In my mind's eye, the scene imitated Martin Luther, nailing his 95 Theses to the doors at Castle Church. The raider's messenger marched up to the boardroom doors at Corporate Express (NYSE: CXP ) and there boldly staple-gunned the bid for all to see.
For the past three months, frightened Corporate Express board members scurried to and fro past the documents, pretending they didn't exist -- wishing they didn't exist, and that these darned barbarians would just please take their offer and leave the corporate gates.
No such luck.
Barbarians back at the gates
The barbarians from would-be acquirer Staples (Nasdaq: SPLS ) came knocking again yesterday. They returned to Corporate Express with an improvement on their original $3.7 billion offer to take over the company. Corporate Express' board had argued in February that "this proposal significantly undervalues the company and fails to reflect Corporate Express' prospects." To which Staples replied, "Fine," and upped the offer to $4.1 billion.
Totaling up the Danegeld
Crunching the numbers that a merger might produce, I concluded back in February: "[A] combined Staples-Corporate Express could potentially generate roughly $25 billion in total revenues and nearly $2.2 billion in operating profit, based on Staples' domestic margins and Corporate Express' international margins. Compared to the $1.9 billion the two companies earned separately over the last 12 months, that makes for a 16% improvement."
Three months, two earnings reports (one from each player), and one raised bid later, it's time to review the numbers and see whether Staples' increased bid still makes sense, and potentially cents, for shareholders. Here are the relevant facts:
- Over the past 12 months, Staples' revenues totaled $19.4 billion, on which it earned an 8.2% operating margin, or $1.6 billion -- essentially unchanged from one quarter ago.
- Corporate Express has not fared so well. First-quarter revenues fell steeply from the year-ago quarter. It generated $2.1 billion, down from the $2.2 billion it booked in Q1 2007. As a result, total revenues amounted to roughly $6 billion.
- On the plus side, Corporate Express' operating margin ticked up by 30 basis points, enough to basically offset the profits lost to declining revenue and hold the operating profit steady.
Conclusion: When you consider the two companies separately, without any benefits from a merger, they still tally up to $25 billion in annual revenue and $1.9 billion in operating profit.
So if, as I argued in February, a combined Staples- Corporate Express would apply the separate operating strengths of both organizations to the combined revenue stream of the whole, I still see the potential for about a 16% improvement in companywide profitability post-merger. Moreover, with smaller rivals Office Max (NYSE: OMX ) and Office Depot (NYSE: ODP ) still flailing, this merger offers the potential for creating an unassailable 800-pound gorilla of the office-supply market -- the biggest player by far, and the most profitable as well. About the only thing that has changed is that, in upping its offer by $400 million yesterday, Staples adds about one year to the six years I previously projected for this merger to "pay for itself."
The way I see it, this merger is a no-brainer. It pays Corporate Express shareholders a 51% premium to the premerger value of their shares -- a premium that Microsoft (Nasdaq: MSFT ) -less Yahoo! (Nasdaq: YHOO ) shareholders will tell you can evaporate in the time it takes to say, "We withdraw our bid."
On the other side of the table, for Staples shareholders who stick it out until the deal goes through, it offers the potential to recoup their investment in as little as seven years -- and perhaps sooner, if the merger "synergies" are greater than I expect, or the merged entity's growth is more rapid.
And now for the good news: The deal looks more likely today than it did three months ago. Responding to Staples' bid, Corporate Express CEO Peter Ventress said he was "surprised" at "Staples' assertion that we have been unwilling to engage."
Oh, sure, Ventress insists that Staples' "initial proposal significantly undervalued the company." Corporate Express expressed that opinion in a terse, four-sentence press release back in February. In contrast, yesterday's press release took a much more conciliatory tone and promised to "carefully consider Staples' revised proposal ... engage in a dialogue with Staples and if appropriate ... meet with Staples management to allow them to elaborate on the revised proposal."
Common sense may win the day yet.