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Depot Makes $1 Billion Tech Move

Thursday, October 5, 2017  
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Office Depot is to acquire IT provider CompuCom Systems for around $1 billion.

 

Depot has called it the first step in a strategy to become a business services platform.

 

Texas-based CompuCom boasts a recurring revenue stream of approximately $1.1 billion with a wide offering of managed technology services. It procures, installs and manages the lifecycle of hardware and software for businesses. Once combined, it is expected to rake in over $40 million in estimated annual cost synergies within two years, and to be accretive by the first year.

 

Under the terms of the acquisition, CompuCom is to be bought from Boston-based private equity firm Thomas H Lee Partners (THL), which includes the repayment of debt and the issuance of new shares. Following the transaction, THL will hold around 8% of Office Depot’s total share capital. 

 

The purchase looks to be a key part of Depot’s transformation as it shifts focus away from retail and transactional products, and expands into the more valuable workplace services. Bringing an IT provider on board opens up a fragmented $25 billion market and would make it the first company in the US to provide a nationwide network of enterprise-level tech products and services. The proposed model also fits well with its omnichannel platform, said Depot, particularly its last-mile footprint.

 

CompuCom’s established SMB offering Tech-Zone is to be placed within some of Depot’s 1,400 retail locations. This is expected to improve per-store profitability as added services sales and foot traffic increase.

 

“Technology is the office supply of the future,” said Office Depot CEO Gerry Smith, who joined the company earlier this year from tech giant Lenovo (see Top 100 entry). His appointment in February was followed by a number of other additions to the management team with strong services and demand backgrounds.

 

“Acquiring CompuCom is the first step in this new strategic direction,” continued Smith.

 

“The combination of CompuCom’s enterprise IT services with our millions of customers and approximately 1,400 distribution points gives us the credibility and scale to build a sustainable platform and stand apart from the competition.”

 

Indeed, Depot’s biggest rival right now is Amazon, which doesn’t currently have an IT services offering, so this diversification could be vital if it is to keep the e-tailer at bay.

 

It also brings to mind a similar move by Staples which launched its own technology solutions division in 2010. But it has since struggled to take off as planned, as it failed to convince customers of its ‘credibility’ as something more than an office supplies retailer. It seems Depot is avoiding this pitfall by snapping up an already well-established player, rather than trying to build one from within. Speaking to OPI, Depot confirmed it would be keeping the CompuCom and TechZone branding.

 

In the release, CompuCom CEO Dan Stone added: “Together with Office Depot we can create a distinctive offering for our enterprise and SMB customers and accelerate our growth. The workplace has truly moved to a digital environment with the average worker having over four connected devices.” 

 

Alongside the acquisition announcement, Office Depot also issued a profit warning, lowering its outlook for 2017. 

 

Preliminary Q3 results showed a 7-8% decline in sales, with adjusted operating profit expected at around $125-$135 million.

 

It now expects adjusted operating profit for FY2017 to be between $400-$425 million, compared to previous estimates of $500 million.

 

Depot said trading was hit by the hurricanes which devastated parts of the US and the Caribbean, particularly the states of Texas and Florida and the island of Puerto Rico, where a significant concentration of its retail and BSD customers are located.

 

This was preceded by a disappointing back-to-school period, as well as temporary high supply chain and development costs.

 

“We have moved quickly to make the necessary management and operational changes to address these performance issues, while investing in our services platform to prepare for this transaction with CompuCom,” assured Smith.

 

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