Discussion Materials | February 3rd , 2017

Recommendation to Staples Inc. | Board of Directors

1

The I.U. Morgan Team

The Team 2

Tim JohnsonMajors: Finance and Real Estate Hometown: Cape Cod, Massachusetts

Christina AdamsMajors: Accounting and FinanceHometown: Wheaton, Illinois

Michael SmithMajors: Finance Hometown: Columbia, Maryland 

Majors: Finance and AccountingHometown: Cincinnati, Ohio

Jake Winans Austin AdamczykMajor: FinanceHometown: Fulton, Maryland

Tom StrongMajors: Finance and Accounting Hometown: Bordeaux, France 

Table of Contents

Table of Contents 3

I. Executive Summary 4

II. Industry and Company Analysis 6

III. Strategic Recommendation 11IV. Appendix

18

I. Executive Summary

4

Executive Summary

Executive Summary 5

• I.U. Morgan proposes that Staples acquires NetScout Systems in order to further develop their markets within IT optimization, cyber securities, and strategically grow their United States customer base

• This potential acquisition will allow Staples to expand upon its Business Advantage package and grant them a larger, more diverse number of resources as they continue to differentiate their company within the digital maintenance market

Macroeconomic & Industry Outlook

Strategic Positioning for M&A Proposal

• Consumer spending is expected to increase over the span of the next three years

• Consumer Confidence Index is at a 13-year high

• Consolidation among the largest firms leaves few remaining major retailers within the industry

• Increasing competition from online, substitute retailers

• Decline of the office supplies industry is predicted to continue over the course of the next five years

• Many of the core products within the industry are now viewed as outdated

• With physical office supplies dwindling in terms of significance within the business world year after year, IT and network operations management and security are becoming imperative for all businesses across the globe

• History of technology companies performing positively post-acquisition is a key factor for the M&A

• Other specialty retailers across various industries have acquired smaller, developing companies in successful attempts to diversify and expand both their products and consumer base

• A greater number of convenient online services allows companies to capitalize on the high Consumer Confidence Index

• Considering the steady decline within the office supplies industry, expansion into more relevant and developing markets is of the utmost importance

• A great number of businesses are expanding their presence within the digital market, and the demand for consistent digital maintenance and security is rapidly increasing as a result

• Using cash, Staples will execute an open market share repurchase of SPLS; Nasdaq (65 million shares) at the purchase price of $9.05 using 60% of cash reserves

• Post share repurchase, Staples Inc. Acquires NetScout Systems Inc. Offer Price: $44.01 per share (35% Control Premium)

II. Industry and Company Analysis

6

• U.S. GDP projected to grow 2.7% in 2017 and 3% in 2018• Trump administration will likely cut corporate tax rates,

deregulate, and increase infrastructure spending• Trump administration could also enact high tariffs,

increasing costs of importing goods for many U.S. companies

• U.S. PMI Composite continuing steady upward trend, reaching 55.4 in January 2017, from 50 in February of 2016

• Consumer Confidence Index has increased to 113.7 in December from 109.4 in November, reaching a 13-year high

• Consumer spending expected to average 2.5% growth per year over the next three years

• Federal Reserve expected to raise rates by 75 basis points this year, showing strong optimism in U.S. economy

Macroeconomic & Industry Analysis

Macroeconomic & Industry Analysis 7

• Office supplies industry expected to continue its decline in the next five years

• Economy is digitalizing, with online growth and decline in floor space

• Increasing competition from substitute retail industries, especially online retailers providing lower prices and at-home convenience

• Consolidation among largest firms leaves few remaining major retailers

• IVA forecasted to decline at an average annual rate of 6.2%• Some of industry decline is result of many core products

becoming obsolete • Households account for 45% of industry sales, while small

and medium sized businesses account for another 44.6%

Macroeconomic Trends Industry Trends

Office Supply Store Forecast

Dec-99Dec-

07Dec-

15Dec-

23Dec-

31Dec-

39Dec-

47Dec-

55Dec-

63Dec-

71Dec-

79Dec-

87Dec-

95Dec-

03Dec-

11$10,000

$12,000

$14,000

$16,000

$18,000

$20,000U.S. GDP ($B)

