JUDGE: STAPLES MUST DIVULGE HOW IT VALUED DOT-COM UNIT

Office supplies giant Staples Inc. must provide shareholders withmore information on how it valued its dot-com business before it canbuy back the unit, a Delaware judge ruled yesterday.

"Staples stockholders are entitled to additional disclosures toclarify the method by which management and the bankers generatedtheir determinations of value," Chancery Court Judge Leo Strine Jr.wrote.

The decision allows the Framingham retailer to move forward withthe buyout but will delay a vote set for Monday during Staples'annual meeting. The company plans to schedule another annual meetingabout 10 weeks from now.

"The court concluded that this is an issue that shareholdersshould vote on," said John Mahoney, Staples' chief financial officer."They did not challenge the valuation of Staples.com's stock. Fromour perspective, it's a pretty big positive."

Shareholder attorney Jay Eisenhofer characterized the ruling asthe first phase of the suit. "Most significantly, they have to tellshareholders in their proxy statement that this isn't fair marketvalue," said Eisenhofer, who represents Teachers Retirement System ofLouisiana.

Two years ago, Staples had hoped to turn Staples.com into a WallStreet darling. But the decision to create a separate stock trackingthe performance of the Net operation has come back to hauntexecutives. Dismantling a dot-com tracking stock, it appears, is anightmare. "This has turned out to be a hairier situation than theyhad anticipated," said Brian Postol, an analyst with A.G. Edwards &Sons.

Staples started taking Staples.com public in 1999 by selling theInternet unit's shares to management and venture capitalists for$3.25 each. But the window of opportunity slammed shut when investorsbegan punishing dot-com stocks, and Staples decided this year to buyback the shares for $7 apiece.

Staples's plan immediately drew the wrath of several institutionalinvestors, who claimed the buyback unfairly rewarded executives andother investors who owned the dot-com shares. In April, Staples'sboard, including chief executive Thomas Stemberg, said they would notbenefit from the buyout. Other executives and managers would stillprofit.

In his ruling, Strine echoed concerns about the process ofdetermining the $7 share price, which would have valued Staples.comat $900 million.

For instance, he wrote, Staples did not consider whether thevaluations should be adjusted due to lack of marketability orStaples.com shares' status as a tracking stock. In addition,Staples.com was valued as a stand-alone company without consideringany possible subsidization from Staples.

Strine aimed some of the harshest criticism at Wit SoundView, aninvestment firm hired by Staples to help justify the buyout price."Wit SoundView originally believed its job to be to determine thefairness of the $7 per share price in comparison to the `fair marketvalue' of the Staples.com shares," Strine wrote. "For some as yetunexplained reason, Wit SoundView then elected not to use fair marketvalue as its benchmark."

Included in Strine's notes were e-mails by a Wit SoundViewprincipal, who raised concerns about the buyout price. "Just got offthe call with the Staples.com CFO. . . . The information is verylight . . . the projections are very aggressive," Wit SoundView'sVito Sperduto wrote to Mack Rossoff, managing director of the firm'smergers and acquisitions department.

Staples's vocal opponents include the California Public Employees'Retirement System, which had asked the company to delay theshareholders vote until more questions over the conflicts of interestwere answered.

Stephanie Stoughton can be reached by e-mail atstoughton@globe.com.