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Running head: MERGERS AND ACQUISITION

Mergers and Acquisitions: Case study of Staples Inc and Office Depot
Name
Institution

MERGERS AND ACQUISITIONS

Contents
Executive Summary.......................................................................................................... 3
1.0 HISTORY OF BOTH COMPANIES............................................................................. 4
1.1 Staples Company.................................................................................................. 4
1.2 History of Office Depot Company............................................................................. 5
2.0 STRENGTHS AND WEAKNESSES OF THE COMPANIES.............................................5
2.1 Staples Company................................................................................................. 5
2.2 Office Depot company........................................................................................... 6
3.0 MARKET SHARE................................................................................................... 7
3.1 Market share of Staples Company............................................................................. 7

MERGERS AND ACQUISITIONS

3.2 Market share of Office Depot Company.....................................................................8


4.0 INDUSTRY ANALYSIS............................................................................................... 8
5.0 RECENT HISTORY LEADING TO THE MERGER..........................................................11
6.0 DESCRIPTION OF THE DEAL, ANALYSIS OF ABNORMAL RETURNS & PREMIUM.........14
6.1 Terms of the deal in Staple and Office Depot merger.......................................................14
6.2 Estimated Valuation of the merger..............................................................................14
6.3 Cost synergies of Staple Company and Office Depot companies.........................................16
6.4 SPLSs ability to finance ODPs purchase.....................................................................17
7.0 Summary and conclusions........................................................................................... 17
References................................................................................................................... 19

Executive Summary
The terms Mergers and acquisitions are used interchangeably to describe a scenario where companies consolidate and operate as
one entity. The fundamental principle of the merger or acquisition is to create shareholder value over the value of the two companies put
together. Mergers and acquisitions are most common during tough economic times when times are tough. The rationale for this is the

MERGERS AND ACQUISITIONS


companies come together to create a more competitive and cost effective company that can survive the economic upheaval. These
companies, therefore, come together to gain a greater market share.
Although the terms mergers and acquisitions are used in the same context, the two concepts are different. According to Hosken
&Tenn (2015), when two companies merge, they form a new company. Mergers occur when two companies of almost the same size
agree to form a single stronger company rather than remain separate entities. Hence, a merger of equals occurs and the companies both
have an equal share in the arrangement. In a merger, the company independent stocks cease to exist, and they issue new ones.
Acquisitions in most cases occur when a small company is absorbed by another larger one. However, when the companies
consolidate through an acquisition, no new company is formed. When the larger company absorbs, the smaller one, it is established as
the new owner and the smaller company ceases to exist. The stocks of both companies, however, are issued in the same form. This
paper will analyze the merger between Staples Company and Office Depot and the implication of this decision for both their operations
and their financial position.

MERGERS AND ACQUISITIONS

1.0 HISTORY OF BOTH COMPANIES


1.1 Staples Company
Staples Inc. is a large US based public company. The company was founded by Leo Kahn and Thomas Stemberg on May 1, 1896
and has its headquarters in Framingham Massachusetts. Currently, the company has approximately 3,856 stores in different parts of the
world. Staples deals in office supplies especially furnishings, facility and janitorial supplies, Electronics, health and beauty, sourcing,
technology hardware, industry-specific supplies and IT consulting. In addition, the company has approximately 183,008 employees as of
2013 (Schenck, 2012).
Over the years, Staples has acquired several companies. For example, in 1991 the company acquired Office land purchasing all
their 23 stores. In 1998, they acquired Quill Corporation, which was a large mail-order office supply retailer in the United States. In
2002, they acquired Medical Arts Press while they acquired Office World in 2004, which is a UK based chain store owned by the
Globus group of companies (Schenck, 2012). Two years later, they were at it again and this time they acquired Chiswick, which was an
industrial and retail packaging company with over 7500 products. In 2007, they acquired Thrive Networks a small IT company renown
for providing IT support to small and medium enterprise in the country. In the same year, they acquired American identity, the largest
global distributor of corporate branded goods. In 2008, they acquired Corporate Express, which was a Dutch company that specialized
in office products while in the year 2014 they acquired PNI Digital Media, which was a Canadian software company (Schenck, 2012).

MERGERS AND ACQUISITIONS

Currently, plans are underway for Staples and Office Depot, which is a company that specializes in office supply and retail. Today,
Staples offers approximately 2,900 different office products that utilize recycled content (Schenck, 2012).
1.2 History of Office Depot Company
Office Depot Company is a public retail company that was founded in 1978 by Bernard Marcus, Ron Brill, Pat Farrah and Arthur
Blank. The companys headquarters is in Atlanta and has other subsidiary branches in 2,248 other locations worldwide as off 2011
(Schenck, 2012). The company specializes in Home appliance tools, garden supplies, plumbing and flooring, lumber and paint. The
company so far has approximately 365,000 employees worldwide. The founders of Office Depot wanted to form a company that could
keep their values of respect, corporate social responsibility and excellent customer service alive (Schenck, 2012). The companys
greatest competitor is Lowes which is located in both the United States and Canada.
2.0 STRENGTHS AND WEAKNESSES OF THE COMPANIES
2.1 Staples Company
The major strength of Staples is the diversity in their services. Staples also has over the years managed to become a renowned
firm with a stable and robust customer base. The company also has developed infrastructure since the stores are located in welldeveloped areas that are densely populated. This gives them a location benefit. In addition, the company has reliable suppliers who
ensure all raw materials are passed through a thorough quality check. This has helped to promote customer satisfaction.

