Staples

Hedge fund Starboard Value LP is calling for a merger of office supply retailers Staples and Office Depot, two companies it owns significant stakes in.

Most of the pressure is being applied on Staples. Starboard on Tuesday wrote in a letter to Staples’ board of directors that “a strategic combination of Staples and Office Depot would result in synergies that would more than double the operating profits of the combined company and would create an industry-leading office supply retailer that could more effectively compete against larger retailers and online competitors. The magnitude of value creation from such a business combination far exceeds anything that either company could achieve on a standalone basis.”

Staples’ response to Starboard’s letter was polite but noncommittal. “Staples values constructive shareholder input and dialogue and regularly meets with its shareholders,” the company said in a press release.

“The company has met and spoken with Starboard Value on several occasions to discuss their ideas. The company made clear that the Staples’ board of directors carefully considers all actions that would create shareholder value and is committed to taking actions that are in the best interests of all of the company’s shareholders. The company welcomes continued, constructive dialogue with shareholders focused on enhancing the value of Staples.”

Starboard says shareholders are “broadly supportive of a transaction between Staples and Office Depot,” citing that Staples’ share price has risen more than 50%, strongly outperforming the S&P 500, since the merger speculation began last September.

If Staples’ management doesn’t pursue the transaction, “it would be a clear sign that significant leadership change is needed,” Starboard says.

A Fortune story on Tuesday reporting on the activist letter said, “interestingly, this isn’t the first time at the rodeo for these companies.”

“Back in the 1990s, Staples tried to merge with Office Depot, a deal that was squashed by the Federal Trade Commission, which wanted to keep the three largest office supply superstores separate,” according to Fortune. “But times have certainly changed since then. Office Depot completed its merger with OfficeMax in 2013, and some Wall Street observers say the competitive landscape has changed enough to make the combination for the final two players more likely now.”

Photo: Anthony92931, Wikimedia Commons, CC BY-SA 3.0

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