by Jim Lundy
The drama of Xerox’s initial offer to buyout HP for $33 billion (a cash and stock offer) got more interesting this week after HP rejected the offer and Xerox sent a letter stating that it intends to get more aggressive —which is also called a Hostile Takeover. What many don’t realize is that one person is driving this deal.
Carl is a Xerox board member and owns 10.6% of stock. He also owns HP 4.24% stock. There is no doubt that he is the one pushing this deal. While he has had limited success in take overs, he has seen a lot of success in getting financial windfalls on the rise of the stock of companies he has targeted.
Icahn started way back in the ’80s with his takeover of TWA Airlines. TWA eventually went bankrupt but before that, they went private and Icahn made back all of his initial investment. He unsuccessfully pushed for the breakup of Nabisco Brands in the 1990s. Now Icahn is pushing for the Xerox merger with HP.
Icahn’s push for the merger comes after more than a year of bullying Xerox Executives to do more and it basically looks like they have capitulated to him. Since HP has rejected Xerox twice, on December 4th, 2019, Carl Icahn upped the ante and posted a letter on his website advocating for the merger.
The Hostile Letter from Xerox
Xerox sent a letter on Thursday, November 21st asking for agreement for mutual due diligence—and stated that if that agreement is not reached that they would go directly to HP shareholders. This strategy is most likely supported by Carl Icahn, who is on the Board of Xerox.
The Second Rejection from HP
After Xerox’s letter threatened to go to HP shareholders, HP rejected this outright. Obviously, the shock of a merger from a smaller firm and the continued pressure often brings out reactions like this. The issue is that once activist board members such as Carl Icahn hatch these ideas, they seldom go away.
Why Does the Merger Make Sense?
The deal does make sense given the consolidation of the copier and printer industry. While HP sells many other things besides printers, ink, and toner, the value of the deal is for those assets and combining them with what Xerox has. We are pretty sure that HP could easily take over Xerox, but HP has been focusing more on cloud computing and PCs. However, it makes a lot of profit off of ink and toner.
Bottomline: No Deal
While the deal makes sense, we expect HP to continue to rebuff and ignore Xerox. Carl Icahn will make money off the stock price increases—one could argue he is trying to manipulate the market. We also could see private equity make the same play by trying to take one of the firms private and then sell them. However, printing and copying has become a commodity business and this is why the Xerox merger makes sense.