MERGERS AND ACQUISITIONS


On the downside, Staples spends a lot of their revenue to cater for their employees because of their high staff turnover. This
factor minimizes their profits and earnings per share. In addition, the company has high expenses which limit the amount they have left
for reinvestment. The company also suffers from a virtual breakdown in their supply chain which weakens the companys supply chain.
2.2 Office Depot company
Office Depot company has remained a key player in the retail market for years. One reason for this is the company has had
excellent execution from a robust management team worldwide. This has helped to keep the company afloat despite the economic
recession and financial crises experienced worldwide and most specifically in America. More so, their product innovation as well as
their strategic product alliances have made the company an industry leader. As a result, Office Depot has been able to deliver exclusive
and innovative products with a combination of national brands and propriety products. Office Depot also has many professional
clienteles especially from professional contractors who make sizable orders and also refer other customers to them. In addition, Office
Depot is shareholder friendly and generates good returns for their shareholders in the form of dividends. Office Depot has a company
culture based on the foundation of individuality, non-conformity, pride and growth. The company has for years taken care of their
customer needs and is renowned for their excellent customer service. Through their new computerized systems, they have increased
their operational efficiency. Another strength of Office Depot is their access to HDTV television network which is a money saving
device that helps the executives f the company to get first-hand information. This information has helped to ensure their products and
staff are always satisfactory.

MERGERS AND ACQUISITIONS

On the downside, Office Depot has rapidly expanded to other unknown regions in the world without prior research on the
regions. Doing this could lose the company money since they do not have appropriate contingency plans in case of failure in those
regions. Another weakness is the company inability to meet the needs of their female consumers. For example, most of their stores have
a rugged appearance with rack-type displays and non-elegant stores which do not appeal to their female customers. Hence, the stores are
considered as unappealing. Lastly, the company has a relatively small online presence
3.0 MARKET SHARE
Market share refers to the percentage of sales that go back to the company. It refers to the companys portion of sales in the
market. This includes the market size. The market share helps analysts to determine the market position of a company as well as their
competitiveness. The market share also is a reflection of the consumers preferences in the market. The market share is calculated as
follows:
Market Share = (Sales Revenue in Time Period X) / (Relevant Market's Total Sales Revenue in Time Period X)

3.1 Market share of Staples Company


Staples Company is the world's largest office products company. According to the fiscal year ended January 31, 2015, the
company operates on a profit margin of 0.60 percent with the gross profit of $5.80 billion. In addition, the companys shares opened at

MERGERS AND ACQUISITIONS

16.62 in the stock exchange in March 2015 (Schenck, 2012). The companys revenue is $22.49 billion with the companys revenue per
share being $35.10. The companys gross profit for the same fiscal period stood at $5.80 billion. The companys enterprise value stood
at $11.18 billion. Staples operating cash flow trailing twelve months as of January 2015 stood at $1.04 billion with a levered free cash
flow of $861.33 million of the same period (Schenck, 2012; White, 2002). In addition, the companys market cap was $10.7 billion and
a dividend yield of 2.95 percent. Based on the fiscal year ended December 2014, the companys annual profit stood at $134.5 million,
and the annual revenue stood at $22.5 billion. The companys EPS for the current quarter is projected to be $0.17 (Schenck, 2012).
3.2 Market share of Office Depot Company
Office Depot shares shot up to $88.23, which was 6 percent increase from the previous year in 2013. The companys sales also
increased by 5.8 percent compared to the same fiscal period the sales in the previous year. Office Depots second quarters earnings for
the year 2014 were recorded at $23,811 million which was an increase from the $22,522 million received in 2013 for the same fiscal
period. More so, the gross profit in the same second quarter in 2014 was $8,161 million an increase from $7,721 million from the
previous year (Schenck, 2012). The total operating expenses of the company remained at $4,713 million which was a 0.2 percent change
from the previous year (Schenck, 2012). However, net earnings shot up to 14.2 percent from the $1,795 received in 2013. This placed
the companys EPS at $1.52 million which was 22.6 percent higher than the EPS received in the previous year. According to the NYSE,
the share value of the company opened at 113.89 and closed at 113.61 as of 31st March 2015 (Schenck, 2012).

