10 Things You Need To Know About Office Depot's Eye-Popping CompuCom Acquisition

Changing The Business Services Game

Office Depot has struck an agreement to acquire systems integration powerhouse CompuCom for approximately $1 billion, the company said Tuesday, as the mega-retailer shifts toward the business and technology services industry.

By joining forces with the Charlotte, N.C.-based solution provider, which works with six of the top 10 Fortune 500 firms, Office Depot attains an instant, established IT services presence in North America – a "fragmented" market valued at $25 billion, according to the office supplies specialist.

"That's a big deal," said Martin Wolf, president of martinwolf M&A Advisors of Walnut Creek, Calif., one of the top channel investment advisory deal-makers. "CompuCom's business has changed over time. But they have a big robust services business, and that's interesting. Any transaction has risks. They're clearly identified. And if they execute well, they'll be fine."

With the deal expected to close by the end of the year, CRN highlights 10 aspects of this potentially game-changing transaction that the channel needs to know.

A Financial Win At The Outset?

Office Depot indicated that the CompuCom acquisition will be accretive in the first year after closure of the deal, which also creates an estimated $40 million in annual cost synergies between the two companies within two years. The acquisition adds revenue of about $1.1 billion to Office Depot's business portfolio.

However, Office Depot’s stock dropped 19 percent to $3.72 per share following the announcement of the deal Tuesday evening, in which the retailer lowered its guidance for the fiscal year 2017. Office Depot cited lower early fall sales and store traffic than normal, ’temporary’ higher supply chain costs and hurricane damage caused in Texas, Florida and Puerto Rico among the influencing factors. Office Depot stock has rebounded to $3.90 per share as of noon Wednesday.

A Snug Fit In Office Depot's Sales Platform

As its North American reach expands, CompuCom will continue to prioritize its core enterprise business as the tech services platform for Office Depot. The two sides believe they'll be able to immediately capitalize on the lack of significant customer overlap via cross-selling. Office Depot said there will be a services-revenue focused sales incentive system.

CompuCom Has Big-Time IT Manpower And An Established Enterprise Footprint

CompuCom employs 11,500, including a team of approximately 6,000 North American-based technicians, and has been in business since 1987. In that time, the systems integrator has forged long-term relationships with several of the largest companies on the continent. CompuCom specializes in managed services, such as help desk, data center and on-site IT support services, as well as infrastructure solutions, consulting and product procurement.

CompuCom Has Hit Rough Water In Recent Years

The solution provider has seen revenue sharply decline since 2014, when it ranked as highly as No. 23 on the CRN Solution Provider 500. Moody's Investor Services has downgraded CompuCom's credit rating twice in the past two years, with the most recent change coming in June 2016, when Moody's assigned the company a Caa2 rating. Four different CEOs also have taken the helm in the past four years, including IT Hall of Fame member Jim Dixon.

Leadership, Lenovo Links

Current CompuCom CEODan Stone (pictured) has been in his current role since November 2016. Before that, he filled a number of high-profile positions at Lenovo, including chief strategy officer and president of Lenovo Brazil and Lenovo Latin America. Office Depot CEO Gerry Smith also spent several years at the PC maker, most recently serving as COO and executive vice president until last February. Both were at Lenovo from 2007 to 2015.

The CompuCom deal also comes less than three months after former Verizon channel chief Janet Schijns joined Office Depot as senior vice president of services, copy, print, and tech.

A Separate CompuCom Deal Had Reportedly Been On The Table

CRN reported in August that CompuCom was in talks with Pomeroy to create a 15,500-employee, $3.1 billion solution provider powerhouse. Hebron, Ky.-based Pomeroy is ranked No. 42 on the 2017 CRN Solution Provider 500, while CompuCom had earned Leader status in Gartner's latest Magic Quadrant for North American managed services.

Wolf told CRN Tuesday that the Office Depot acquisition offers CompuCom greater sales and marketing opportunity than it would have achieved by merging with Pomeroy.

Office Depot Isn't The First Retailer To Dip Its Toes Into The IT Space

Staples bought managed service provider Thrive Networks in 2007 and electronics giant Best Buy purchased mindShift in 2011. Both of those big retailers sold their respective MSPs in 2014. More recently, Best Buy has added in-home advisers, tech support and services personnel to help consumers solve their tech problems at home. Similarly, furniture retailer IKEA bought freelance service provider Task Rabbit so it could provide a variety of services outside its stores.

Office Depot Faces The Same Challenges Many Retailers Do

The Boca Raton, Fla.-based office supplier reported a preliminary sales decline of 7 percent to 8 percent for the third fiscal quarter 2017, which includes store closures. Office Depot also saw between a 5 percent and 6 percent decline in comparable retail store sales. The company, which attained revenues of $11 billion in 2016, employs 38,000 and operated 1,400 retail stores in North America.

Plans For Tech-Zone

CompuCom’s SMB-tailored solution Tech-Zone, a walk-up IT services center, will be moved into Office Depot storefronts nationwide in an attempt to broaden Tech-Zone's North American footprint and increase foot traffic in Office Depot retail locations, said the company, which is hoping to improve store profitability.

’Together with Office Depot we can create a distinctive offering for our enterprise and SMB customers and accelerate our growth,’ Stone said in a statement.

Dealing With CompuCom's Debt

Private equity firm Thomas H. Lee Partners, former controlling owner of CompuCom, will hold an 8 percent equity position in Office Depot following completion of the sale. Office Depot will finance the deal with debt and by issuing 45 million common shares to Thomas Lee. In addition, Office Depot said it plans to take out a separate $750 million loan and refinance CompuCom's debt.