NOTE 2. MERGER, ACQUISITION TERMINATION, AND RESTRUCTURING ACTIVITY

Merger and Restructuring

In recent years, the Company has taken actions to adapt to changing and competitive conditions. These actions include closing facilities, consolidating functional activities, eliminating redundant positions, disposing of businesses and assets, and taking actions to improve process efficiencies. In 2013, the OfficeMax merger (the “Merger”) was completed and integration activities similar to the actions described above began. The Company also assumed certain restructuring liabilities previously recorded by OfficeMax. In mid-2014, the Company’s real estate strategy (the “Real Estate Strategy”) identified 400 retail stores for closure and integration of the supply chain. During the second quarter of 2016, the Company completed the retail store closures under this program. The changes to the supply chain related to the Merger are anticipated to be complete in 2017.

Staples Acquisition and Merger Agreement Termination

On February 4, 2015, Staples, Inc. (“Staples”) and the Company announced that the companies entered into a definitive merger agreement (the “Staples Merger Agreement”), under which Staples would acquire all of the outstanding shares of Office Depot and the Company would become a wholly owned subsidiary of Staples (the “Staples Acquisition”).

On December 7, 2015, the United States Federal Trade Commission (the “FTC”) informed Office Depot and Staples that it intended to block the Staples Acquisition. On the same date, Office Depot and Staples announced their intent to contest the FTC’s decision to challenge the transaction. On May 10, 2016, the U.S. District Court for the District of Columbia granted the FTC’s request for a preliminary injunction against the proposed acquisition, and as a result, the companies terminated the Staples Merger Agreement on May 16, 2016.

Comprehensive Business Review

During August 2016, the Company announced the results of a comprehensive business review of its strategy (the “Comprehensive Business Review”), which, among other things, includes a plan to close approximately 300 additional retail stores in North America over the next three years, and to lower operating and general and administrative expenses through efficiencies and organizational optimization. The significant components of expenses relating to the cost saving programs activities are discussed below.

Merger, restructuring, and other operating expenses, net

The Company presents Merger, restructuring and other operating expenses, net on a separate line in the Condensed Consolidated Statements of Operations to identify these activities apart from the activities to sell to and service its customers. These expenses are not included in the determination of Division operating income. The table below and narrative that follows provides the major components of Merger, restructuring and other operating expenses, net.


	First Quarter
(In millions)	2017		2016
Merger related expenses
Severance, retention, and relocation	$	—	$	1
Transaction and integration		6		11
Facility closure, contract termination and other expenses, net		4		2

Total Merger related expenses		10		14

Staples Acquisition expenses
Retention		—		2
Transaction		—		20

Total Staples Acquisition expenses		—		22

Comprehensive Business Review and Other Restructuring expenses
Severance		9		3
Facility closure, contract termination, professional fees and other expenses, net		1		—

Total Comprehensive Business Review and Other Restructuring expenses		10		3

Total Merger, restructuring and other operating expenses, net	$	20	$	39

Merger related expenses

Transaction and integration expenses include integration-related professional fees, incremental temporary contract labor, salary and benefits for employees dedicated to the Merger activity, travel costs, non-capitalizable software integration costs, and other direct costs to combine the companies. Such costs are being recognized as incurred.

Facility closure, contract termination, and other costs, net primarily relate to facility closure accruals, contract termination cost, gains and losses on asset dispositions, and accelerated depreciation. Facility closure expenses include amounts incurred by the Company to close retail stores in the United States as part of the Real Estate Strategy, as well as supply chain facilities. During the first quarter of 2017, the Company recognized a gain of $1 million from the sale of a warehouse facility that had been classified as assets held for sale. The gain is included in Merger, restructuring and other operating expenses, net, as the disposition was part of the supply chain integration associated with the Merger.

Staples Acquisition expenses

Expenses include retention accruals and transaction costs, including costs associated with regulatory filings and professional fees. The Staples Merger Agreement was terminated on May 16, 2016 and no further expenses are expected.

Comprehensive Business Review and Other Restructuring expenses

Expenses include severance, facility closure costs, contract termination and accelerated depreciation associated with the announced closure of approximately 300 retail store locations through 2018, as well as severance and reorganization costs associated with reductions in staff functions. Severance costs are being accrued through the anticipated facility closure or termination date and consider timing, terms of existing severance plans, expected employee turnover and attrition.

In the first quarter of 2016, the Company incurred $3 million of severance expense associated with the restructuring of certain selling activities in advance of the Comprehensive Business Review.

Merger and Restructuring Accruals

The activity in the merger and restructuring accruals is presented in the table below. Of the total $20 million Merger, restructuring and other operating expenses, net incurred in the first quarter of 2017 Condensed Consolidated Statement of Operations, $11 million relates to Merger and restructuring liabilities and are included as Charges incurred in the table below. The remaining $9 million expense is comprised of $6 million in Merger transaction and integration expenses and $4 million in property expenses, professional fees, non-cash items and other expenses, partially offset by a $1 million gain on the disposition of a warehouse facility which was part of the supply chain integration associated with the Merger. These remaining amounts are excluded from the table below because they are charges that are recorded as incurred, non-cash, or otherwise not associated with Merger and restructuring balance sheet accounts.


(In millions)	Balance as of December 31, 2016		Charges Incurred			Cash Payments			Lease Accretion and Other Adjustments		Balance as of April 1, 2017
Termination benefits:
Merger-related accruals	$	5	$	—		$	(1	)	$	—	$	4
Comprehensive Business Review		8		9			(12	)		—		5
Lease and contract obligations, accruals for facilities closures and other costs:
Merger-related accruals		40		3			(11	)		—		32
Comprehensive Business Review		13		(1	)		(4	)		—		8
Other restructuring accruals		5		—			(1	)		—		4
Acquired entity accruals		18		—			(2	)		1		17

Total	$	89	$	11		$	(31	)	$	1	$	70

The short-term and long-term components of these liabilities are included in Accrued expenses and other current liabilities and Deferred income taxes and other long-term liabilities, respectively, on the Condensed Consolidated Balance Sheets.

Assets held for sale

Certain facilities identified for closure through integration and other activities have been accounted for as assets held for sale. Assets held for sale primarily consist of supply chain facilities, and are presented in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets. The assets held for sale activity for the first quarter 2017 is presented in the table below.


(In millions)
Balance as of December 31, 2016	$	23
Disposition		(3	)

Balance as of April 1, 2017	$	20

Gains on dispositions associated with Merger or restructuring activities are recognized at the Corporate level and included when realized in Merger, restructuring and other operating expenses, net in the Condensed Consolidated Statements of Operations. Losses, if any, are recognized when classified as held for sale. Gains or losses associated with dispositions of properties not associated with Merger or restructuring activities are presented as a component of operations when the related accounting criteria are met.