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4.0 INDUSTRY ANALYSIS


An industry analysis is an assessment tool designed to give the business an idea of the particular industry. There are tremendous
changes in the spending patterns of small business owners a factor that significantly pushed the two companies to merge (Sherman,
2015). Comparing this situation between 1997 and today, the office supplies market has increased substantially. The completion of the
market has also significantly increased. On the downside, the merger between the two companies would give the companies would now
have a higher bargaining power with its suppliers. For this reason, there will be an expected decline in the sales of the companies
(Sokler &Kim, 2013). Other factors in the industry to that contributed to the companies wanting to merge is the entry of other
companies in the industry that could supply their consumers with same products.
Unlike in 1997 when the government felt a merger would lead to the monopolizing of the companies and push the prices up,
today the presence of other competitors has made it safer for the merger to be reconsidered as the antitrust issues can now be resolved.
In addition, the presence of the internet has helped to revolutionize the market as more consumers are turning to online shopping for
their needs. Companies like Amazon have specialized in online retail. This has necessitated companies like Staples and Office Depot to
close down some of their physical branches in favor of adopting online retailing. Other competitors include Wal-Mart and the chain
stores that stock office furniture. This has made the profits of the companies to decline as competition declines and the buyer bargaining
power increases at the expense of the company. This situation has been made worse by the financial crises and recession that hit USA
and other parts of the world.

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11

The home improvement industry has also changed a great deal with 58 percent of the revenues from Office Depot being from
their home allowances. The industry is also highly cyclical. The reason for this is because the home improvement industry is directly
correlated with the housing situation in the country. For this reason, changes in the housing conditions in the country also affect the
company returns.
Mergers and acquisitions are today a common event in the markets as companies come together to form a bigger and stronger
company. The primary motivator of mergers and acquisitions is to increase the companys competitiveness and market share. Mergers
and acquisitions combine the resources and strategies of both companies. The companies, therefore, need to be aware of the legal
ramifications of this move as well as the potential tax implications. Companies that are merging need to come to an agreement on the
people they need in the new company and also the departments they no longer require. They also need to agree on the members from
each company who will be in the board of directors and decide on the best leadership to adopt in the new organization.
Corporate strategies include the various methods adopted by companies as they try to create value for their products and
services as well as remain competitive. In the case of Staples, after the merger, Staples will incorporate two existing Office Depot
directors into their board, increasing the number of board members to 13. In addition, there is a hedge fund that owns a 6 percent stake
in Staples in addition to 10 percent stake in Office Depot (Froeb et al., 2005). Once this is done, the combined company will adopt and
operate under the Staples name. In addition, the proposed chairman will be Mr. Sargent. Also, the companies have closed 15 percent of
their European market in 2012. The company has also adopted a smaller format resulting in the reduction of stores from 24,000 to

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12,000. Office Depot, on the other hand, has made arrangements to close at least 400 stores in the USA market by 2016 (Soni, 2014).
The company also expects a sales transfer rate of at least 30 percent, which is a 2 percent increase in its store closure plan. Therefore, for
a merger to effectively utilize a common corporate strategy, the individual companies have to break down their initial structure and
adopt a new one that will accommodate their changed status as a new company.
To conclude, the industry is faced with rapid changes taking place at once. Changes in how the companies trade, for example
online retailing, have changed how the companies operate. This fact has resulted in Office Depot closing down over 400 of their stores
worldwide as well as seeking smaller more presentable stores for their operations. This move will save the company operational
expenses. In addition, the market forces of demand and supply have also played a major role in determining the continuity and success
of the companies. For example, during the housing bubble and housing crises.

5.0 RECENT HISTORY LEADING TO THE MERGER


The merger between Office Depot and Staples has been planned for over a decade. Massachusetts-based Staples and Office
Depot, based in Boca Raton, Florida, tried to merge in a 1996 deal, but the proceedings were blocked by the Clinton administration on
antitrust grounds (Sokler &Kim, 2013). When Staples (SPLS) and Office Depot (ODP) wanted to merge in 1997, the Federal Trade
Commission challenged their decision. The reasons they gave were citing that they could push the prices of their products higher for
their consumers (Sherman, 2015). However today, the industry has experienced many changes and as a result, SPLS reduced its stores
count in North America by over 10 percent in the past three years, as more reductions are expected (Sokler &Kim, 2013).The merger

MERGERS AND ACQUISITIONS


speculation between the two shows that the stock prices will rise by 19.6 percent and 22.6 percent for Staples and Office Depot
respectively (Sherman, 2015). Also, due to the differences in size between the two, SPLS is expected to be the likely acquirer n this
partnership. The reason for this was SPLSs market cap was 2.6x ODPs market cap with the difference standing at $4.3 billion versus
$11.1 billion. Hence, this cannot be considered a merger of equals (Soni, 2014). This is demonstrated below.

