Shares of Office Depot (NASDAQ:ODP) soared late last year. In December, activist investor fund Starboard Value LP reported that it had increased its investment in Office Depot and had also bought a 5.1% stake in its main rival, Staples (NASDAQ:SPLS).

This set off a wave of speculation that Starboard would try to arrange a merger between the last two office supply giants. Both Office Depot stock and Staples stock rose on the news, but Office Depot achieved larger gains.

SPLS Chart

Staples vs. Office Depot Stock Chart, 12/10/14-1/13/15; data by YCharts

There has been no more news on Starboard's plans in the past month. As the merger speculation has died down, Office Depot stock has fallen from its multiyear high of $8.91 reached late last year to around $8 in the past few days. However, an investment in Office Depot could pay off even without a Staples merger.

Another merger is more important

Speculation about a Staples-Office Depot merger has made the investment community forget that Office Depot is still in the early stages of integration for its late-2013 merger with OfficeMax. This integration process will yield substantial savings for Office Depot, moving the company from breakeven in 2013 to substantial profitability in 2016 and beyond.

Early merger synergies have enabled Office Depot to raise its 2014 adjusted operating income guidance multiple times. Office Depot's most recent projection calls for adjusted operating income of $255 million-$265 million in 2014, compared to an initial projection of $140 million.

Office Depot's earnings will soar as merger synergies kick in. Photo: The Motley Fool

For 2015, Office Depot is currently projecting that adjusted operating income will reach at least $475 million: up about 80% year-over-year. Considering how conservative Office Depot's initial 2014 guidance was, this figure may be quite conservative.

By the end of 2016, Office Depot expects merger synergies to reach at least $750 million annually. A recently announced restructuring of Office Depot's European operations will add another $90 million in annual savings.

This total (pre-tax) savings of $840 million is quite large by comparison to Office Depot's $4.3 billion market cap. If management can bring all this savings to the bottom line, EPS could rise to $1 by 2017. Office Depot stock currently trades for just 8 times that figure.

Stores begin closing

One of the major cost-cutting drivers in 2015 and 2016 will be store closures in North America. Both Staples and Office Depot have acknowledged that they have too many stores. As a result, Staples plans to close 225 stores between 2014 and 2015, and Office Depot plans to close at least 400 between 2014 and 2016.

Staples and Office Depot are each closing hundreds of stores. Photo: The Motley Fool

A big wave of store closures has occurred in the past 6 months or so. For example, more than 100 of Office Depot's 165 store closures scheduled for 2014 occurred during Q4.

By closing stores that were underperforming and/or located too close to other stores, Staples and Office Depot should be able to significantly improve their same-store sales trends. This will reverse a trend that has weighed on office-supply retailers' profitability in the past few years.

Big dividend or buyback potential

As noted above, Office Depot stock currently trades for about 8 times its potential 2017 earnings -- assuming that all of the projected merger synergy savings drops to the bottom line. Office Depot's free cash flow could be even higher.

Non-cash depreciation and amortization expense is estimated at approximately $300 million for 2014. Normally, this would be offset by capital expenditures (cash spent on long-term projects that is reflected in future depreciation charges). However, store growth and major remodels are the main drivers of capital spending for retailers.

Yet Office Depot is shrinking its store base, not growing. This is reflected in its estimated 2014 capital budget of $150 million. The gap between depreciation and amortization expenses and capital spending will cause free cash flow to exceed net income at Office Depot after the integration process is completed in 2016.

This means that Office Depot will probably be able to implement a significant dividend and/or buyback program by 2016 or 2017. If Office Depot stock doesn't rise this year as the company's earnings improve, the introduction of a large capital return strategy should drive big gains for Office Depot stock in the future.