Will Staples Buy Corporate Express?

In the Netherlands there is heated speculation about when Staples (SPLS) will make an offer for Corporate Express (CXP), the Amsterdam based office products supplier, and how high the offer will be.

Last week, the share price climbed more than 40% in a matter of hours based on an article in a Dutch newspaper that Staples had admitted to be in preliminary discussions with Corporate Express about a takeover. Later the same day, Corporate Express came out with a statement that no such discussions are taking place, and the stock gave back a large chunk of the price increase.Still, many investors feel a take over is imminent based on the low valuation of the company, and the problems it has facing the competition, especially in North America where Corporate Express earns more than half of its revenue. Results for 2007 that were mildly positive and a high book value per share should support this scenario.

I feel however there is something wrong with the assumptions for a takeover, and I think the wishful thinking is coming almost entirely from opportunistic Corporate Express shareholders. Of course it would be a wonderful outcome for investors that bought the shares at cheap perceived valuations, and even big opportunistic investors like AllianceBernstein and Centaurus who came to the party too early may favor a rapid and somehow still dignified exit. But the question that puzzles me is why Staples would buy Corporate Express?

Staples is the biggest and strongest company in the sector, with margins and growth rates ahead of its competition. It has consistently delivered increasing returns for shareholders, while using cash flow wisely by buying back shares and investing in expanding the business, both at home and abroad. This model seems to work well, while I believe an acquisition of Corporate Express may turn out to be quite expensive and risky. Sure, they may be buying market share in a highly fragmented home market, while picking up some business in Europe and Australia.

But somehow I believe Staples prefers the current strategy, where it has much more control over its performance and growth rate, where it can stay completely focused with less risk of causing a major disruption in the execution of the strategy through a potentially disappointing integration process. Expanding through new store openings and smaller acquisitions could well be the preferred and more profitable route for Staples’ shareholders.

I hope for shareholders in Corporate Express that I am wrong and that sometime soon in this period of earnings announcements, the much anticipated offer will come, but I will not hold my breath. And neither will the management of Corporate Express if they have been truthful about their preference for going it alone in the execution of their vision for the next few years.

Disclosure: Author holds a long position in CXP

Comments

[Philly Dog:]

Who cares? These corporate fat cats are only in business to keep their shareholders happy. The employees are treated like numbers who can be deleted at any time.

2008 Sep 26 11:23 AM