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.

Related Articles
  1. Stock Analysis

    Analyzing Microsoft's Return on Equity (ROE) (MSFT)

    Discover a detailed analysis of Microsoft's historical return on equity, and learn how its ROE stacks up to its competitors in the tech industry.
  2. Budgeting

    Trunk Club Review: Is It Worth It?

    Take a close look at one of the best-known online clothing services in the country, and determine whether it's a good fit for your style and budget.
  3. Budgeting

    HelloFresh Review: Is It Worth It?

    Discover one of the world's most successful meal subscription services, and learn more about how the service operates and what it costs.
  4. Budgeting

    Beer of the Month Subscription Review: Is It Worth It?

    Learn how you can get access to some of the best craft beers produced in the world, delivered right to your front door every month.
  5. Budgeting

    Just the Right Book Review: Is It Worth It?

    Take an in-depth look at Just the Right Book, a subscription service that delivers personalized book selections based on your reading history and preferences.
  6. Entrepreneurship

    ‘Happy Birthday to You’ Belongs to Everyone Now

    A class action lawsuit over the copyright to the iconic American song “Happy Birthday to You” ends by placing the ubiquitous ditty in the public domain.
  7. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  8. Budgeting

    The Honest Company Bundles Review: Are They Worth It?

    Learn more about The Honest Company and its bundle subscription services, which deliver discounted diapers, formula and other baby products to your doorstep.
  9. Stock Analysis

    The Top 10 Small-Cap Stocks for 2016 (ATI, ARCB)

    Discover the top 10 small-cap stocks expected to grow in 2016, complete with summaries and growth outlooks for each company and its expected price target.
  10. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center