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Mergers, acquisitions, divestitures, and other restructurings (M&A) have arguably existed as long as the history of business. The processes of merging, purchasing, divesting entities or assets, and restructuring businesses are all major methods of providing growth and value to both large and small corporations alike. The Wall Street–coveted analysis of understanding the drivers leading to growth through M&A has remained somewhat of a mystery to the public, until now.

Although M&A activity has its origins arguably with the dawn of commerce, M&A as a greater business strategic phenomenon began in the nineteenth century in a period known as “The Great Merger Movement.” It was at this time that very small businesses were consolidated into large public entities that dominated the markets. Companies like U.S. Steel, International Paper, and Standard Oil created near-monopolistic entities. Today M&A has evolved and changed with regulation, market, and industry. Despite the details of its evolution and progress, M&A still proves to be a key driver for business growth.

A merger or acquisition is the purchase of or combination of at least one business asset or entity into another. The definition of mergers and acquisitions, although not directly stated, often incorporates divestitures and other restructurings as well, which is why I've expanded the title of the book to Mergers, Acquisitions, Restructurings, and Other Divestitures. Although the core focus of the book from a technical perspective will be on mergers, it is important to note the other aspects of M&A, which we will define in Chapter 1. This is a book in a series, and subsequent books will dive into cases that reflect the other areas, including divestitures and restructurings. Mergers and acquisitions come in varying forms, the analysis of which helps determine the impact of said purchase, combination, divestiture, or other restructurings on the financial entities involved. Such analyses are important for establishing posttransaction value and helping to determine if the transaction is potentially worth the efforts.

This book seeks to give an investor the fundamental tools to help analyze such transactions and determine and interpret the results. These fundamental tools are used by investment banks and private equity funds worldwide. We will evaluate the potential merger of Office Depot and OfficeMax, utilizing the exact same methods used by the bulge bracket investment banks and top private equity firms. We will also step through the framework behind various types of M&A transactions and give you a conceptual understanding of the analyses. Using the model, you will learn how such transactions are implemented. We will have you step into the role of an analyst on Wall Street to give you a firsthand perspective and understanding of how the modeling process works, and to give you the tools to create your own analyses. This book is ideal for both those wanting to create their own analyses and those wanting to enter the investment banking or private equity field. This is also a guide designed for investment banking or private equity professionals if they need a thorough review or simply an M&A modeling refresher.

The Office Depot and OfficeMax Merger Case Study

Naperville, Ill. and Boca Raton, Fla. – OfficeMax Incorporated (NYSE: OMX) and Office Depot, Inc. (NYSE: ODP) today announced the signing of a definitive merger agreement under which the companies would combine in an all-stock merger of equals transaction intended to qualify as a tax-free reorganization. The transaction, which was unanimously approved by the Board of Directors of both companies, will create a stronger, more efficient global provider better able to compete in the rapidly changing office solutions industry. Customers will benefit from enhanced offerings across multiple distribution channels and geographies. The combined company, which would have had pro forma combined revenue for the 12 months ended December 29, 2012 of approximately $18 billion, will also have significantly improved financial strength and flexibility, with the ability to deliver long-term operating performance and improvements through its increased scale and significant synergy opportunities.

Under the terms of the agreement, OfficeMax stockholders will receive 2.69 Office Depot common shares for each share of OfficeMax common stock.

“In the past decade, with the growth of the internet, our industry has changed dramatically. Combining our two companies will enhance our ability to serve customers around the world, offer new opportunities for our employees, make us a more attractive partner to our vendors, and increase stockholder value,” said Neil Austrian, Chairman and Chief Executive Officer of Office Depot. “Office Depot and OfficeMax share a similar vision and culture, and will greatly benefit from drawing on the industry's most talented people, combining our best practices and realizing significant savings. We are confident that this merger of equals represents a new beginning for our two companies and will allow us to build a more competitive enterprise for the long term.”

“We are excited to bring together two companies intent on accelerating innovation for our customers and better differentiating us for success in a dynamic and highly competitive global industry,” said Ravi Saligram, President and CEO of OfficeMax. “We are confident that there will be exciting new opportunities for employees as part of a truly global business. Together, we will have the opportunity to build on our strong digital platforms and to expand our multichannel capabilities to better serve our customers and to compete more effectively. Importantly, this merger of equals transaction will provide stockholders of both companies with a compelling opportunity to participate in the long-term upside potential of the combined company.” (OfficeMax, Office Depot press release, February 20, 2013)

In this press release dated February 20, 2013, Office Depot and OfficeMax announce a proposed merger.

OfficeMax provides office supplies and paper, print and document services, technology products and solutions, and furniture to businesses and consumers. OfficeMax consumers and business customers are served by approximately 29,000 associates through OfficeMax.com, OfficeMaxWorkplace.com, and Reliable.com, more than 900 stores in the United States and Mexico, and direct sales and catalogs.

Office Depot provides office supplies and services through 1,628 worldwide retail stores, a field sales force, top-rated catalogs, and global e-commerce operations. Office Depot has annual sales of approximately $10.7 billion, employs about 38,000 associates, and serves customers in 60 countries around the world.

What is the purpose and viability of such a merger? How will the merger be funded? What happens to each entity involved? What happens to the shareholders? What are the potential impact, benefits, and drawbacks to such a merger? There are technical analyses used by Wall Street analysts to help answer such questions. We will walk you through the complete merger analysis as a Wall Street analyst would.

It is important to note that the modeling methodology presented in this book is just one view. The analysis of OfficeMax and Office Depot and the results of that analysis do not directly reflect my belief, but rather, are a possible conclusion for instructional purposes based only on limiting the most extreme of variables. There are other possibilities and paths that I have chosen not to include in this book. Many ideas presented here are debatable, and I welcome the debate. The point is to understand the methods and, further, the concepts behind the methods to equip you properly with the tools to drive your own analyses.

How This Book Is Structured

This book is divided into three parts:

1. Introduction

2. M&A Analyses

3. Office Depot/OfficeMax Merger

In Part One, we explain the M&A framework from a high level, overviewing types of transactions and the M&A process. We will also provide a refresher on the core financial statements, which will help you understand concepts demonstrated in Parts Two and Three.

Part Two will step through the process of an equity raise, a debt raise, a simple asset acquisition, an asset divestiture, and an accretion/dilution analysis. In each analysis we will illustrate the concepts and model example situations. These high-level analyses help us to understand the importance of key variables and are crucial to understanding how various assumption drivers affect potential results. The understanding of these analyses will help conceptualize the mechanics of a fully integrated merger, which will be detailed in Part Three.

In Part Three, we build a complete merger model of Office Depot and OfficeMax. We utilize the companies' historical performance and step through techniques to make accurate projections of the business's future combined performance. The goal of this part is not only to understand how to build a fully integrated merger model but also to understand the merger integration concepts to best interpret the merger results, understand how various drivers affect the analysis, and be able to create a transactional model based on any unique situation.

The book is designed to have you build your own merger models step-by-step. The model template can be found on the companion website associated with this book and is titled “NYSF_Merger_Model_Template.xls.” To access the site, see the “About the Companion Website” section at the back of this book. If you have no prior technical experience in the subject of modeling, I would recommend reading the book that precedes this one, entitled Financial Modeling and Valuation: A Practical Guide to Investment Banking and Private Equity, which steps through the building of a core model on Walmart.