When Staples announced on February 4 that it planned to buy all outstanding shares of rival Office Depot for $6.3 billion, one Staples shareholder was particularly pleased. In addition to benefiting from the pending sale, Jeffrey Smith, whose New York–based hedge fund firm Starboard Value owns 4.9 percent of the office supplies giant, stands to add one more success story to his activist résumé.
Smith, 42, officially began pushing Framingham, Massachusetts–based Staples toward the deal in December, having built up Starboard’s position in the company after stepping down from the board of Office Depot. He led the charge that saw Boca Raton, Florida–headquartered Office Depot combine with rival OfficeMax in 2013 and now has his sights set on even further office supplies industry consolidation.
“It’s pretty apparent that putting the companies together comes up with a better value creation opportunity than either company could possibly come up with on their own,” says Smith, who launched Starboard within Ramius Capital in 2002, later spinning it off after Ramius merged with New York–based Cowen Group. Starboard currently has $2.9 billion in assets under management, according to Securities and Exchange Commission filings.
The merger, which is expected to close by the end of the year, hasn’t been very controversial; most observers agree that there are many financial advantages to combining the two businesses, and although Staples has publicly predicted $1 billion in potential synergies, some analysts have suggested that the number may be closer to $2 billion. One stumbling block could be approval from the Federal Trade Commission, which rejected an earlier proposed tie-up between Staples and Office Depot on antitrust grounds.
The FTC is concerned with price fairness for consumers, but many observers think it will approve the merger this time around because times have changed: In evaluating Office Depot’s merger with OfficeMax, the committee broadened its definition of the office supplies market to encompass any business that sells such products, including companies like Amazon.com and Costco Wholesale Corp.
But Smith isn’t just focused on staplers and filing cabinets. He’s previously taken activist positions with companies such as U.S. pork producer Smithfield Foods and Tessera Technologies, a San Jose, California–based specialist in semiconductor miniaturization. Last year he made a splash with his influence on conglomerate Darden Restaurants, which owns Olive Garden and LongHorn Steakhouse and until recently owned Red Lobster. Orlando, Florida–based Darden’s handling of its July 2014 sale of the seafood chain prompted Smith to launch his crusade, which left him with effective control of the board.
Activist investing is nothing new, but Smith stands out for his aggressive strategy. Starboard owned less than 10 percent of Darden before Smith began criticizing the company’s valuation and its decision to sell Red Lobster instead of rolling it up into a real estate investment trust with Darden’s other restaurants. He rallied shareholders to search out an alternative to selling Red Lobster, but the board, led by then-CEO Clarence Otis Jr., voted for a sale to San Francisco–based private equity firm Golden Gate Capital for $2 billion in cash.
Although Smith eventually built a 15 percent position in Office Depot, he held just 5.7 percent of Smithfield when he began seeking a different buyer for the company than the one the board had chosen in 2013. Shareholders still ended up approving the $4.7 billion sale to Chinese meat processor Shuanghui International.
Starboard also owns less than 1 percent of web portal and search engine giant Yahoo and a 2.4 percent share of digital content veteran AOL. Those positions are some of Starboard’s smallest, but they may leave the hedge fund and its leader’s biggest mark yet. As the wheels on the Staples–Office Depot merger were beginning to turn last year, Smith sent a letter to Yahoo president and CEO Marissa Mayer that was made public. In it he made some suggestions: Sell Yahoo’s stake in Chinese e-commerce titan Alibaba Group Holding to cut costs, stop spending so much money on small start-ups, and merge with AOL.
Smith backed away from AOL after trying and failing in 2011 to gain seats on its board, though he did convince the company to spin off local news network Patch. About two months after he sent the Yahoo letter, Starboard filings showed its 2.4 percent stake in AOL.
After the shake-up at Darden and his success with Staples and Office Depot, Smith has made it clear that size doesn’t matter as much as strategy. At the end of January, Yahoo capitulated to one of Starboard’s demands by agreeing to unload its 15 percent stake in Alibaba. Yahoo officials insist that they aren’t considering a deal with AOL, but ultimately shareholders will decide.
