Pedestrians pass a Staples store in New York City.
Photograph by Spencer Platt — Getty Images

Activist investor says a combination will improve competitive position, double operating profits.

By John Kell
January 20, 2015

Starboard Value LP, an activist investor with stakes in Staples and Office Depot, said Tuesday a merger between the office-supplies retailers could double operating profits and help the companies more effectively compete against competitors.

The letter, made public on Tuesday, was addressed to Staples’ SPLS CEO Ronald Sargent, and said Starboard believes “the best way to maximize value for Staples’ shareholders is through exploring and completing a business combination with Office Depot.”

Starboard made its case by pointing to Staples’ strong share price performance since merger speculation began in September. The company’s stock has risen over 50%, strongly outperforming the S&P 500. Numerous analysts have weighed in on the benefits of a combination with Office Depot ODP , Starboard said. Starboard owns about 6% of Staples and almost 10% of Office Depot, Bloomberg has reported.

A Staples representative wasn’t immediately available to comment on the letter.

The idea of a merger between the struggling office supply retailers has floated around for a while now, with Fortune reporting on it back in September when a Credit Suisse research note recommended they combine forces to compete against Amazon.com AMZN and Wal-Mart WMT .

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Interestingly, this isn’t the first time at the rodeo for these companies. Back in the 1990s, Staples tried to merge with Office Depot, a deal that was squashed by the Federal Trade Commission, which wanted to keep the three largest office supply superstores separate. But times have certainly changed since then. Office Depot completed its merger with OfficeMax in 2013, and some Wall Street observers say the competitive landscape has changed enough to make the combination for the final two players more likely now.

“Without a combination with Office Depot, we would expect Staples’ share price to decline to reflect the company’s standalone value,” Starboard warned in its letter. The investor was critical of Staples’ stock performance over the past five years, badly trailing the S&P 500, Office Depot and the performance of the Russell 100 consumer discretionary sector. Starboard was also critical of Staples’ response time with regards to a shareholders vote held in June last year that called for the separation of the chairman and CEO roles. Staples earlier this month indicated it would appoint an independent chairman, though Starboard said it was “disappointed” that the response took seven months and also questioned the motivation behind the changes.

Starboard, meanwhile, has found itself in the headlines a lot the past year. It is currently waging a public campaign for Yahoo YHOO to consider a merger with AOL AOL . The investor scored a notable and high-profile victory last year when it won all 12 seats on Darden’s DRI board after arguing the restaurant company’s Olive Garden chain is run poorly.

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