mergers and acquisitions ppr (2)

Running head: MERGERS AND ACQUISITION 1

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

Name

Institution

MERGERS AND ACQUISITIONS 2

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

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 SPLS’s ability to finance ODP’s 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

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.


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).


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 company’s 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 company’s

greatest competitor is Lowe’s 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 well-

developed 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.


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 company’s 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.


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 company’s 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 company’s shares opened at


16.62 in the stock exchange in March 2015 (Schenck, 2012). The company’s revenue is $22.49 billion with the company’s revenue per

share being $35.10. The company’s gross profit for the same fiscal period stood at $5.80 billion. The company’s 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 company’s market cap was $10.7 billion and

a dividend yield of 2.95 percent. Based on the fiscal year ended December 2014, the company’s annual profit stood at $134.5 million,

and the annual revenue stood at $22.5 billion. The company’s 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 company’s sales also

increased by 5.8 percent compared to the same fiscal period the sales in the previous year. Office Depots second quarter’s 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 company’s 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).


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.


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 company’s 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


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

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 SPLS’s market cap was 2.6x ODP’s 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.


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.

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.


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

Revenue 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

R&D — — — — — — — —

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


ii) Growth

Profitability 2006-01 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01 2013-01

Tax Rate % 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

Return on Assets % 11.32 12.12 11.42 7.31 5.53 6.38 7.20 -1.64

Financial Leverage (Average) 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

Interest Coverage — — — — 5.88 7.31 9.40 2.63


Financial Year 2006-01 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01 2013-01 2014-01

Revenue %

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

10-Year Average 18.02 16.43 14.10 12.48 10.51 8.68 8.79 7.71

Operating Income %

Year over Year 16.65 11.41 5.82 -11.39 0.76 13.83 3.49 -68.68 130.85


Financial Year 2006-01 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01 2013-01 2014-01

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

Net Income %

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 — -11.08

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 —


Financial Year 2006-01 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01 2013-01 2014-01

EPS %

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 —


iii) Cash flows

Cash Flow Ratios 2006-01 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01 2013-01

Operating Cash Flow Growth % YOY 476.00 -570.00 — — — — 899.00

Free Cash Flow Growth % YOY -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 -4.13

iv) Financial health

Balance Sheet Items (in %) 2006-01 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01 2013-01

Cash & Short-Term Investments 20.46 17.57 14.08 4.87 10.32 10.50 9.41 10.87



Accounts Receivable 7.51 8.58 9.10 14.34 13.20 14.05 15.14 14.78

Inventory 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

Other Long-Term Assets 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

Taxes Payable — — — — — — — 2.35

Accrued Liabilities 13.56 6.58 6.21 9.07 11.69 10.77 10.53 3.66

Other Short-Term Liabilities — 6.54 5.14 — 0.49 4.22 — 6.49



Total Current Liabilities 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

Liquidity/Financial Health 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

vi) Efficiency rations


Efficiency 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

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

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

Profitability 2005-12 2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12

Tax Rate % 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


Profitability 2005-12 2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12

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

Interest Coverage — — — -22.10 -3.74 0.03 1.98 -0.09

iii) Growth

2005-12

2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12

Revenue %

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

2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12

10-Year Average 10.39 9.48 8.74 4.88 1.70 0.05 0.30 -0.60

Operating Income %

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 —

Net Income %

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 —


2005-12

2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12

EPS %

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 —

iv) Cash flow

Cash Flow Ratios 2005-12 2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12

Operating Cash Flow Growth % YOY -155.00 — — — — — -170.00

Free Cash Flow Growth % YOY — — — — — — —

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


Cash Flow Ratios 2005-12 2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12

Free Cash Flow/Net Income 1.37 0.94 -0.12 -0.07 -0.28 -0.75 0.72 -0.77

v) Financial health


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



Other Long-Term Assets 6.16 7.48 7.74 10.27 7.39 7.51 8.06 9.40

Total Assets 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Accounts Payable 21.71 23.77 21.93 23.76 22.11 23.64 23.37 23.31

Short-Term Debt 0.78 0.73 2.87 3.64 1.22 1.58 0.86 4.34

Taxes Payable — — — 0.17 0.14 0.06 0.17 0.13

Accrued Liabilities 16.07 18.64 16.13 22.27 26.18 26.00 23.76 23.23

Other Short-Term Liabilities 1.93 2.06 0.05 — — — — —

Total Current Liabilities 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

Total Liabilities & Equity 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00



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

Efficiency 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 2005-12 2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12

Receivables Turnover 11.26 11.07 10.38 10.48 10.22 11.16 12.45 12.68

Inventory Turnover 7.14 7.08 6.73 6.88 6.77 6.66 6.77 6.78

Fixed Assets Turnover 10.29 10.97 10.30 9.21 8.57 9.56 10.33 11.12

Asset Turnover 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 company’s 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

Staples stood at approximately 12 percent as of March 2015 to $16.73 (Sherman, 2015). However, on the same day stocks at Office

Depot’s 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 company’s 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.


[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


(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;


6.4 SPLS’s ability to finance ODP’s 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). SPLS’s 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 company’s 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.

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 company’s 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.


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 SSRN 2552548.

Morining Star. (2015). Staples Inc (SPLS). Retrieved April 3, 2015, from Morning Star 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 Financials:

http://financials.morningstar.com/ratios/r.html?t=ODP

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

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

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Office Depot and OfficeMax.

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Warren-Boulton, F. R., & Dalkir, S. (2001). Staples and office depot: an event-probability case study. Review of Industrial

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