NOTE 2. MERGER, ACQUISITION TERMINATION, AND RESTRUCTURING ACTIVITY

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.

Merger

In 2013, the OfficeMax 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 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 are anticipated to be complete in 2017.

Staples Acquisition and Merger Agreement Termination

On February 4, 2015, Staples and the Company announced that the companies had entered into 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.

On December 7, 2015, 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. Per the terms of the termination agreement, Staples paid Office Depot a Termination Fee of $250 million in cash on May 19, 2016, which is included in Merger, restructuring and other operating (income) expenses, net in the Consolidated Statements of Operations and in Net cash provided by operating activities of continuing operations in the Consolidated Statements of Cash Flows.

Comprehensive Business Review

During August 2016, the Company announced the results of a comprehensive business review and strategy (the “Comprehensive Business Review”), which, among other things, included an anticipation of closing approximately 300 additional retail stores in North America over the next three years, anticipated restructuring initiatives to lower operating and general and administrative expenses, and continued exploration of strategic alternatives regarding the European business that had been initiated by Staples as part of their attempt to get European Union regulatory approval of the Staples Acquisition.

Merger, Restructuring, and Other Operating (Income) Expenses, net

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


(In millions)	2016			2015		2014
Merger expenses:
Severance, retention, and relocation	$	—		$	15	$	148
Transaction and integration		37			81		124
Facility closure, contract termination, and other expenses, net		27			44		62

Total Merger related expenses		64			140		334

Staples Acquisition (income) expenses:
Retention		15			65		—
Transaction		43			37		—
Termination Fee		(250	)		—		—

Total Staples Acquisition (income) expenses		(192	)		102		—

Comprehensive Business Review expenses:
Severance		22			—		—
Facility closure, contract termination, professional fees and other expenses, net		26			—		—

Total Comprehensive Business Review expenses		48			—		—

Total Merger, restructuring and other operating (income) expenses, net	$	(80	)	$	242	$	334

Merger related expenses

Severance, retention, and relocation expenses include amounts incurred for the integration of staff functions and include termination benefits for certain retail and supply chain closures. Such benefits are being accrued through the anticipated facility closure dates. Severance calculations consider factors such as the expected timing of facility closures, terms of existing severance plans, expected employee turnover and attrition.

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 expenses, net primarily relate to facility closure accruals, contract termination costs, 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. The Company closed 51, 181 and 168 retail stores in 2016, 2015 and 2014, respectively. During 2016 and 2015, the Company recognized gains of $1 million and $36 million, respectively, from the sale of warehouse facilities that had been classified as assets held for sale. The gains are included in Merger, restructuring and other operating (income) expenses, net, as the dispositions were part of the supply chain integration associated with the Merger.

Staples Acquisition (income) expense

Expenses include retention accruals, transaction costs, including costs associated with regulatory filings and professional fees and are offset by the Termination Fee income.

Comprehensive Business Review expenses

Expenses associated with implementing the Comprehensive Business Review include severance, facility closure costs, contract termination, accelerated depreciation, professional fees, relocation and disposal gains and losses, as well as other costs associated with the store closures. The Company has closed 72 stores since announcing this initiative. Restructuring expenses also include severance and reorganization costs associated with reductions in staff functions that continued into the first quarter of 2017. 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.

Asset impairments related to the restructuring initiatives are not included in the table above. Refer to Note 14 for further information.

Merger and Restructuring Accruals

Activity in the merger and restructuring accruals in 2016 and 2015 is presented in the table below. The total of $(80) million in income presented in Merger, restructuring and other operating (income) expenses, net in the 2016 Consolidated Statements of Operation, includes the $250 million Termination Fee income. There were $170 million of expense incurred in 2016 of which $70 million relate to Merger and restructuring liabilities and are included as Charges incurred in the table below. The remaining $100 million expense is comprised of $43 million for Staples Acquisition transactions expenses, $37 million of Merger transaction and integration expenses and $20 million in property expenses, professional fees, non-cash items and other expenses. For 2015, of the total $242 million Merger, restructuring and other expenses incurred, $158 million is related to merger or restructuring liabilities and are included as Charges incurred in the table below. The remaining $84 million incurred in 2015 is comprised of $81 million Merger transaction and integration expenses, $37 million Staples Acquisition transaction expenses, and $2 million associated primarily with fixed assets and rent related expenses, partially offset by the $36 million gain on the disposition of the warehouse facilities which resulted from the supply chain integration. These charges are excluded from the table below because they are expensed as incurred, non-cash, or otherwise not associated with the merger and restructuring balance sheet accounts.


(In millions)	Beginning Balance		Charges Incurred			Cash Payments			Lease Accretion and Other Adjustments			Ending Balance
2016
Termination benefits:
Merger-related accruals	$	16	$	—		$	(9	)	$	(2	)	$	5
Comprehensive Business Review		—		19			(11	)		—			8
Lease and contract obligations, accruals for facilities closures and other costs:
Merger-related accruals		77		22			(62	)		3			40
Comprehensive Business Review		—		19			(6	)		—			13
Other restructuring accruals		14		(2	)		(8	)		1			5
Acquired entity accruals		25		(3	)		(7	)		3			18
Staples acquisition related accruals		64		15			(79	)		—			—

Total	$	196	$	70		$	(182	)	$	5		$	89

2015
Termination benefits:
Merger-related accruals	$	31	$	16		$	(31	)	$	—		$	16
Lease and contract obligations, accruals for facilities closures and other costs:
Merger-related accruals		71		76			(70	)		—			77
Other restructuring accruals		23		(1	)		(10	)		2			14
Acquired entity accruals		36		3			(15	)		1			25
Staples acquisition related accruals		—		64			—			—			64

Total merger and restructuring accruals	$	161	$	158		$	(126	)	$	3		$	196

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 Consolidated Balance Sheets.