Last week an announcement by Staples Inc. (NASDAQ:SPLS) confirmed that the company is actually acquiring its rival Office Depot Inc. (NASDAQ:NDP) for the amount of $6.3 billion. The deal however, requires a cash of $7.25 per share in consideration. An increase in the shares of both companies was witnessed ever since the investors became aware of the merger of the two companies.
However, Staples’ (NASDAQ:SPLS) shares started to decline just as the company announced the acquisition, while the shares of Office Depot (NASDAQ:NDP) kept on increasing. Staples’ (NASDAQ:SPLS) stock has declined by 12.84% in the three previous trading days, while the stock of Office Depot (NASDAQ:NDP) has increased by 2.2%.
The merger of the two companies did not impress the investors because they are of the view that Staples (NASDAQ:SPLS) over paid for the acquisition of Office Depot (NASDAQ:NDP). The enterprise value of Office Depot (NASDAQ:NDP), at the moment, is $5 billion and each shareholder of the company is eligible to receive $11.69 per share, indicating a 23.4% increase than the company’s stock which closed on Friday at $9.48.
As a result of the announcement regarding the takeover, Goldman Sachs Group elevated its rating of Staples (NASDAQ:SPLS) to Neutral from Sell. In the time period of the next three years, both companies will have to attain cost synergies of $ 1 billion, with $1 billion being the upfront cost as well. At the same time Goldman Sachs is of the opinion that the management is being timid as far as the cost-savings is concerned.
According to the investment firms, the $1 billion that the management is expecting in the form of synergies does not include the $440 million that would be attained by Office Depot (NASDAQ:NDP) towards the end of this fiscal year. The analysts have elevated the rating of Staples (NASDAQ:SPLS) to Neutral, along with its target price for the next 12 to 18 months from $14 to $16.
The target price on Office Depot (NASDAQ:NDP) was also increased by the investment firm from $8.15 to $10 as a result of the implementation of the merger. According to Goldman Sachs, there is a risk factor involved that might prevent the two companies to reach their potential. The market of office supplies are quite challenging and that might disrupt the synergies.
Moreover, this is the second attempt towards the merger of the two companies; the first attempt was disrupted by the regulatory authorities in the year 1997. There are chances of an interference of the commission this time around as well. According to analysts, there is a possibility that the US Federal Trade Commission will take its time to review the deal from various angles before approving it.
Staples (NASDAQ:SPLS) is a big name in the industry of office supplies and its earnings are expected to grow further. Companies like Telsey Advisory Group have elevated the company’s stock to Outperform from Market Perform along with an increase in its target price from $18 to $23 per share. Also, there was a rise in the company’s stock and it was raised to Buy from Neutral, by an analyst at Janney Montgomery Scott.