Office Depot bowed to its largest common shareholder and agreed to oust two board members to make room for three Starboard Value representatives.
The management challenge was playing out amid merger negotiations to bring together Office Depot (NYSE, ODP $4.01) and OfficeMax (NYSE: OMX, $10.32) to form a company better able to compete against office supply superstore industry leader Staples and online competitors like Amazon. Share prices for both companies are down about 5 percent in morning trading.
Office Depot CEO Neil Austrian acknowledged after Wednesday’s annual shareholders meeting that many votes were going to New York hedge fund Starboard Value, causing the Boca Raton-based office supply superstore chain to give in to the activist shareholders demands. Starboard Value sponsored a challenge ballot of board directors.
Ultimately, Office Depot directors Marsha Evans and Scott Hedrick agreed to step down Thursday. The 10-member board will be expanded to 11 members and Starboard Value nominees Jeffrey Smith, the hedge fund CEO, Joseph Vassalluzzo and Cynthia Jamison will be appointed.
Charles Elson, director of the Weinberg Center for Corporate Governance at University of Delaware said that is a classic move.
“If the dissidents’ vote look to be high enough, they’ll typically settle,” he said. And the alternative views can be beneficial to the company, he said.
Both Austrian and Smith said the two sides are now serving together for the good of all shareholders.
“The board and the people on the board are going to work very well together,” Smith said after the shareholders meeting.
Potentially, the company weakened itself as it heads into the final stretch of merger negotations.
While the merger is posed as a joining of equals, Office Depot will have two of five members of the joint board who came in with their own gameplan. And Austrian will not be heading the company, by his own admission.
“I took myself out of the running a long time ago,” said the man who will be 74 soon and stepped into his current role after an interim gig. Austrian said he is unwilling to make the five-year commitment he thinks the new leader will need to establish the joint company.
The selection committee, which will now include Vassalluzzo, has said it is down to five finalists and will make a decision by September.
While OfficeMax is giving up its stock in exchange for Office Depot stock — getting 2.69 shares in return for each one — ISS Proxy Advisory Services points out that OfficeMax appears to have had the upper hand as the merger was laid out. Office Depot wanted a cash deal, but agreed to the stock swap, and it wanted to name a CEO before closing the deal, but bowed to OfficeMax’s desire to wait, the advisory company said in its analysis.
ISS and advisory firm Glass, Lewis & co. recommended shareholders vote for the three nominees Starboard Value that will now be on the board. Technically, Starboard Value pulled its dissident ballot Wednesday morning and voted its shares for the company-sponsored proxy.
Meanwhile, time is limited for economic development leaders.
Austrian said the company is talking to Enterprise Florida and he has met with Gov. Rick Scott, who clearly want the joint company to remain in Florida. Local economic development leaders said they will come with a competitive offer, but lawmakers in Illinois where OfficeMax is located have also been active.
Both the headquarters location and company name will be determined after — and it’s still an if — the merger is approved by the Federal Trade Commission. But that could come as early as mid-October, as the company has mostly submitted its responses to regulators’ questions and has a few more depositions to wrap up.
Starboard’s Smith said where the headquarters is located will depend on the benefits and costs. He said Wednesday he had “no presdisposition.” At least one of his board nominees, Joseph Vassalluzzo, may be a secret weapon for Palm Beach County.
The former Staples executive lives in Boca Raton. He worked at Staples in the mid-1990s when merger negotations with Office Depot were derailed by the Federal Trade Commission. The industry at that time was accelerating like a “rocket ship,” Vassaluzzo said. Now “it’s a much different environment and much different climate.”
The merger will offer “tremendous synergies” that can make the new company profitable.
Office Depot has reported a loss for the past five quarters, though it has slowed the leaks by downsizing stores and increasing use of high-margin services such as copying and printing.
While there are many details to settle, Wednesday’s annual shareholders meeting could have been the company’s last.
At the close of the meeting, Austrian said, “We look forward to next year having a new combined company that will be very successful.”