Office Impasse: Office Depot/Staples Merger On The Verge Of Getting Shredded

It appears that the proposed merger of Staples, Inc. (NASDAQ:SPLS) and Office Depot Inc (NASDAQ:ODP), which at one point was widely expected to succeed, is now doomed to failure. The shares of both companies are down by more 7% in trading today after the New York Post reported that Deborah Feinstein, the head of the Federal Trade Commission (FTC) Bureau of Competition will recommend that the deal not go through. The two companies, which deal primarily in office supplies, delayed the closing of their merger by 45 days towards the end of August to allow the FTC time to gather information and make a declaration, which is expected by October 12.

A scuttled deal would be a big blow to some of the hedge funds tracked by Insider Monkey, particularly Jeffrey Smith’s Starboard Value, which was loading up on both company’s shares towards the end of last year and pushed them for just such a merger. Smith held 43.55 million shares of Office Depot Inc (NASDAQ:ODP) and 8.14 million shares of Staples, Inc. (NASDAQ:SPLS) on June 30, making them two of his top eight long positions.

Following activist funds like Starboard Value is important because it is a very specific and focused strategy in which the investor doesn’t have to wait for catalysts to realize gains in the holding. A fund like Jeffrey Smith’s can simply create its own catalysts by pushing for them through negotiations with the company’s management and directors. In recent years, the average returns of activists’ hedge funds has been much higher than the returns of an average hedge fund. Furthermore, we believe do-it-yourself investors have an advantage over activist hedge fund investors because they don’t have to pay 2% of their assets and 20% of their gains every year to compensate hedge fund managers. We have found through extensive research that the top small-cap picks of hedge funds are also capable of generating high returns and built a system around this premise. In the 32 months since our small-cap strategy was launched it has returned 118% and beaten the S&P 500 ETF (SPY) by more than 60 percentage points (read more details).

While a merger of Staples, Inc. (NASDAQ:SPLS) and Office Depot Inc (NASDAQ:ODP) would create the largest office supplier in both the United States and Canada, the deal was expected to pass, unlike the failed attempt by Staples to buy Office Depot in 1997, which was shot down at that time by regulators citing antitrust concerns. Now however, even a merged business (and one even further bolstered by Office Depot’s acquisition of Office Max last year) would still be facing stiff competition in its sphere from the likes of Amazon.com, Inc. (NASDAQ:AMZN) and Wal-Mart Stores, Inc. (NYSE:WMT), both of which deal in some of the same products. That fact is likely why the FTC Bureau of Economics did not stand against the deal. However, Feinsand’s recommendation would carry great weight with the FTC Commissioners, with a source telling the New York Post that “The chances are very low the commissioners would go against her”.