Staples to reject call to buy Office Depot
A car drives past a Staples Inc. store in Mount Prospect, Illinois, U.S., on Saturday, Aug. 13, 2011. Staples Inc. is scheduled to announce second quarter earnings on August 17. Photographer: Tim Boyle/Bloomberg©Bloomberg
Staples, the US’s biggest stationery seller, is expected to reject a call by activist investor Starboard Value to merge with Office Depot as it fears that the deal would be blocked by regulators, people familiar with the matter said.
The Massachusetts-based company is concerned that the Federal Trade Commission would block a merger on the grounds that it would hurt competition in the lucrative business of supplying stationary to large corporate clients.
“The deal makes a lot of sense [from a strategic perspective] but I can’t see how they could get it done,” said a person familiar with the thinking of Staples’ management.
Starboard, which owns about 6 per cent of Staples and a tenth of Office Depot, argued in a letter that a merger would more than double operating profits and help them compete with Walmart and Amazon.
“The magnitude of value creation from such a business combination far exceeds anything that either company could achieve on a standalone basis,” Starboard chief executive Jeffrey Smith said in a letter to Staples’ board.
Staples tried to merge with Office Depot in the late 1990s but the deal was aborted by the FTC despite the two companies offering to sell 63 of their stores to Office Max.
Since then, the consumer focused side of its business has suffered due to the rise of Amazon and other online retailers. However, competition in the segment focused on servicing large companies has diminished. Office Depot and Office Max merged early last year, leaving only two large competitors.
“Regulators will want to see how the Office Depot—Office Max merger affects the market before they allow for another deal to go through,” said a lawyer who asked not to be named.
Staples and Office Depot did not return calls and emails seeking comment.
Staples has already made corporate governance changes to try to head off the threat of a shareholder revolt. Last week, it appointed a new lead independent director, strengthened the board with the addition of an executive from Google, and announced that chief executive Ron Sargent will not take a pay rise this year.
One large Staples shareholder said the company should focus on improving its results before embarking on a combination with Office Depot that could prove a management distraction.
“If you look at what has happened to profits in the sector, it is pretty clear there is too much capacity,” the shareholder said. “Ultimately there should be one player, but the question is when and how.”
Starboard has emerged as one of the largest and most dogged players in the upsurge of hedge fund activism, taking on targets as big as Yahoo, where it is agitating for a merger with AOL. Last year, it swept away the board at Darden Restaurants, owner of the Oliver Garden chain, after a lengthy battle over the company’s performance.