Activist investment firm Starboard Value LP called for a merger between office supply companies Staples Inc. and Office Depot Inc. in a letter Tuesday.
The investor bought a stake in Staples and increased its investment in Office Depot last month, fueling speculation that the firm would push for a merger.
The two companies can double their operating profits and better compete with online retailers if they merge, Starboard managing member Jeffrey C. Smith said in the letter addressed to Staples Chief Executive Ronald L. Sargent.
"We have met with and spoken to a number of large Staples shareholders and Wall Street research analysts who strongly, and without exception, corroborate our view that this merger makes too much sense to ignore," Smith said in the letter.
Smith urged Sargent to retain an investment bank and legal advisors to explore the merger.
If the company does not pursue a merger, Smith warned, "it would be a clear sign that significant leadership change is needed at Staples."
Starboard Value holds a 5.1% stake in Staples and a 9.9% stake in Office Depot, according to regulatory fillings from Dec. 10.
Shares of both companies climbed after Starboard announced its increased stakes, but the shares fell Tuesday. In midday trading, Staples fell 5.36% to $16.42 while Office Depot fell 4.29% to $7.68.
In October Starboard convinced shareholders to replace the board of Darden Restaurants, the owner of Olive Garden and other chain restaurants, with Starboard appointees.
Office Depot previously merged with competitor OfficeMax in 2013.