2015 2016 2017 2018 2019 2020$10,000

$12,000

$14,000

$16,000

-700%-600%-500%-400%-300%-200%-100%0%

Revenue Growth %

• Headquartered in Framingham, Massachusetts• Founded in 1985 by two former rivals in the New England

supermarket industry• IPO on April 27th, 1989 with $325 million shares sold at

stock adjusted price of $0.74• Ticker Symbol: SPLS (NASDAQ)• Market Capitalization: $6.0501 billion• Currently employs over 79,075 people• Recorded revenue of $21.1 billion in 2015, down 6.37%

from $22.5 billion in 2014• Holds over 36% of industry market share• Subsidiaries: Quill Corporation, Staples Business Advantage,

Corporate Express, PNI Media

Staples Company Overview

Company Overview 8

• Staples has completed over nine acquisitions in past ten years

• November 2016: Q3 earnings call unveils “Staples 20/20” strategic plan

• November 2016: Agrees to sell U.K. retail division to Hilco as international sales continue to decline

• September 2016: Appoints Shira Goodman as CEO, a veteran of 25 years

• August 2016: Pays Office Depot $250 million breakup fee for blocked merger due to anti-trust concerns

• March 2016: Staples introduces its Business Advantage package to small-medium sized companies

• July 2014: Acquires PNI Digital Media, a Canadian printing software company for $67.3 million in cash

Business Description Recent Developments

Growth and Revenue

2015 2016 2017 2018 2019$19,000

$19,500

$20,000

$20,500

$21,000

$21,500

-700%-600%-500%-400%-300%-200%-100%0%100%200%

Revenue Growth %Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Jul-16

$0$2$4$6$8

$10$12$14$16$18$20 Stock hits 13-

year low after FTC files suit to block Office De-pot merger

Historical Stock Chart (5Y)Staples shares are currently up over 4.3% YTD, underperforming the NASDAQ and S&P500 by 17.4% and 13.1% respectively

Staples announces purchase of Lonesource

Stock advances over 30% based on speculation of merger with Office Depot

Small Businesses27.80%

Households for Ed-ucation Purposes

22.50%Large Businesses

16.80%

Households for General Purposes

15.30%

Other 17.60%

• Main products include office supplies and equipment, office machines, technology, office furniture, staples, and more

• Main services include printing, marketing, shipping, tech, office, and finance

• Products sold through brick-and-mortar locations as well as online

• Focusing on mid-market customers with Staples Business Advantage

• 85% of revenue comes from within North America, with only 15% international

• Number one office supply superstore in United States and worldwide leader in the office category

• Working towards goals of over 60% sales from beyond office supplies, over 80% sales delivered, and over 95% of sales from North America

Staples Strategic Focus

Strategic Focus 9

Major Market Segmentation

North America 85%

International 15%

Geographic Segmentation

Office Supplies and Equipment

44.60%

Office Machines28.50%

Technology 13.00%

Services 8.20%

Office Furniture 5.70%Sales SegmentationProducts and Services

Staples Football Field Analysis

Football Field Analysis 10

52-Week Range

DCF

Precedent Transactions

Comparables

$6 $8 $10 $12 $14 $16 $18

Implied Share Price Range

III. Strategic Recommendation

11

• Using cash, Staples will execute an open market share repurchase of SPLS; Nasdaq (65 million shares) at the purchase price of $9.05 using 60% of cash reserves (1B)

• The target share price post-buyback is between $11.50 and $12.00

• Share price will rise as a result of increased EPS and share holder confidence

• Staples used this strategy in both 2007 and 2011 to raise their EPS by an average of 17% from the respective previous years

Strategic Recommendation 

Strategic Recommendation 12

• The increased share price from the share repurchase provides substantial utility in capital to assist in the acquisition of NetScout

• Staples Acquires NetScout Systems, which will operate under the Staples brand

• Staples benefits from the synergy between NetScout and Staples Business Advantage

• Offer Price: $44.01 per share (35% Control Premium)• Transaction Currency: 40% Stock, 40%Debt, 20% Cash