13

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14

When interviewed, the representatives of the two companies claimed that the merger would benefit them both especially because
Office Depot would make Staples bigger. They attributed this to changes created in the industry by not only the big-box retailers but
also the online sales which they believed would make any antitrust concerns controversial (Soni, 2014). In planning a $6.3 billion
merger, Staples and Office Depot assert that their 18 year wait for the deal to get approved a long enough wait. They felt the government
regulators were long overdue in changing the mindset of how consumers buy office supplies (Sokler &Kim, 2013). The office supplies
business has become more competitive than it was two decades back, and the merger was, therefore, a strategic move for the two
companies to capitalize on this (Hosken & Tenn, 2015). The companies also justify this merger claiming that it would benefit consumers
who will now enjoy a wider range of affordable commodities lessening their reliance on other superstores like Amazon, Walmart and
Target (Soni, 2014). They also felt that the current market was flooded by bigger store chains and online competitors that have resulted
in increased competition and reduced prices. This is the reason that has propelled Staples and Office Depot to argue that the proposed
merger is necessary. It is for this reason they feel it will give them the best platform to compete in a new world (Hosken & Tenn, 2015).
To further justify the merger, the representatives admitted that the annual revenue at Office Depot was declining steadily and has
fallen 36 percent in the past seven years. This decline was weighing down heavily on the company, and the merger would, therefore,
help to ward off this continuous decline in the company revenues and profitability. For example, if the merger is approved, it is predicted
that Staples will be able to save at least $1 billion from combining purchasing and marketing costs with Office Depot.

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Financiers estimate that if the merger goes through, the merged Staples-Office Depot will benefit from the creation of a retailer
at is twice as large, and with $34 billion in revenue and 4,400 stores (Hosken & Tenn, 2015). Hence, the market leader Staples
confirmed that it would acquire the number 2-ranked rival Office Depot in a cash and stock deal to create a combined company with
over 4,000 locations in 25 countries. The company also has annual sales of nearly $39 billion (Sherman, 2015; Warren & Dalkir, 2001).
This merger is, therefore, necessary for the long-term sustainability of these two companies.

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Below is an analysis of Staples key ratios for the financial years between 2006 and 2015
i)

Profitability

Margins % of Sales

2006-01

2007-01

2008-01

2009-01

2010-01

2011-01

2012-01

2013-01

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

COGS

71.48

71.40

71.35

72.94

73.33

73.09

73.06

73.38

Gross Margin

28.52

28.60

28.65

27.06

26.67

26.91

26.94

26.62

SG&A

20.27

20.46

20.58

20.06

20.21

20.02

20.18

20.03

Other

0.08

0.08

0.08

1.06

0.76

0.49

0.26

4.50

Operating Margin

8.17

8.06

7.99

5.94

5.69

6.41

6.51

2.09

Net Int Inc & Other

0.01

0.05

0.03

-0.56

-0.93

-0.88

-0.68

-1.00

EBT Margin

8.18

8.10

8.02

5.39

4.76

5.53

5.83

1.09

Revenue

R&D

MERGERS AND ACQUISITIONS


ii)

17

Growth

Profitability

2006-01

2007-01

2008-01

2009-01

2010-01

2011-01

2012-01

2013-01

36.50

33.85

36.00

34.50

34.50

34.50

32.57

160.60

Net Margin %

5.19

5.36

5.14

3.49

3.04

3.59

3.94

-0.86

Asset Turnover (Average)

2.18

2.26

2.22

2.09

1.82

1.78

1.83

1.90

11.32

12.12

11.42

7.31

5.53

6.38

7.20

-1.64

1.73

1.67

1.58

2.34

2.03

2.00

1.91

2.00

Return on Equity %

19.54

20.61

18.54

14.27

11.98

12.86

14.11

-3.21

Return on Invested Capital %

18.08

19.16

17.55

11.97

9.75

10.83

11.85

-1.22

5.88

7.31

9.40

2.63

Tax Rate %

Return on Assets %
Financial Leverage (Average)

Interest Coverage

Financial Year

2006-01

2007-01

2008-01

2009-01

2010-01

2011-01

2012-01

2013-01

201

MERGERS AND ACQUISITIONS

Financial Year

18

2006-01

2007-01

2008-01

2009-01

2010-01

2011-01

2012-01

2013-01

201

Year over Year

11.28

12.95

6.67

19.16

5.16

1.11

1.94

-2.56

3-Year Average

11.51

11.27

10.27

12.81

10.16

8.21

2.72

0.14

5-Year Average

8.54

11.01

10.81

11.86

10.93

8.83

6.62

4.71

18.02

16.43

14.10

12.48

10.51

8.68

8.79

7.71

Year over Year

16.65

11.41

5.82

-11.39

0.76

13.83

3.49

-68.68

13

3-Year Average

24.43

22.38

11.20

1.47

-1.87

0.54

5.88

-28.28

5-Year Average

21.90

23.55

17.83

11.44

4.19

3.68

2.16

-19.91

10-Year Average

24.41

21.78

19.02

12.72

9.99

12.42

12.35

-2.86

Revenue %

10-Year Average

Operating Income %

Net Income %

MERGERS AND ACQUISITIONS

Financial Year

19

2006-01

2007-01

2008-01

2009-01

2010-01

2011-01

2012-01

2013-01

201

Year over Year

17.79

16.69

2.26

-19.12

-8.27

19.40

11.65

3-Year Average

23.21

25.70

12.02

-1.18

-8.80

-3.96

6.93

-1

5-Year Average

69.46

29.73

17.42

10.44

0.84

1.11

0.22

10-Year Average

27.47

24.78

22.49

15.82

8.90

30.90

14.03

Year over Year

19.94

17.86

4.55

-18.12

-9.73

18.63

15.70

3-Year Average

21.34

25.99

13.90

0.30

-8.24

-4.29

7.40

5-Year Average

62.11

37.68

17.09

11.35

1.78

1.56

1.18

10-Year Average

23.11

21.17

19.80

15.24

8.60

28.31

18.03

EPS %

MERGERS AND ACQUISITIONS


iii)

