Activist investor Starboard Value LP on Thursday reported it had acquired a roughly 6% stake in Staples Inc. (SPLS) at the same time that it boosted its stake in Office Depot Inc. (ODP) to about 10% while people familiar with the hedge fund suggest that it's seeking to pressure the two companies to merge.
The insurgent's investment comes about a year after a $1.2 billion merger between Office Depot and OfficeMax Inc — one that received extension attention from antitrust authorities but ultimately was approved in November 2013 without divestitures. And Starboard was heavily involved with that merger — the fund pushed to put its candidates on the board at Office Depot, eventually settling for three board seats, including one for its founder, Jeff Smith. Smith also had a hand in recruiting Office Depot's CEO, Roland Smith, a former supermarket executive.
Starboard's founder stepped down from Office Depot's board in September.
If Starboard pushes for a combination, as expected, such a combination would also be a throwback to 1997 when the two companies tried to merge, but were blocked by the Federal Trade Commission. Still, as the Office Depot-OfficeMax deal illustrated, the competitive landscape is greatly altered, especially with competition from online retailers such as Amazon.com Inc. (AMZN) as well as big box stores including Costco Wholesale Corp. (COST) , Target Corp. (TGT) and Wal-Mart Stores Inc. (WMT) .
Starboard's filings don't provide much detail about the activist's plans at either company, however, a person familiar with the activist acknowledge that a combination is what the fund is seeking. This person added that the activist believes that the value for both companies combining "would be tremendous" and that the analysis behind the FTC's decision in the Office Depot-Office Max approval suggests that a combination of Staples and Office Depot would be "fine" and pass muster. "They aren't competition with each other so much as they are competing with Costco, Amazon and a number of other companies," the person said.
It is unclear what Starboard's next step may be though it is likely that the activist will seek to meet with executives and could write letters to their boards. If there is pushback from either company it is possible that Starboard would launch a proxy contest at one of them. The person familiar with the activist noted that both office supply stores have deadlines for nominating dissident director candidates coming up in "the next few months."
Neither companies' board is staggered, which means that an activist could seek to take over the entire board. While that would be an unlikely course of action, Starboard did recently take over the entire board of Darden Restaurants Inc. (DRI) , as part of an activist campaign there.
It is unclear which company Starboard would prefer to have acquire the other or whether a merger of some sort would be preferred. However, industry observers point out that Staples has the larger market capitalization at $9.25 billion — to Office Depot's $3.5 billion — and would be the more likely acquirer.
Office Depot, based in Boca Raton, Fla., closed at $6.72 per share Wednesday and was up about 12% in early morning trading. Framingham, Mass.-based Staples closed at $14.82 per share and was up 8.8% soon after the open.
Starboard said in its Staples filing that the shares were purchased based on the activist fund's belief that they were undervalued and represented an attractive investment opportunity.
The Starboard campaign also comes after a September report from Credit Suisse, in which analysts urged a merger of Office Depot and Staples, arguing that such a combination makes "significant financial and operational sense."
The report suggests that a possible combination is "synergistic" and has been "essentially blessed" by the FTC's wording of the Office Depot-Office Max approval documents from last year. The report notes that synergies from the merger can be "conservatively" estimated at $1.44 billion and that the remaining chain would trade at a much more respectable multiple.
"Most important, the merger would create multiple years of earnings growth from synergies, reversing what has been a negative trajectory for Staples," the report said. The Credit Suisse analysts predict Staples' stock will "more than double in two years assuming that ODP is acquired at an 80% premium."