Share BuyBack Acquisition of NetScout

Staples EPS Growth Shareholder Aspirations• According to I.U. Morgan analysts, Staples stock is currently

undervalued • Buying back shares at an undervalued price gives

confidence to shareholders and will increase the stock price• Staples has consistently underperformed in comparison to

its index (Nasdaq)• Staples has over 1 billion in cash on hand, able to purchase

107+ million shares outstanding• Staples would be protected from tax on cash• EPS and subsequently share price is projected to increase

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

00.20.40.60.8

11.21.41.6

-1500%

-500%

500%

1500%

2500%

EPS Growth %, YoY

File a 10B-18 with the SEC, announce share repurchase

(N-23-c3)

Using industry practices of ASR to

complete repurchase

timeline of 6 months

Allow market trends and analyst reports to help

bolster share price following increased EPS

Research, propose & close NetScout (with

fairness opinion)

Strategic Rationale

Strategic Rationale 13

Potential Risks & Mitigations• Acquisition of NetScout may not meet the expectations of

technology portion of Staples’ Business Advantage Series• NetScout may not be able to handle the larger network that

Staples serves• NetScout provides solutions that are used in various service

providers, enterprise and government networks, meaning Staples will be exposed to new sectors improving the technology portion of their Business Advantage Series

• NetScout has successfully reacted and changed their practices after numerous acquisitions and company changes

Culture Fit

• Both companies are headquartered in Massachusetts, less than 40 minutes apart

• Companies share many similar corporate responsibility incentives including ROHS and WEEE

• Similar mission alignment between both companies as they pride themselves on reliability and “24/7 performance”

• NetScout Systems is a member of Technology Alliance Partners, which Staples has worked with in the past with successful results

Strategic Fit

• Staples is looking to diversify their product and develop a strong presence in the IT services industry

• Through the acquisition of NetScout Systems Staples stands to significantly bolster the technology portion of their Business Advantage services

• NetScout Systems serves as a Tier 1 ERP software solution, able to meet the demands and breadth of Staples corporate clients

• As Staples moves to a digital focus closing all stores that do not turn a profit, NetScout Systems offers a sustainable business model for the retention of Staples’ international clients

• Staples would have the utilitarian position and resources to accommodate NetScout Systems growth due to ample increases in client base

Acquisition & Integration

42.54%

27.29%

16.87%

7.85%5.46%

Office supplies and equipmentOffice machinesTechnologyServicesOffice furniture

Post-Acquisition Revenues

•Headquartered in Westford, Massachusetts•Founded as Network General in 1984 by Anil Singhal, who is still the company’s President, CEO, and Chairman •IPO on August 12th, 1999 with 3 million shares sold at $11 per share•Ticker Symbol: NTCT (NASDAQ)•Market Capitalization: $2.880 billion•Currently employs over 3,144 people•Focus on mid-market and large corporate customers

NetScout Company Overview

Company Target Overview 14

Business Description

NetScout shares are currently up over 59% YTD, outperforming the NASDAQ and S&P500 by 38% and 42% respectively

Historical Stock Chart (5Y)

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Jul-16

Jan-17

$0$5

$10$15$20$25$30$35$40$45$50

NetScout announces plans to acquire businesses from Danaher for $2.6B

Stock down over 20% in one day over missed earnings

4 large shareholders hold more than 30% of NetScout

OwnershipVolume Weighted

Average PriceExpected Return on Investment

11.19%

$35.28

35.7%

57.6%$18.67

$29.60

$28.29

32.7%

19.83%

7.75%

7.32%

5.38%

Major Shareholders

• R&D expense rose 64% YoY to $209 million in 2016• Acquired technology assets of Avvasi Inc. in August 2016• Acquired multiple communications businesses from

Danaher for $2.6 billion in July 2015 to expand customer base, fortify distribution, and accelerate adoption of the cybersecurity industry

• Businesses acquired from Danaher include Tektronic Communications, Arbor Networks, Fluke Networks, and VSS

• Acquired Fox Replay in October 2011, a Dutch information assurance and cybersecurity company

• Acquired Psytechnics in April 2011, a U.K. voice and video management company

• Recorded revenue of $955 million in 2015, up 110% from $453 million in 2014

• NetScout designs, develops, manufactures, markets, and supports products that enable businesses and service providers to report and manage performance of computer networks and business software applications

• Collects information used to optimize application and network performance

• Working towards solidifying and expanding its information assurance and cybersecurity business

