The case of Office Depot and Staples is a good example of why investors should be aware of both the bull and bear thesis on a stock. For those who were short Staples at the time, being aware of the bull thesis would have helped frame the risk of a short position in Staples. Since November, that bull thesis has largely played out as both companies are now several steps closer to a potential merger. Office Depot and Staples are now up 78% and 45%, respectively, as the stocks price in the increased likelihood of a combined company. 

Here's what has happened in that time frame. The prevailing sentiment around Staples and Office Depot at the time was that they were troubled companies stuck in an obsolete industry. However, there was a growing bull thesis, which I detailed in November, which discussed the idea that the two companies could potentially merge together. That idea gained further momentum when it was disclosed that the activist shareholder behind Office Depot and OfficeMax merger now held a stake in Staples, and was likely trying to get Staples and Office Depot to merge. Today, WSJ reported that SPLS and ODP are now in active discussions on a potential merger. What was once a small, speculative bull thesis has now become a strong possible outcome two steps removed from reality.  

The potential benefit from an Office Depot-Staples merger is a significant. Wall Street analysts estimate that synergies would be as significant as $1.5 billion (compared to Office Depot's 2013 pro forma EBITDA of $385 million). Some articles have been quick to bash this number, but it's not difficult to see where these synergies could come from. Both companies have a significant overlap in costs, with advertising and real estate as significant sources. Additionally, there would be savings from purchasing as the combined company would have more negotiating power over suppliers. Office Depot and OfficeMax's $750m+ of stated synergies further support analyst estimates; the combination of two larger companies would likely come with even larger synergies. 

The key is that Staples and Office Depot did not have to successfully merge together for the stock to move up. As the bull thesis became increasingly possible, the stocks moved up to price in the potential upside scenario of ~$1.5b+ of synergies. With the stocks now significantly higher, there will be increased scrutiny on the deal specifics. Look for the discussion to move towards whether such a merger is legally and operationally possible, and what the potential synergies would be if it were to go through.