20

Cash flows

Cash Flow Ratios

2006-01

2007-01

2008-01

2009-01

2010-01

2011-01

2012-01

Operating Cash Flow Growth % YOY

476.00

-570.00

899.00

-765.00

Cap Ex as a % of Sales

2.84

2.91

2.43

1.64

1.29

1.67

1.53

Free Cash Flow/Sales %

4.85

3.50

4.60

5.66

7.30

4.23

4.77

Free Cash Flow/Net Income

0.93

0.65

0.89

1.62

2.40

1.18

1.21

Free Cash Flow Growth % YOY

iv)

201

Financial health
2006-01

2007-01

2008-01

2009-01

2010-01

2011-01

2012-01

2013-01

20.46

17.57

14.08

4.87

10.32

10.50

9.41

10.87

7.51

8.58

9.10

14.34

13.20

14.05

15.14

14.78

22.23

22.86

22.72

18.49

16.48

16.96

18.11

18.84

Other Current Assets

3.79

3.76

4.51

6.36

5.00

4.99

4.18

6.00

Total Current Assets

53.99

52.77

50.41

44.06

45.01

46.49

46.84

50.49

Net PP&E

22.91

23.51

23.92

17.61

15.78

15.44

15.49

15.99

Intangibles

21.09

20.10

22.09

34.46

34.00

33.04

33.00

29.36

Balance Sheet Items (in %)


Cash & Short-Term Investments
Accounts Receivable
Inventory

MERGERS AND ACQUISITIONS

21

2006-01

2007-01

2008-01

2009-01

2010-01

2011-01

2012-01

2013-01

2.01

3.62

3.58

3.87

5.21

5.03

4.67

4.16

Total Assets

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

Accounts Payable

18.70

17.70

17.27

16.35

15.39

15.87

16.53

15.44

Short-Term Debt

0.04

2.40

0.26

11.33

3.27

8.04

2.35

13.56

6.58

6.21

9.07

11.69

10.77

10.53

3.66

6.54

5.14

0.49

4.22

6.49

32.30

33.21

28.88

36.74

27.57

30.86

30.34

35.98

Long-Term Debt

6.87

3.77

3.79

15.14

11.91

8.16

Other Long-Term Liabilities

3.17

3.22

4.05

5.34

23.06

19.22

5.53

5.96

Total Liabilities

42.35

40.20

36.72

57.22

50.63

50.09

47.77

50.10

Total Stockholders' Equity

57.65

59.80

63.28

42.78

49.37

49.91

52.23

49.90

Total Liabilities & Equity

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

Balance Sheet Items (in %)


Other Long-Term Assets

Taxes Payable
Accrued Liabilities
Other Short-Term Liabilities
Total Current Liabilities

2006-01

2007-01

2008-01

2009-01

2010-01

2011-01

2012-01

2013-01

Current Ratio

1.67

1.59

1.75

1.20

1.63

1.51

1.54

1.40

Quick Ratio

0.87

0.79

0.80

0.52

0.85

0.80

0.81

0.71

Financial Leverage

1.73

1.67

1.58

2.34

2.03

2.00

1.91

2.00

Debt/Equity

0.12

0.06

0.06

0.35

0.37

0.29

0.23

0.16

Liquidity/Financial Health

vi)

Efficiency rations

MERGERS AND ACQUISITIONS

22

2006-01

2007-01

2008-01

2009-01

2010-01

2011-01

2012-01

2013-01

Days Sales Outstanding

12.05

13.04

14.54

21.24

27.64

28.00

29.09

28.81

Days Inventory

52.54

51.04

52.46

48.31

47.83

47.00

47.83

48.42

Payables Period

42.51

41.13

40.23

39.96

43.45

43.95

44.21

41.99

Cash Conversion Cycle

22.08

22.95

26.76

29.60

32.02

31.05

32.70

35.24

Receivables Turnover

30.29

27.99

25.11

17.18

13.21

13.04

12.55

12.67

Inventory Turnover

6.95

7.15

6.96

7.55

7.63

7.77

7.63

7.54

Fixed Assets Turnover

9.57

9.73

9.37

10.37

10.90

11.38

11.84

12.06

Asset Turnover

2.18

2.26

2.22

2.09

1.82

1.78

1.83

1.90

Efficiency

Below is the financial breakdown of the key ratios for Office Depot Company between the years 2005 to
the financial year that ended in December 2014

i)

