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Starboard Was Buying Office Supplies Last Week

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I don't follow NASCAR, and it's possible that this puts me out of touch with the bulk of stock market investors, but I feel like there's a person or robot who regrets writing this sentence last Wednesday:1

Office Depot Inc. stock surged 16.40% to $2.20 after the company announced that Tony Stewart, driver of the No. 14 Office Depot/Mobil 1 Chevrolet in the NASCAR(R) Sprint Cup Series(TM), will join the Foundation to donate 6,000 new sackpacks to non-profit organizations, schools, and agencies in and around the Chicagoland area.

Doing some math, ODP's 285 million outstanding shares times Wednesday's forty cent move gives you $114mm of market cap added on Wednesday, which works out to $19,000 per donated sackpack, which seems like a lot, though I cannot be sure since I don't exactly know what a sackpack is.2

Other possibilities present themselves. Here is Starboard Value LP's Form 4 filed today, noting among other things that Starboard bought 3.1 million shares - about half a day's volume - last Wednesday at an average price of $2.21. It kept going, totting up a total of 8.2mm shares in the last three days of last week, which, added to some other shares that it acquired earlier (in the month? week? day?3), gave it a total of 38mm shares, or 13.3% of the company. Also some interest in where things are headed:

In a letter to Office Depot's chief executive, Neil Austrian, that was made public Monday, Starboard CEO Jeffrey Smith said Office Depot's shares are "deeply undervalued" but that management could take certain actions such as cutting expenses to improve performance. ... Wall Street analysts have called for industry consolidation, arguing that a merger of Office Depot and OfficeMax would help the combined company cut costs and better compete with large rivals such as Staples, as well as retailers such as Wal-Mart Stores Inc.

While the activist fund stopped short of calling for a sale or merger, it did earmark Office Depot de Mexico, a 50-50 joint venture with Grupo Gigante SAB de C.V., as a "non-core" asset that investors aren't attributing the right value.

The letter is here, and while I selectively cut the Journal above to look all M&A-y because really why else be an activist, the tone is in fact mostly consultanty, suggesting that Office Depot is spending too lavishly on G&A and advertising and that it's not optimizing its product mix and space. Here's a sample:

Third, we believe there is a substantial opportunity to improve gross margins and reduce inventory by lowering the number of SKUs in order to obtain more scale in purchasing to reduce procurement expense. For example, Office Depot currently has approximately 9,000 SKUs per store versus Staples at approximately 7,000 SKUs per store.

Fourth, in its North American Retail business, we believe Office Depot has a compelling opportunity to dramatically improve the economics of its stores by downsizing to smaller store formats. Currently, Office Depot's average square footage per store of approximately 23,500 square feet is larger than Staples at approximately 21,500 square feet and OfficeMax at approximately 22,500 square feet. According to the Company, the new 5,000 square foot format store, relative to its existing 24,000 square foot format, can retain up to 90% of total store sales, while at the same time significantly reducing occupancy costs, improving labor utility, and reducing inventory investment by 50%.

Wait come back! Okay that was boring,4 but somebody seems to appreciate that Starboard is holding Office Depot's feet to the fire, store-format-wise. The stock is up another 6.9% today, on top of a 31% jump last week, presumably reflecting some combination of (1) upward pressure on the stock price from Starboard's buying, (2) general gladness about the presence of a fairly punchy activist in the stock, (3) general industry-wide consolidation speculation, and (4) those sackpacks.

We talked a while back about a controversy over how and when activist shareholders should be required to disclose their positions, with some people - represented by Harvard's Lucian Bebchuk - thinking that activists should be able to build positions secretly so as to be able to take advantage of their smartness and dynamism, and other people - represented by law firm Wachtell Lipton - thinking that that's unfair to the dumb and lazy among us. Wachtell Lipton later weighed in with another missive making basically the point that, while maybe it would be a good thing if activists could profit from their smartness to improve corporate operations, the intent of the law is really to prevent that, so it should do so.

