In a surprise transaction, Office Depot announced the acquisition of U.S.-based CompuCom, an end-user computer specialist. The price is significant: ~$1bn, including $750m in cash and 45m shares of Office Depot, with the seller, PE Thomas H. Lee Partners, owning 8% of the share of Office Depot. Despite revenues of $10.6bn, Office Depot has a market cap of just ~$2bn.

With the acquisition, Office Depot expects to add $1bn in annual revenue and deliver $40m in cost savings within two years. The real value is deemed to be in projected longer-term revenue synergies.

Founded in 1987, CompuCom has historically specialized in break-fix services, with 6k of its 11.5k employees being field technicians. The company services around 5.15m users (6.4m desktop/laptops and 1m mobile devices), across 57k locations. 2016 revenues were $1,086m, with an EBITDA margin of 6.4%.

CompuCom also leads (with Getronics) the Global Workspace Alliance (GWA), an alliance of several IT providers, offering workspace services including field and remote services in over 90 countries globally. Key GWA capabilities include 38,000 employees, 9.9m serviced PCs, and 6m users supported onsite.

Having sold its European operations, Office Depot is focusing on North America. After its failed merger with Staples last year, the company has a new CEO, Gerry Smith, who joined from Lenovo earlier this year. Although a program of store closures continues, and revenues on a like-for-like basis continue to decline in mid-single digits, he has secured a number of significant senior leadership appointments, including Janet Schijns (who left Verizon somewhat unexpectedly in July to head Office Depot’s services division), and a new CMO, Jerri Devard, who left ADT Corp. It is now evident that these appointments were part of a broad strategic transformation plan to evolve Office Depot’s positioning from being seen primarily as a retailer to a company that provides integrated technology services to the SMB market. Gerry Smith, in an interview with the Wall Street Journal mentioned “our goal is to grow the services piece faster. This is a necessary pivot for us to be a highly valued company in the future.”

The acquisition of CompuCom puts tech support/field services back into the spotlight, a capability that has largely been divested by most IT infrastructure management services giants, the latest example of this being the divestment by Atos in 2016 of its field services in the U.S. and France. Given the competitive nature of field service tech support, most activity is now done by small to mid-sized specialist firms. It is not yet clear how Office Depot will bring innovation to this service with Compucom.

The big advantage that Office Depot will have is its ability to cross-sell CompuCom’s desktop support services through its network of 1.4k stores across the U.S. and its concept of the “business center”. Having a local physical presence for break-fix (and also replacement) services continues to be an attractive proposition. The company believes Compucom can potentially access 6m SMBs that are located within three miles of its stores. The potential is therefore significant.

But this will not be easy. CompuCom has targeted mid-sized businesses to large enterprises; its Tech-Zone offering for small businesses is not a major part of its business. Servicing SMBs brings a set of specific challenges, requiring, inter alia, very standardized services, extremely efficient delivery, and (particularly difficult to achieve), a strong channel strategy: both Smith and Schijns have great expertise in the latter.

Office Depot looking to be a consolidator

Office Depot’s press release emphasized this is a first step in its transformation to a technology services company. It claims that CompuCom has a 3% share of the North American EUCS market, and is the second largest vendor therein. More acquisitions are likely. As well as field services, capabilities of interest are likely to include security and mobility.

By Dominique Raviart and Rachael Stormonth