6 Unlikely Rivals That Should Merge

By Ryan C. Fuhrmann | June 05, 2012 AAA

Slower economic growth is causing companies to get more creative in finding ways to grow value for shareholders. Some are looking to acquire market share or spin off divisions that have less appealing growth potential. Others are looking to overseas expansion and exposure to faster growing emerging markets. Fewer are looking to merge with archrivals, but it could represent a unique and compelling way to cut costs and combine resources committed to pursuing the same mission. Below are three pairs of rivals that operate in very similar businesses but are struggling to grow on their own. To revive their fortunes, they might want to swallow their pride and merge their operations.

SEE:
The Merger - What To Do When Companies Converge

Home Depot and Lowe's
Since the bursting of the
housing bubble, the residential construction industry has struggled to regain its footing. As the two largest home improvement retailers in the country, both Home Depot and Lowe's have experienced similar challenges to boosting their top lines. Merging the two do-it-yourself (DIY) giants might seem unlikely, but it could make sense. This year, Lowe's is projected to report sales of nearly $51 billion and Home Depot should log sales of around $74 billion.

Combined, this would be a $125 billion retail behemoth, yet it would still fall well behind the nearly $475 billion Wal-Mart is expected to report this year, with domestic sales contributing the bulk of its top line at more than $265 billion. By combining, the DIY leaders could drive harder bargains with key product suppliers and also cut corporate overhead to boost profits and wait for more favorable industry conditions.

SEE:
New Construction's Hidden Costs Can Burn Buyers

Best Buy and RadioShack
Best Buy is having a difficult time competing with the likes of Amazon and online rivals that don't have store overhead and don't always have to charge their customers sales tax. Consumers are also using Best Buy giant stores and impressive merchandise mix as a showroom to touch and feel products of interest, then they order them more cheaply online. RadioShack's predicament is similar in that many of its products can be purchased online. It also struggles to offer competitive prices, compared to Amazon and Best Buy, which have purchasing clout.

Best Buy would like to open smaller stores and is starting to push aggressively into selling smartphones. RadioShack currently offers thousands of smaller locations across the country and has also thought to sell mobile phones to boost its fortunes. Best Buy currently sports a market capitalization of above $6 billion and could easily snap up RadioShack and its market cap of less than $500 million.

SEE: Analyzing Retail Stocks

Dell and HP
Dell and Hewlett-Packard experienced rapid growth several years ago, when businesses and consumers were snapping up as many computer laptops and desktops as they could get their hands on. The market has slowed considerably over the past five years, and the past couple of years have seen consumers embrace smartphones and tablet computers over clunkier, more traditional computers.

Dell and HP have both looked to shift into tech services, such as IT consulting and product maintenance activities for corporations and government customers; but overall, slowing hardware sales are making it difficult for total sales to move steadily forward. In similar fashion to Home Depot and Lowe's, combining their existing operations could allow for better scale and help cut costs. Combining businesses with better growth and profit potential, such as services, storage and server divisions, and cloud computing units, could also help them better compete with purer play industry rivals such as EMC Corp and Accenture.

SEE: A Primer On Investing In The Tech Industry

The Bottom Line
Little market evidence currently suggests that a merger of the above rivals might happen any time soon. However, back in 2010 there was speculation that RadioShack was considering selling itself to a rival or private equity group and Best Buy was mentioned as a potential suitor. For the others, merging with rivals might be too difficult to stomach, but could easily make sense in a climate where growing sales has become extremely difficult. Product maturity could also make it extremely challenging to grow at levels acceptable to shareholders that remember much happier days of expansion and steadily improving profits.

At the time of writing Ryan C. Fuhrmann was long shares of HP but did not own shares in any of the other companies mentioned in this article.

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