Anyway, the Starboard/Office Depot situation manages to make everyone's point in that debate. On the one hand, over the last week Office Depot shareholders are richer by some $200 million of market cap, with Starboard surely playing some role.5 And that value seems to come not from "short-term" financial engineering and divestitures, but rather from operational suggestions - cut costs, go to smaller formats, stop wasting so much money on ads - that you could imagine both (1) increasing shareholder value and (2) annoying managers who were more interested in their own empires than in making money for shareholders. This is at least schematically "good" activism, with the prospect of creating lasting shareholder value - and Starboard gets only 13.3% of that value, and bought in at ever increasing prices over the last two weeks. If it had disclosed its entire plan before going above 5%, it would have lost almost two-thirds of what it's made from its activism so far, which - in a small-cap stock - might have been enough to deter it from bothering in the first place. You could easily tell a story where that rule would allow OfficeMax's management to waste shareholder money on big salaries, cavernous stores and loud ads.

On the other hand. The average weekly volume for ODP's stock in the last year was about 24mm shares; the last two weeks were ~66mm and ~55mm. Even if you assume that Starboard bought all of its 38mm shares in those two weeks, trading away from Starboard still seems to have been almost double normal levels.6 Starboard disclosed its stake Friday evening and this morning, after all that trading - and after last week's 31% rise. It may be possible to accumulate 13.3% of a small-cap stock without anyone knowing about it but the evidence suggests rather the opposite, doesn't it? Starboard is enriching itself off its ideas and enterprise, but it looks like it's enriching someone else too, with that someone else being basically whoever figured out that a big investor was buying up the stock before the announcement, and got in ahead of Starboard. And while swift disclosure would reduce the riches flowing to value-creating activists, it also seems like it would reduce the riches flowing to free-riding, value-destroying front-runners and copycats. Or at least give everyone an equal opportunity to join their ranks.

Starboard Takes Office Depot Stake [WSJ]
Starboard/ODP Form 3 and Form 4 [EDGAR]
Starboard Discloses 13.3% Ownership in Office Depot and Sends Letter to CEO and Board of Directors [PR Newswire]

1.Though the "after," instead of "on the company's announcement that ...," leaves them some wiggle room.

2.Apparently it's school supplies. So, yeah, seems like a lot.

3.The Form 3 doesn't need to disclose when Starboard made its purchases; the Form 4 seems to cover only purchases made after Starboard hit the 10% threshold to file the Form 3. We'll find out soon enough, I guess, with the 13-D [update:now online; they were buying pretty heavily since September 4 though had built a toehold in July and August] but for now I note that the last 4 days, as well as Weds/Thurs 9/5 and 9/6, were all well-above-average volume days.

4.Though, also, like, 90% of the sales in 20% of the space? That sounds too good to be true until you remember that somebody does 900% of the sales in roughly 0% of the space.

5.For a rough minimum, note that SPLS is down ~1% today and OMX is down ~5.7%, while ODP is bouncing around up 5-7%; assume ODP would be up 0% without the Starboard announcement and you get $37-$48mm of shareholder value created by that announcement.

6.OMX traded ~14.6mm shares last week and ~11.4mm the week before, versus a one-year weekly average of 9.3mm shares - so a bit high but nothing like ODP.


John Paulson Ditches Banks, Drums Up Some Business For Them

I think everyone who's ever worked at an investment bank saw at least a little something of themselves in the Journal's fat asshole article this morning. My own feelings are mixed since, for me, investment banking was a lifestyle improvement over a previous job that left me partially paralyzed from overwork (true story! I got better). So in a sense I don't have that much to complain about, but I did, and do, constantly and loudly and now on the internet. Part of what sucks about banking - that I think the Journal article missed - is the frequent pointlessness of your activity: you get on a plane, go see a guy, tell him about this awesome merger or financing or whatever you've got planned for him, shake hands, and fly away never to see him again. And by "never" I mean "not until six months later, after he's printed a deal away from you, when you go and do the same thing, but this time maybe you don't shave." You'd probably still be a fat, stressed, overworked cabbie-puncher if most of your ideas actually got executed, but you'd perhaps be less suffused with metaphysical dread. That's how I'd feel anyway. Then, I blog now. Anyway, a thing that I don't know anything about, and never ever want to know anything about, so don't tell me, is the proper price-to-book trading multiples of life vs. P&C insurance companies and whether there's a conglomerate discount for being in both businesses. So with that as a disclaimer I found this pretty damn convincing: