HP and Xerox – Now What?

On Sunday, HP Inc.’s board of directors rejected Xerox’s offer to buy it out for $33.5 billion, or $22 per share, stating that the offer undervalued HP. However, the HP board did leave open the possibility of further negotiations.

HP’s board appeared wary of Xerox’s declining revenues, and the debt that the new company would have to take on (Xerox would have to borrow to purchase HP).

The HP board was probably also wary of who would lead the new company. Under the Xerox offer, current Xerox CEO and VP John Visentin, who has the backing of Carl Icahn, would have been the CEO of the new merged HP-Xerox. The problem with that is that while Icahn has some success in turning companies around, he has also has a history of increasing share prices and then selling out, but leaving the company in a worst position. The HP board likely doesn’t want Icahn and cohorts calling the shots at a new HP-Xerox company.

Icahn also recently revealed that he’s acquired an approximate 4.24-percent stake (worth approximately $1.2 billion) in HP, and recently stated his approval of a Xerox-HP merger, saying, “It’s a no brainer.”

Our Take

Xerox could of course make a counter-offer that HP accepts. Overall, though, we still believe that if anything happens – and nothing might actually happen – it will be HP acquiring Xerox. Although there various potential pitfalls for HP with such an acquisition, one big benefit would be eliminating a competitor in the A3 copier/MFP market. However, the HP board would have to decide whether taking on a company with trailing revenues would be worth such a move, and whether it would risk ceding control of HP to Icahn. Moreover, HP’s acquisition of Autonomy several years when it was still one company known as Hewlett-Packard didn’t turn out well and may make it wary of a Xerox purchase.

We should also consider that Icahn, who holds the largest stake (10.6 percent) in Xerox recently acquired a 4.24-percent stake in HP. Will Icahn attempt to acquire a greater share and then seek to propel an HP sale? According to CNN Money, as of today, Icahn is now the fifth-largest stake holder in HP – with only the Vanguard Group, Dodge & Cox, SSgA Funds, and Black Rock having larger stakes (with the first two holding about 8 percent each, and the second two holding about 4 percent each).

With his stake now in HP, Icahn may attempt to deploy the strong-arm tactics he used against Xerox’s board to derail Xerox’s sale to Fujifilm and take control of Xerox’s board. But – at this time at least – with his 4.24-percent stake, it doesn’t appear Icahn has the firepower to strong-arm HP into a deal – but that of course may change.

An interesting footnote to all of this was pointed out by CRN, which noted that in its press release announcing it was rejecting Xerox’s offer, HP included the name of the law firm advising it, Wachtell, Lipton, Rosen & Katz.

Apparently, there are “years of bad blood” between the founding partner of this law firm, Martin Lipton, and Icahn, and the law firm has helped various companies, including Dell, push back against Icahn’s strong-arm tactics, calling him a “bullying corporate raider.” This law firm may be key if push-comes-to-shove.

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