Staples Inc. (NASDAQ: SPLS) has already rallied handily from its bottom, due in part to the consolidation plans to acquire Office Depot (NYSE: ODP). Staples has been the target of activist investor Starboard Value for a while, and now the group has released a letter to Staples commending its efforts, but also asking for more efforts that could make Staples’ stock worth another 100% higher in price.

Starboard’s new letter to the Staples board of directors does commend the company and management for negotiating and announcing the acquisition of Office Depot. What stands out the most is that Starboard claims that management’s current cost-benefit assessment of post-merger synergies is conservative. Starboard believes those synergies could be over $2 billion, and Staples could ultimately be worth $32 to $37 per share once the Office Depot acquisition has closed and once those synergies can be realized.

What investors will want to consider is that Staples has risen more than 50% from its lows. Office Depot is now up close to 150% from its lows. Is it fair to assess that another 100% gain could be seen for the combined company? It seems more than aggressive on the surface. Still, Starboard outlines the how and why they get to such a large valuation ahead.

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Even with the market at all-time highs, one would have to assume that every single pre-merger and post-merger effort would have to be executed without flaw. Another consideration is that Staples shares have never traded as high as what Starboard is suggesting. Staples shares peaked above $26 all the way back in 2006. They tried to stay above $25 briefly in 2007, before sinking to $16 during the 2009 panic selling, and then went back to $25.75 by February of 2010. The share price slid from there, and the stock has not been back above $20 since April of 2011.

So, what does Starboard have up its sleeve?

Starboard is hoping that Staples will give serious consideration to its suggestions for improving the board of directors to ensure a successful deal completion and to help with an efficient post-merger store integration. Keep in mind that Staples has been closing stores, and also keep in mind that Office Depot and Office Max have not even come close to realizing their store closure and integration efficiencies.

Starboard Value is now one of the largest shareholders of Staples, with its 4.5% ownership stake. Its letter said:

We are pleased that you have negotiated and announced an acquisition of Office Depot. We believe that the strategic and financial logic behind this transaction is undeniable, and that the magnitude of value creation from a Staples-Office Depot combination will far exceed anything that either company could achieve on a standalone basis. The combination of Staples and Office Depot will create an industry-leading office supply retailer with an optimized cost structure that will allow it to prosper despite the continued secular decline in office supplies and increased competition.

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As far as the $32 to $37 valuation, it is based on an assumed $2.2 billion estimated synergies realized over three years and a valuation range of approximately six to seven times enterprise value to EBITDA (EV/EBITDA), or based upon 11 to 13 times earnings (P/E ratio). Outside of cost synergies and the unified brand image, Starboard also said:

We believe that Staples’ current stock price remains undervalued relative to the potential synergies and earnings growth for the combined company. We believe that management’s current estimate of synergies will prove to be conservative and that the actual amount realized could be more than $2 billion. These synergies can be realized by reducing duplicate corporate overhead and advertising expenses, combining and optimizing the retail store footprint, reducing purchasing expenses, and combining Staples’ Contract and International businesses with those of Office Depot. In addition, the combined company will be able to pursue long-term growth initiatives and operational improvements, such as expanding the online business and omni-channel initiatives, expanding into higher margin services, including copy & print, and reducing the number of retail SKUs while testing new small-store formats.

Given the substantial opportunities outlined above, we expect that when the announced merger is completed, Staples will raise its total synergy forecast as management gains increased visibility on cost savings. Fully realizing the potential synergies between Staples and Office Depot will result in a dramatic increase in earnings and free cash flow. Based on our assumptions, we believe that Staples could be worth between $32.00 to $37.00 per share once the acquisition of Office Depot is completed and the combined company begins realizing synergies.  This represents an increase of 88% to 118% relative to the current share price.

After speaking with you, it is clear that we share the same top priorities, which are to make sure that the announced transaction is completed and that the integration is well-executed. However, we also recognize that shareholders are frustrated with Staples’ historical performance.

While we commend the Board for evaluating, pursuing and ultimately announcing the acquisition of Office Depot, we are mindful that the stock price performance, operating performance, and corporate governance of Staples prior to this announcement had been suboptimal. Over the past two years, Staples management has pursued a standalone strategy that has resulted in a 31% decline in earnings per share. Prior to merger speculation, Staples’ share price had declined more than 38% over the previous five-year period, dramatically underperforming its peer group. Furthermore, the current Board and management team ignored a clear mandate from shareholders, waiting more than seven months to respond to a vote against named executive officer compensation and for a separation of the Chairman and CEO role. The Company has yet to fully address the concerns raised by these vote results.

As we discussed, completing and then ultimately integrating the acquisition of Office Depot will require close oversight from the Board. The combined company’s board must have the proper skill set in place to oversee the integration of two large companies with more than $37 billion of combined revenue, and approve a new business strategy to maximize success over the long term. Shareholders need to have confidence that you will be able to complete this transaction and then execute far better than in the past in order to effectively integrate and perform as a combined company. This is a difficult task and will require having the right people in place. To that end, as we have discussed with you, we believe that it would be beneficial to improve the composition of the Board to ensure successful deal completion and efficient integration of the two companies.

This is an exciting time and critical turning point for Staples. We trust that you will seriously review and consider our suggestions for improving the Board and that we can work together to enhance oversight at Staples. We look forward to continuing our dialogue with you.

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24/7 Wall St. would remind investors to at least consider that there is no such thing as an “Easy Button” when it comes to mergers of this sort. There are still merger approval risks that could undermine the proposed deal, and there are of course ongoing economic risks and customer behavior shift risks that do not seem to be working in the favor of retailers looking to sell office supplies and office products.

The initial reaction has seen a $0.09 drop to $16.72 for Staples shares after the letter was released. Staples has a 52-week range of $10.70 to $19.40. The consensus analyst estimate from Thomson Reuters is almost $17.50, and the absolute highest analyst price target for the stock is up at $23.

So, does a $32 to $37 price target from Starboard feel objective, or like they are just “talking their book” further and further? Stay tuned.

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