down 5% and Office Depot falling 15%.

The day started very differently, with early rises building on yesterday’s gains, but you can see the drop occur right about the time the announcement was released:

FactSet

(Click for larger image.)

These are�the actual details of the merger:

Boca Raton, Fla.-based Office Depot and Naperville, Ill.-based OfficeMax said holders of OfficeMax shares will receive 2.69 shares of Office Depot for every OfficeMax share they own.

That’s equal to about $13.50 per share, based on Office Depot’s $5.02 per share closing price Tuesday, giving the deal a total value of about $1.2 billion. OfficeMax had about 86.7 million shares outstanding as of Oct. 26, according to SEC filings. It is a 3.8 percent premium to OfficeMax’s closing price of $13 on Tuesday and a 26 percent premium to OfficeMax’s closing price on Friday, before word of negotiations leaked out.

At the latest, Office Depot shares are trading at $4.23 each, which values OfficeMax shares at $11.38 (they’re trading right now at $12.32) — and which, unless my math is off — values the deal at about $990 million.

So what’s with the change in sentiment? Perhaps the way the deal was announced put off some investors — apparently, the release wasn’t ready, and came out early as did OfficeMax’s latest earnings. But there’s more:

Instead of announcing a merger where the governance of the newly combined company was clearly established, the companies punted. OfficeMax and Office Depot said they would split the board equally, drawing directors from each side and have �governance rights from each of the two companies,� whatever that means. In other words, they split the governance, but offered few additional details. The parties didn�t even appear agree on where the headquarters, since they didn�t announce the location.

The parties also couldn�t agree on a chief executive. Instead, a selection team will be formed drawing from an equal number of independent board members from both companies. They will then select the chief executive…

This could be a recipe for disaster. Without a clear path on governance or even leadership, the combined company risks severe in-fighting as the two chiefs battle it out for the top position. And don�t think this won�t happen. Just look at what happened in the merger between�Duke Energy�and Progress Energy. The chosen chief executive from Progress, William D. Johnson, was ousted in a boardroom coup in favor of the head of Duke, James E. Rogers.

Not the best start to a deal that both companies see the key to some sort of guaranteed future in what’s a tough, tough world for bricks-and-mortar office supplies retailers.

Maybe investors are taking heed of the advice put out in a note by analysts at BB&T Capital Markets:

While we believe such a tie up would make sense from a strategic perspective (e.g., increased scale/leverage with suppliers, the long-awaited rationalization of the North American office supply superstore market, myriad synergies), we think the uncertainties surrounding such a deal (e.g., structure and price, which management team would control the combined company, length/difficulty of the integration process) make it prudent to head to the sidelines.

Meanwhile, industry leader Staples (SPLS) is also taking a hit today, down 6%. The stock rose just over 13% yesterday.