• Sells products directly and through distributers to government and corporate customers

NetScout Strategic Focus

Strategic Focus 15

Recent DevelopmentsProducts and Services

Growth and Revenue

2015 2016 2017 2018 2019$0

$200$400$600$800

$1,000$1,200$1,400

0%2000%4000%6000%8000%10000%12000%

Revnues Growth %

North Amer-ica

71%

Asia 15%

Europe 14%

Geographic Segmentation

Key Employees

Key Employees 16

Anil K. Singhal Michael Szabados

Jean Bua Daryle DeBalski

Founder, Chairman of the Board, President and Chief Executive Officer

• Co-founded NetScout in June of 1984 and has served as CEO and as a director on the company’s Board since inception

• Credited with numerous innovations in the field of network traffic monitoring and analysis

Chief Operating Officer

• Served as NetScout’s Chief Operating Officer since April 2007

• Previously served as the Senior Vice President, Product Operations

• Held senior leadership roles with multiple companies: UB Networks, SynOptics/Bay Networks, and MIPS Corporation

Executive Vice President and Chief Financial Officer

• Served as NetScout’s Chief Financial Officer and Treasurer since November 2011

• Before NetScout, Ms. Bua served as Executive Vice President, Finance and Treasurer of American Tower Corporation

Senior Vice President, Research & Development and General Manager, Tools

• Joined NetScout in July 2015 after NetScout’s acquisition of Danaher’s Communications, where he was general manager for the Fluke Networks Enterprise business unit

• Mr. DeBalski has more than 20 years of software industry experience from a variety of companies

NetScout Football Field Analysis

Football Field Analysis 17

$15 $20 $25 $30 $35 $40 $45 $50 $55

Implied Share Price Range

52-Week Range

DCF

Precedent Transactions

Comparables

IV. Appendix

18

Staples Precedent Transactions Analysis

Comparable Companies Analysis 19

Target Acquirer  Announced Date  

Purchase Type

Equity Value (in millions)  

Transaction Value (in millions)   TV/Revenue   TV/EBIT   TV/EBITDA

                             

OfficeMax OfficeDepot 2/20/2013 All-Stock $ 1,323.84 $ 1,789.20 .99x 14.31x 11.16x

Lamrite West Inc

Michaels Cos Inc 2/2/2016 Cash $ 150.00 $ 150.00 .31x 15.59x 7.53x

Alfonso Nutrition

Vitamin Shoppe 6/9/2014 Cash $ 80.00 $ 80.00 .95x 12.87x 21.25x

THSDGNC Holdings 4/17/2014 Cash $ 7.50 $ 7.50 .86x 19.7x 6.29x

High $ 1,323.84 $ 1,789.20 .99x 19.7x 21.25x

Low $ 7.50 $ 7.50 .31x 12.87x 6.29x

Mean $ 390.34 $ 506.68 0.7775x 15.6175x 11.5575x

NetScout Precedent Transactions Analysis

Target Precedent Transactions 20

Target Acquirer  Announced Date  

Purchase Type

Equity Value (in millions)  

Transaction Value (in millions)   TV/Revenue   TV/EBIT   TV/EBITDA

                             

Net Optics Inc Ixia 10/29/2013 Cash $ 190.00 $ 190.00 1.52x 307.9x 43.02x

Airwave Solutions Ltd

Motorola Solutions Ltd 12/3/2015 Cash $ 817.50 $ 817.50 2.54x 13.98x 10.17x

ADC India Communications

CommScope Holding Co Inc 9/4/2015 Cash $ 47.68 $ 47.68 1.06x 11.31x 7.69x

Transmode AB

Infinera Corp 4/9/2015

Cash & Stock $ 2,659.40 $ 2,954.20 2.91x 31.39x 18.62x

High $ 2,659.40 $ 2,954.20 2.91x 307.9x 43.02x

Low $ 47.68 $ 47.68 1.06x 11.31x 7.69x

Mean $ 928.65 $ 1,002.35 2.0075x 91.145x 19.8x

Staples Comparable Companies

Staples Comparables 21

NetScout Comparable Companies

NetScout Comparables 22

Discounted Cash Flow Analysis (Staples)

