Activist hedge fund Starboard Value LP, in an official letter to Staples, Inc. (SPLS), has urged management to consider a strategic merger with rival Office Depot, Inc. (ODP) to ensure higher profitability and greater shareholder return.
Starboard has subtly hinted that if Staples’ management does not go ahead with the merger, approved by majority of shareholders, it would press for a management shuffle. Staples shares fell 5.5% yesterday.
The investor fund also insisted the company to appoint investment bankers and legal advisors to help it in assessing, structuring and executing the proposed merger. Notably, Starboard Value, famous for its aggressive activism, had earlier pushed Office Depot to merge with OfficeMax in order to fight dwindling revenues.
As per Starboard, synergies from the merger will help the combined company to double its profits and compete effectively with mass merchandisers like Wal-Mart Stores Inc. (WMT) and online retailers like Amazon.com Inc. (AMZN), which have now expanded into the office supplies sector.
Analysts have speculated about the Staples-Office Depot merger ever since the activist fund increased its stake in Office Depot to 9.9% and simultaneously disclosed a 5.1% stake in Staples last December.
Many analysts also believe that the merger might pass the regulatory hurdle this time, unlike in 1997 when Staples tried to acquire Office Depot but failed to pass the antitrust concerns. However, circumstances have drastically altered in these 18 years. The office supplies industry is grappling with secular headwinds. Advancing technology has reduced demand for traditional core office supplies items, leaving very little scope for growth in the last couple of years.
As a result, consolidation seems to be the only survival strategy for these retailers. Consolidation will not only facilitate closure of overlapping outlets leading to massive cost cuts, but also help in availing miscellaneous synergies.
This was well reflected in the Office Depot-OfficeMax merger, concluded in Feb 2014. Following the merger, Office Depot is on a store rationalizing drive and plans to close 400 overlapping locations (165 stores in 2014) by 2016, to generate synergies of at least $100 million annually, beginning in 2016. Further, management expects total synergies, including those from store closures, to hit the $765 million mark in 2016.
At present, Staples carries a Zacks Rank #3 (Hold) while Office Depot is a Zacks Rank #2 (Buy) stock.
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