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Will Starboard Value Lose On Its Staples Bet?

As Staples continues its streak of 14 straight quarters of year-over-year declines in same-store-sales and 16 quarters of shrinking revenue, its shareholders have a lot riding on the pending merger with Office Depot, not least activist hedge fund Starboard Value. Starboard first began pushing for consolidation in the office supplies industry in 2013 with the merger of Office Depot and OfficeMax and the fund has now put its weight behind the Staples deal that is currently awaiting antitrust approval.

It's not surprising that Office Depot's shareholders voted overwhelmingly in favor of the proposed merger considering the secular decline in the office supplies industry as a whole. Demand for traditional supplies like paper and toner has being trending downward for some time as consumers increasingly favor digital retailers like Amazon, and the only area of growth that both companies have seen in recent years is in large business contracts. This area is quickly becoming the primary focal point for the office supplies stores, potentially at the expense of retail and smaller commercial customers.

With no end in sight to the industry's decline, one can question whether the push for a Staples-Office Depot merger is a misguided attempt by several parties to "catch a falling knife." For Starboard Value, who owns approximately 8% of Office Depot as of its latest filing, it seems that every day that the office supplies industry remains fragmented is another blow to its prospects of realizing substantial gains. Staples and Office Depot are both hurtling towards a profit cliff, with few channels of cost-cutting left to right the ship. If the pending merger is blocked by the FTC on antitrust grounds, some investors might not want to stick around long enough to enjoy the view from the office supplies industry's last-chance saloon.

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