Staples and Office Depot under increased pressure to merge

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Starboard Value, the activist investor with stakes in both Staples Inc. and Office Depot Inc., is ratcheting up pressure on the office-supply rivals to merge.

The investment firm sent a letter to Staples chief executive officer Ronald Sargent Tuesday demanding that his company engage advisers to begin work on a deal. The move represents Starboard's most public push for such a transaction following behind-the-scenes prodding.

"The best way to maximize value for Staples' shareholders is through exploring and completing a business combination with Office Depot," Starboard CEO Jeffrey Smith said in the letter, which was addressed to Mr. Sargent and the rest of Staples' board. "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 advisers to assist the board in evaluating, structuring and executing a transaction."

The combination could deliver more than $2-billion (U.S.) in cost savings and help the office-supply retailers compete with larger chains and online offerings, according to Starboard. The investment firm also criticized Staples for delaying a shareholder-supported measure to separate the chairman and CEO roles.

In a response to Starboard, Staples said it has met with the investment firm on several occasions to discuss ideas.

"The company made clear that the Staples' board of directors carefully considers all actions that would create shareholder value and is committed to taking actions that are in the best interests of all of the company's shareholders," the company, based in Framingham, Mass., said in the statement. "The company welcomes continued, constructive dialog with shareholders focused on enhancing the value of Staples."

Staples has a market value of about $11-billion, while Office Depot is pegged at about $4-billion. Shares of both companies have climbed since Starboard disclosed a new stake in Staples and a larger position in Office Depot on Dec. 11. The activist investor successfully pushed Office Depot and OfficeMax to merge, and investors have been speculating that it could replicate that strategy with Staples. New York-based Starboard has said it owns 6 per cent of Staples and almost 10 per cent of Office Depot.

Mr. Smith also has pressured Office Depot, based in Boca Raton, Fla., to improve operations since taking a stake in 2012.

Starboard has a record of buying stakes in companies and pushing for mergers. The firm also is campaigning for changes at Yahoo Inc., including a possible tie-up with rival AOL Inc.