Profitability

Margins % of Sales

2005-12

2006-12

2007-12

2008-12

2009-12

2010-12

2011-12

2012-12

Revenue

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

COGS

69.24

68.90

71.00

72.37

72.07

71.14

70.18

69.64

Gross Margin

30.76

31.10

29.00

27.63

27.93

28.86

29.82

30.36

SG&A

28.32

26.30

25.93

28.05

29.90

28.74

29.53

30.00

R&D

Other

-0.09

-0.05

10.24

0.22

0.44

0.66

MERGERS AND ACQUISITIONS

23

2005-12

2006-12

2007-12

2008-12

2009-12

2010-12

2011-12

2012-12

Operating Margin

2.44

4.89

3.11

-10.66

-2.18

-0.32

0.29

-0.29

Net Int Inc & Other

0.09

-0.04

-0.16

-0.22

-0.38

-0.17

-0.01

-0.42

EBT Margin

2.53

4.85

2.95

-10.88

-2.56

-0.49

0.28

-0.71

Margins % of Sales

2005-12

2006-12

2007-12

2008-12

2009-12

2010-12

2011-12

2012-12

24.27

29.04

13.74

Net Margin %

1.92

3.44

2.55

-10.20

-5.16

-0.70

0.52

-1.03

Asset Turnover (Average)

2.22

2.37

2.25

2.31

2.39

2.46

2.61

2.59

Return on Assets %

4.26

8.15

5.72

-23.62

-12.34

-1.73

1.36

-2.66

Financial Leverage (Average)

2.23

2.52

2.35

3.87

6.22

6.57

5.75

6.06

Return on Equity %

9.18

19.30

13.90

-66.52

-58.34

-11.03

8.36

-15.72

Return on Invested Capital %

8.31

16.56

12.63

-46.07

-31.14

-2.32

5.72

-3.11

-22.10

-3.74

0.03

1.98

-0.09

Profitability
Tax Rate %

Interest Coverage

iii)

Growth
2006-12

2007-12

2008-12

2009-12

2010-12

2011-12

2012-12

2013-12

Year over Year

5.27

5.13

3.44

-6.65

-16.22

-4.21

-1.23

-6.91

3-Year Average

7.93

6.70

4.61

0.50

-6.82

-9.18

-7.45

-4.15

5-Year Average

4.30

6.12

6.46

3.24

-2.19

-4.02

-5.21

-7.18

2005-12

Revenue %

MERGERS AND ACQUISITIONS

24

2006-12

2007-12

2008-12

2009-12

2010-12

2011-12

2012-12

2013-12

10.39

9.48

8.74

4.88

1.70

0.05

0.30

-0.60

Year over Year

-34.33

110.75

-34.07

3-Year Average

-11.36

15.97

-3.01

5-Year Average

10.26

15.66

-0.65

-45.98

10-Year Average

3.61

11.85

4.79

-20.95

Year over Year

-18.39

88.51

-23.35

3-Year Average

-4.13

23.16

5.65

5-Year Average

40.88

20.75

4.95

-28.61

10-Year Average

7.54

14.87

9.50

-7.15

Year over Year

-17.92

105.75

-20.11

3-Year Average

-3.89

26.70

10.50

5-Year Average

40.31

22.08

7.85

-34.25

10-Year Average

4.63

12.87

8.26

-10.40

2005-12

10-Year Average
Operating Income %

Net Income %

EPS %

iv)

Cash flow

Cash Flow Ratios

2005-12

2006-12

2007-12

2008-12

2009-12

2010-12

2011-12

201

MERGERS AND ACQUISITIONS

25

Cash Flow Ratios

2005-12

2006-12

2007-12

2008-12

2009-12

2010-12

2011-12

Operating Cash Flow Growth % YOY

-155.00

-170.00

Cap Ex as a % of Sales

1.83

2.29

2.97

2.54

1.08

1.46

1.13

Free Cash Flow/Sales %

2.63

3.22

-0.32

0.69

1.36

0.29

0.60

Free Cash Flow/Net Income

1.37

0.94

-0.12

-0.07

-0.28

-0.75

0.72

Free Cash Flow Growth % YOY

v)

201

Financial health

Balance Sheet Items (in %)

2005-12

2006-12

2007-12

2008-12

2009-12

2010-12

2011-12

2012-12

Cash & Short-Term Investments

11.53

2.64

3.07

2.96

13.49

13.73

13.42

16.73

Accounts Receivable

20.20

22.53

20.83

23.84

22.93

21.09

20.30

20.04

Inventory

22.30

23.74

23.67

25.28

25.62

27.00

26.98

26.20

Other Current Assets

3.84

3.67

3.63

7.20

3.52

4.44

3.85

4.26

Total Current Assets

57.88

52.59

51.21

59.27

65.56

66.27

64.55

67.22

Net PP&E

21.51

21.69

21.90

29.56

26.13

25.32

25.10

21.35

Intangibles

14.45

18.25

19.16

0.91

0.92

0.90

2.28

2.02

6.16

7.48

7.74

10.27

7.39

7.51

8.06

9.40

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

21.71

23.77

21.93

23.76

22.11

23.64

23.37

23.31

0.78

0.73

2.87

3.64

1.22

1.58

0.86

4.34

0.17

0.14

0.06

0.17

0.13

Other Long-Term Assets


Total Assets

Accounts Payable
Short-Term Debt
Taxes Payable

MERGERS AND ACQUISITIONS

Balance Sheet Items (in %)

