Starboard sends Staples a ‘Dear Ron’ letter

If Staples fails to merge with Office Depot, activist investor and major Staples shareholder Starboard Value LP is warning the company’s share price will crater and Chairman and CEO Ron Sargent needs to go.

In a letter to Sargent, Starboard contends a combination with Office Depot, which hasn’t fully integrated with OfficeMax following a late 2013 merger, is the best way to maximize value for Staples' shareholders.

“For a variety of reasons, we believe that now is the right time to pursue such a transaction, and we urge you to immediately retain a reputable investment bank and legal advisors to assist the Board in evaluating, structuring and executing a transaction with Office Depot,” Starboard managing member Jeffrey Smith wrote in a letter to Sargent. “We believe 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.”

Such a combination might make sense from a business and competitive standpoint, but the Starboard letter makes no mention of the challenge of securing regulatory approval. Staples tried to acquire Office Depot in 1997 when it could be argued the competitive landscape was different. That deal was bitterly disputed with the federal government which ultimately prevailed in its view that such a combination would not be good for consumers.

Without commenting specifically on the merits of a merger with Office Depot or the current regulatory climate, Staples said it values constructive shareholder input and dialogue and the Board carefully considers all actions that would create shareholder value.

Starboard is looking for the company to at least explore the possibility and engage in a dialogue with Office Depot, a company with whom Starboard is intimately familiar, having agitated for change at Office Depot prior to the deal with OfficeMax. If Staples fails to pursue and execute a merger and persists in its standalone strategy the company’s share price will tumbled and a change in senior leadership should be made.

“We have met with and spoken to a number of large Staples shareholders and Wall Street research analysts who strongly, and without exception, corroborate our view that this merger makes too much sense to ignore,” according to Starboard. “It is time for you to take action – engage advisors and work expeditiously with Office Depot to consummate a transaction. We understand that this will require cooperation from Office Depot, and we have already expressed to them our strong support for a transaction.” Office Depot knows Starboard well. Until last September Starboard CEO Jeff Smith served on the Office Depot board and was instrumental in hiring Office Depot chairman and CEO Roland Smith who gushed about the Starboard CEO when he left the board.

“Jeff has been an integral part of our accomplishments and provided important perspectives that helped to define strategies that position the company for long-term growth and profitability. I have appreciated our time working together and wish Jeff well in his existing and future projects,” Roland Smith said last fall.