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Activist investor pressuring Staples to pursue merger


A well-known activist investment firm is pressing Staples Inc. of Framingham to merge with Office Depot Inc., a transaction that would combine the last two battered survivors in the office supply superstore business.

Starboard Value LP, which succeeded in a campaign to replace the entire board of Olive Garden’s parent company three months ago, wrote to Staples’ chief executive, Ronald Sargent, on Tuesday, urging him to consider combining with Office Depot.

Such a deal “makes too much sense to ignore,” wrote Starboard’s chief executive, Jeffrey C. Smith. His firm owns about 6 percent of Staples and nearly 10 percent of Office Depot.


“The best way to maximize value for Staples’ shareholders is through exploring and completing a business combination with Office Depot,” Smith wrote. “We believe that now is the right time to pursue such a transaction.”

In a statement, Staples said that it had met with Starboard and that its board was “committed to taking actions that are in the best interest of all the company’s shareholders.” Staples declined to comment directly on Smith’s letter, but the Financial Times reported the company was cool to the merger idea, because executives feared it might be shot down by antitrust regulators.

Smith’s interest in merging the companies did not come as a surprise on Wall Street. Staples’ shares have climbed since Starboard disclosed an ownership interest last month. But the stock declined 96 cents, or 5.5 percent, to $16.39 per share on the news of the letter Tuesday.

Staples is under pressure in the marketplace, facing increased competition from online retailers and from big-box giants Walmart, Costco, and others as demand for core products such as paper and ink declines. The company has responded by closing stores and more aggressively integrating its online sales with its brick-and-mortar and business-to-business operations.


In his letter, Smith argues a merger would generate billions in cost savings and help both companies compete more effectively.

The combined company could double profits, he said.

Starboard cited a series of Wall Street analyses supporting a merger and pointed to a jump in Staples’s stock price following speculation about a merger as evidence that shareholders want a transaction.

The letter said that if Staples disregards its advice, “it would be a clear sign that significant leadership change is needed.”

Coming from Starboard, that’s no idle threat. In October, the firm successfully lobbied public stockholders to take over the board of Darden Restaurants Inc., which owns the ubiquitous Italian chain Olive Garden. Starboard said that it has spent the past month actively recruiting other Staples shareholders to its cause.

Starboard had prodded Office Depot, which is based in Boca Raton, Fla., to merge with OfficeMax in 2013. Analysts said Starboard may be trying to push a Staples-Office Depot merger before 2017, when two of the five federal trade commissioners who approved the 2013 merger will be replaced.

“The Starboard lawyers know these [commissioners] and know what their concerns were about the Office Depot-Office Max deal,” said Scott Tilghman, a senior analyst at B. Riley & Co.

“From an environment and timing standpoint, better to do it now when you have a group that approved the prior merger,” he said.

Tilghman said that a merger of the two companies would make financial sense. The companies have combined operating costs of about $35 billion, so even a modest reduction of 3 to 5 percent in overhead would create lots of extra shareholder value, he said.


The biggest hurdle for a merger, analysts said, would be winning government approval.

In 1997, an attempted acquisition of Office Depot by Staples was blocked by the Federal Trade Commission for being anticompetitive. While retail sales of office supplies is a reasonably diversified market, the landscape for the business-to-business sales that account for much of Staples’ revenue is more consolidated and could prompt regulatory scrutiny.

“A merger is plausible if you just look at combining the retail stores, because you can argue there’s more competition from Amazon.com and Walmart,” said Liang Feng, an equity analyst at Morningstar who has followed the office supply market. “But it’s more difficult to see how combining the two commercial businesses would not be anticompetitive.”

Another hurdle is the apparent reluctance of executives at Staples.

By releasing its letter publicly, Starboard is putting pressure on the Staples executives to consider a merger, analysts said, and sending a signal to other investors about the seriousness of its intentions.

Combining the two national retailers could come with significant nonregulatory challenges, such as combining the companies’ inventory systems and delivery networks.

The current process of integrating Office Depot and Office Max is proceeding more smoothly than expected, however, Tilghman said — giving Starboard confidence that combining the two remaining retailers in the sector would not create a logistical meltdown.

Dan Adams can be reached at daniel.adams@globe.com. Follow him on Twitter @DanielAdams86.