26

2005-12

2006-12

2007-12

2008-12

2009-12

2010-12

2011-12

2012-12

16.07

18.64

16.13

22.27

26.18

26.00

23.76

23.23

1.93

2.06

0.05

40.48

45.20

40.98

49.84

49.65

51.29

48.16

51.01

Long-Term Debt

9.33

8.69

8.37

13.07

13.55

14.44

15.25

12.10

Other Long-Term Liabilities

5.27

6.38

8.16

11.21

20.71

19.05

19.20

20.40

Total Liabilities

55.08

60.27

57.50

74.13

83.92

84.78

82.61

83.51

Total Stockholders' Equity

44.92

39.73

42.50

25.87

16.08

15.22

17.39

16.49

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

Accrued Liabilities
Other Short-Term Liabilities
Total Current Liabilities

Total Liabilities & Equity

Liquidity/Financial Health

2005-12

2006-12

2007-12

2008-12

2009-12

2010-12

2011-12

2012-12

Current Ratio

1.43

1.16

1.25

1.19

1.32

1.29

1.34

1.32

Quick Ratio

0.78

0.56

0.58

0.54

0.73

0.68

0.70

0.72

Financial Leverage

2.23

2.52

2.35

3.87

6.22

6.57

5.75

6.06

Debt/Equity

0.21

0.22

0.20

0.51

0.84

0.95

0.88

0.73

vii)

Efficiency ratios
2005-12

2006-12

2007-12

2008-12

2009-12

2010-12

2011-12

2012-12

Days Sales Outstanding

32.41

32.98

35.17

34.84

35.72

32.71

29.33

28.78

Days Inventory

51.11

51.53

54.26

53.05

53.89

54.83

53.88

53.85

Payables Period

54.91

50.92

52.19

49.46

48.65

47.67

46.94

47.25

Cash Conversion Cycle

28.62

33.58

37.23

38.43

40.96

39.87

36.27

35.37

Efficiency

MERGERS AND ACQUISITIONS

Efficiency
Receivables Turnover
Inventory Turnover
Fixed Assets Turnover
Asset Turnover

27

2005-12

2006-12

2007-12

2008-12

2009-12

2010-12

2011-12

2012-12

11.26

11.07

10.38

10.48

10.22

11.16

12.45

12.68

7.14

7.08

6.73

6.88

6.77

6.66

6.77

6.78

10.29

10.97

10.30

9.21

8.57

9.56

10.33

11.12

2.22

2.37

2.25

2.31

2.39

2.46

2.61

2.59

6.0 DESCRIPTION OF THE DEAL, ANALYSIS OF ABNORMAL RETURNS & PREMIUM


6.1 Terms of the deal in Staple and Office Depot merger
Staples have a market value of approximately $11 billion compared to $4.1 billion at Office Depot. Since the merger has not yet
been approved, it is somewhat difficult to get the returns and premiums that the merger will culminate in (Froeb et al., 2005). However,
financiers estimate that the mergers will not only save Staples over $1 billion, but it will also boost the companys revenue to
approximately $34 billion (Soni, 2014). The first step would be for the Federal Trade Commission to approve the merger. Staples have
agreed to pay Office Depot a $250 million termination fee in case the deal is rejected on antitrust grounds (Sokler &Kim, 2013). The
deal in the merger stipulates that Staples will pay $7.25 in cash and 0.2188 of a share of Staples stock for each share acquired from
Office Depot. Based on the closing prices on Tuesday, the deal was valued at about $11.41 per Office Depot share. This value is
approximately 44 percent premium over the value traded before news of the merger emerged (Soni, 2014). Consequently, the shares in

MERGERS AND ACQUISITIONS

28

Staples stood at approximately 12 percent as of March 2015 to $16.73 (Sherman, 2015). However, on the same day stocks at Office
Depots closed below the offer price, at $9.48.
6.2 Estimated Valuation of the merger
Valuation refers to a technique that quantifies the value a given item should be exchanged for today, with consideration to its
future benefits. These can be calculated using the transaction comparables, trading comparables, discounted cash flow analysis and the
sum of the parts valuation (Soni, 2014). The valuation also helps companies to determine how much a company is worth during a
merger or acquisition. Using the valuation multiples of 6.5x-7x, the estimated value of the combination stand at ~$19.10-$21.70 (Soni,
2014). This value was ~23 %-40% of the company compared to the current value of the companies singly. The enterprise value weights
of ODP stood at ~$5-$5.7 billion including the companys debt and ~$4.3-$5 billion excluding debt. As a result, the estimated share
price will stand at ~$77.89-$9.15, which is a premium of 205-40% compared to the initial $6.55 percent as of financial year ended
December 2014 (Soni, 2014). Below is a graph showing Staples Annual Office Supplies sales for the years 2010 up until financial year
that ended in 2014.

