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Office Depot employees face a new year of changes

Office Depot Inc.Restaurant and Catering IndustryOfficeMax Inc.FinanceRestructuring and Recapitalization

Boca Raton-based Office Depot had a busy year in 2013, with most of the year spent completing its $1.2 billion merger with OfficeMax. For South Florida employees, the company's December 10 decision to base the headquarters in Boca Raton was a major hurdle.

Yet the nation's No 2. office-supply company, with 66,000 employees, hasn't seen anything yet.

New chief executive Roland Smith and his team "has to move quickly," said merger specialist Laura Kozloski Hart.

The next steps and strategic moves include appointing key staff members, realizing up to $600 million in cost savings from the combination, and closing redundant Office Depot or OfficeMax stores.

Hart said typically companies that are consolidating headquarters and other operations make the painful job cuts within the first 100 days. Many of those are likely to be in Illinois to avoid relocation costs, she said.

Office Depot won't need two human resources teams, information technology staffs or other headquarters-type jobs, for example.

"You take good care of them, setting up outplacement services, and then [survivors] don't feel guilty and can focus on what they have to do," said Hart, who teaches about mergers and acquisitions for Barry University in South Florida.

The "new" Office Depot generates $17 billion in sales, based on 2012 numbers, but is struggling both to increase sales and generate profit in an industry that has shrinking demand and broader competition.

In November, Wall Street cheered the announcement of Smith, a turnaround specialist, as Office Depot's new CEO, sending the stock up 3.3 percent within a day of that selection. Smith, 59, has accomplished turnarounds at Arby's and Wendy's restaurant chains, and led restructuring at American Golf Corp. and AMF Bowling Worldwide.

But Smith and his board have a lot on their plate, with decisions that will impact more than 3,700 headquarters employees in Florida and Illinois, as well as store employees who may see some stores closed.

Hart said many of the cost-cutting decisions were likely made before Smith was named chief executive in November. The company had to know its integration costs before settling on a price to acquire OfficeMax, of Naperville, Ill., she added.

Kelly Smallridge, president of Palm Beach County's Business Development Board, said Office Depot's employment likely will be in flux for awhile. But she said the future looks bright for expanded employment in the county, now that Office Depot has selected Boca Raton as its headquarters.

"We won't know for a while what their numbers are. But with the new CEO and his ability to do a turnaround, I would think Office Depot would also grow. They certainly didn't pick Boca Raton to get smaller," she said.

Office Depot also has a 2006 economic incentives contract it signed with Florida to maintain at least 1,750 jobs in the state. In an effort to retain the headquarters, a new incentives contract is in the works, county and city officials have said.

In pitching its merger with OfficeMax, former Office Depot management led by then-CEO Neil Austrian argued the combination would enhance financial performance, increase competitiveness, accelerate innovation, and leverage employees with "deep industry knowledge."

But analysts have said they are concerned that some of those experienced employees are leaving the organization. While some key executives named to Smith's staff last week are familiar Office Depot names, many others have left in recent months. The company said it would launch a search for new top executives to oversee strategy and innovation, retail and e-commerce.

Mick Lasher, a long-time executive recruiter in South Florida, said the new CEO will be looking for the best talent available to lead the new Office Depot — not necessarily choosing from the Boca Raton staff or OfficeMax's workforce.

His selections "won't be necessarily the best of the two," he said. Smith is likely to bring in key players he has worked with in the past, he added.

And on Dec. 2, Smith did just that by hiring Stephen Hare as chief financial officer. Smith and Hare have a long history turning around companies together, at The Wendy's Co., where Hare was executive vice president and CFO; Arby's Restaurant Group and AMF Bowling Worldwide.

For consumers and store employees, decisions about real estate and store closures are likely to take some time, as leases come up for renewal. Warehouse and distribution centers also could be affected, as both companies do business across the country.

There are a total of 2,000 Office Depot and OfficeMax stores in North America, compared with about 1,900 stores for prime competitor Staples, said Liang Feng, analyst for Morningstar. Some Office Depot and OfficeMax stores are within 2 miles of each other in key markets.

"The office product retail sector overbuilt capacity before the recession," Feng said.

New management also will have to boost Office Depot's performance to the satisfaction of major investors.

Activist shareholder Starboard Value, whose associates now hold two seats on Office Depot's board, previously criticized Office Depot for its "underperformance" relative to Staples.

From 2007 to 2012, the Office Depot store count declined from 1,370 to 1,235, yet its general and administrative expenses actually increased by $27 million during that same time period, according to Starboard's filing with securities regulators.

Some analysts have said Staples, which is No. 1 in market share, is the winner in Office Depot's merger with OfficeMax because it eliminates a major competitor. But the entire office-supply sector faces increasing competition from online retailer Amazon and discount retailers — that was the prime reason the Federal Trade Commission didn't object to the marriage.

Ultimately, proof of success of Office Depot's restructuring actions and new strategies will be seen in the company's stock price, which has bounced from a 52-week low of $3.18 a share to $5.31 a share at Thursday's close.

Smith's employment contract, disclosed in securities filings, includes a potential $2 million bonus for meeting certain undisclosed performance targets by March 14.

"He has a lot to do. The new guy always has to bring in something great," Hart said.

mpounds@tribune.com or 561-243-6650

 

 

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