23Discounted Cash Flow Analysis

Pro Forma Income Statement                    Actual FYE       Projected FYE        2014A 2015A 2016A LTM 2017E 2018E 2019E 2020E 2021E  0.5 1.5 2.5 3.5 4.5

Total Revenues (Sales) $ 23,144.26

$ 22,492.00

$ 21,059.00

$ 20,476.00 20,467.00 $19,824.70

$ 19,713.50

$ 19,939.33 $20,168.63

% Growth -2.82% -6.37% -2.77% -0.04% -3.14% -0.56% 1.15% 1.15%

Cost of Sales (COGS) $ 17,111.96

$ 16,691.00

$ 15,545.00

$ 15,168.00

$ 15,212.60

$ 14,700.00

$ 14,588.00

$ 14,854.83

$ 15,150.03

% Sales 135.25% 134.76% 135.47% 134.99% 134.54% 134.86% 135.14% 134.23% 133.13%

Net Operating Revenues $ 6,032.30

$ 5,801.00

$ 5,514.00

$ 5,308.00

$ 5,254.40

$ 5,124.70

$ 5,125.50

$ 5,084.50

$ 5,018.60

% Margin 26.06% 25.79% 26.18% 25.92% 25.67% 25.85% 26.00% 25.50% 24.88%     

Selling, General, & Administrative $ 4,735.29

$ 4,815.00

$ 4,600.00

$ 4,382.00

$ 3,887.95

$ 3,751.84

$ 3,761.90

$ 3,749.50

$ 3,667.60

% Sales 20.46% 21.41% 21.84% 21.40% 19.00% 18.93% 19.08% 18.80% 18.18%     

EBITDA (Adjusted) $ 1,699.80

$ 1,443.00

$ 1,379.00

$ 1,369.00

$ 1,366.45

$ 1,372.86

$ 1,363.60

$ 1,335.00

$ 1,351.00

% Margin 7.34% 6.42% 6.55% 6.69% 6.68% 6.92% 6.92% 6.70% 6.70%     

Less: D&A $ 55.41

$ 62.00

$ 67.00 444 437.74 455.72 429.93 399 418

% Sales 0.24% 0.28% 0.32% 2.17% 2.14% 2.30% 2.18% 2.00% 2.07%

EBIT $ 1,644.39

$ 1,381.00

$ 1,312.00

$ 925.00 928.71 917.14

$ 933.67

$ 936.00

$ 933.00

% Margin 7.10% 6.14% 6.23% 4.52% 4.54% 4.63% 4.74% 4.69% 4.63%Taxes 511.40529 403.252 378.9056 259.925 260.96751 257.71634 262.36127 263.016 262.173Tax Rate 31.10% 29.20% 28.88% 28.10% 28.10% 28.10% 28.10% 28.10% 28.10%

EBIAT 1132.9847

1 977.748 933.0944 665.075 667.74249 659.42366 671.30873 672.984 670.827     Plus: D&A 55.41 62 67 444 437.74 455.72 429.93 399 418

Less: (Inc.) In Net Working Capital $ 156.10

$ 67.00

$ 131.00

$ 53.00

52.97670443

51.31417757

51.02634792

51.61088543

52.20441061

Less: Capital Expenditures $ 371.20

$ 361.00

$ 381.00

$ 324.00

$ 290.80

$ 324.50

$ 319.70

$ 375.00

$ 375.00

Unlevered Free Cash Flow 661.09471 611.748 488.0944 732.075761.70578

56739.32948

24730.51238

21645.37311

46661.622589

4WACC 6.91%    Discount Factor   96.71% 90.46% 84.61% 79.14% 74.02%

Present Value   $ 736.67

$ 668.79

$ 618.09

$ 510.74

$ 489.74

WACC Calculation      Target Capital Structure

Debt-to-Total Capitalization 18.80%Equity-to-Total Capitalization 81.20%

Cost of DebtCost of Debt 2.34%Tax Rate 34.84%

After Tax Cost of Debt 2.29%

Cost of Equity

Risk-Free Rate 2.51%Market Risk Premium 6.93%Levered Beta 0.79Exected Market Return 9.44%Size Premium

Cost of Equity 7.98%CAPM 7.98%

WACC 6.91%

Discounted Cash Flow Analysis (NetScout)

24Discounted Cash Flow Analysis