MERGERS AND ACQUISITIONS

[Source: Soni, (2014)]


6.3 Cost synergies of Staple Company and Office Depot companies
Based on the data collected over the years, the potential cost synergies from the merger are estimated to stand at $1.2 and $1.5
billion. This would result from the fact the companies would share distribution facilities. In addition, economies of scale that would
result from purchasing and supply chain efficiencies as well as the reduction of general business expenses as well as occupancy costs

29

MERGERS AND ACQUISITIONS

30

(Soni, 2014; Warren & Dalkir, 2001). This will be made more effective with the closure of several stores worldwide especially in shared
catchment areas, coupled with the reduced square footage (Sherman, 2015). However, despite this, the margins of SPLS are better
compared to Office Depots margins (Hosken & Tenn, 2015). There were also a lot of o synergies due to the ODPs merger in 2013. This
will, therefore, result in the incremental EBITDA of $0.8-$1 billion for the new combined company. This is illustrated below;

MERGERS AND ACQUISITIONS

31

6.4 SPLSs ability to finance ODPs purchase


Given that SPLS is the bigger company of two hence SPLS will have to buy ODP in this acquisition. Currently, the company has
cash estimates of ~$770 million. For this reason, in order to finance the acquisition, the company will have to explore the possibility of
alternative financing to finance the potential $4-$5 billion office acquisition (Soni, 2014). SPLSs long-term debt to equity ratio was
recorded at a low 17 percent as at November 2014. Hence based on this, and the current vulnerability of the business model, financing
the acquisition using debt financing will put pressure on the companys declining profit margins (Soni, 2014; Froeb et al., 2005).

7.0 Summary and conclusions


Mergers and acquisitions today have become more common as companies with shared interests are combining to form stronger
and more competitive versions of themselves together. The merger between Staples and Office Depot has been stalled for the past 18
years because of the antitrust issues propagated by the Federal Trade Commission (Sokler &Kim, 2013). Today, 18 years later, the
industry is not what it was then. More people are investing in quality office furniture, and there are more competitors. In addition, the
companies are losing financially, and this is necessitating the need for them to merge sooner than later. In addition, the merger will help
both companies to fend off this intense competition from the super online stores like Amazon and Wal-Mart. Given the current value of
both companies, Staples is bigger in size which would necessitate the company to buy off Office Depot. However, the company
currently does not have enough liquidity to finance this acquisition. Hence, they would need to adopt alternative financing techniques in
a time when their profit margins are slimming down.

MERGERS AND ACQUISITIONS

32

The advantages attributed to this merger included that the companies combined would have a stronger bearing on the market.
They also argued that their presence would help to increase completion in the industry eliminating the dominance of Amazon and
Walmart among others. The merger would also increase the companys profitability as well help them save on expenses. For example,
Staples was documented to have calculated their savings to at least $ 1 billion as a result of the merger. This will result from the layoffs
and also the closure of several physical stores in the locations both companies have already established branches. This will substantially
lessen the operational costs of the company.
The Principle of the merger or acquisition is to create shareholder value over the value of the two companies put together. Hence,
the rationale for this merger is met since their coming together will culminate in the creation more competitive and cost effective
company that can survive the economic upheaval. These companies, therefore, will gain a greater market share. Therefore, although the
acquisition has been long overdue and could go a long way towards boosting the profitability and market share of both companies, as
well as their competitiveness, the acquisition will cost Staples more money that it currently has unless if explores other funding options.

MERGERS AND ACQUISITIONS

References
Boston School of Management. (2014). Techniques in Finance &Valuation. Boston: Boston

University.

Froeb, L., Tschantz, S., & Werden, G. J. (2005). Pass-through rates and the price effects of

mergers. International Journal of

Industrial Organization, 23(9), 703-715.


Hosken, D. S., & Tenn, S. (2015). Horizontal Merger Analysis in Retail Markets. Available at
Morining Star. (2015). Staples Inc (SPLS). Retrieved April 3, 2015, from Morning Star

SSRN 2552548.

Financials:

http://financials.morningstar.com/income-Statement/is.html?t=SPLS&region=usa&culture=en- US
Morning star. (2015). Office Depot Inc (ODP). Retrieved April 3, 2015, from Morning Star
http://financials.morningstar.com/ratios/r.html?t=ODP

Schenck, B. (2012, August 21). Office Depot Inc. Bloomberg Business .


Schenck, B. (2012, August 21). Staples Inc. Bloomberg Business .

Financials:

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MERGERS AND ACQUISITIONS


Sokler, B., & Kim, H. (2013). What a Difference 16 Years Can Make: FTC Approves Merger

Between Office Superstore Giants

Office Depot and OfficeMax.


Sherman, A. (2015, February 3). Staples and Office Depot Shares spike after report they've

entered into merger talks. Financial

post .
Soni, P. (2014, December 23). Why Is Starboard Interested In Staples And Office Depot? Market Realist
Warren-Boulton, F. R., & Dalkir, S. (2001). Staples and office depot: an event-probability case
Organization, 19(4), 467-479.
White, L. J. (2002). Staples-Office Depot and UP-SP: An antitrust tale of two proposed mergers.

study. Review of Industrial

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