HP Vs. Xerox: Carl Icahn’s Secret Goal

Xerox is <href=”#5a68ecb4b4d6″>attempting a hostile takeover of HP; this is apparently with the backing of Carl Icahn, who appears to run Xerox effectively. And HP has just executed a Poison Pill defense. Xerox is a shadow of its former technical self, and it appears to be run by financial types who don’t seem to understand the business they are running. They aren’t alone because—other than copiers, which have been in decline—Xerox doesn’t appear to have much of a business. But their effort appears to be surrounded by some powerful promises of increased value for shareholders which, given this is a hostile takeover, are largely false.

It might be different if we had slavery but is instead we have a tight labor market, and Xerox has made no real effort to make the managers and executives at HP see anything but their impending doom in the merger. In fact, hostile takeovers are best when they strip the acquired company of assets much like Oracle did to Peoplesoft. But, at least Larry Ellison was honest about the likely outcome, and Peoplesoft is no more. These kinds of attempts were far more common decades ago, so common that Monty Python had a skit on the process.

The reason they fell out of favor is that the defenses against these efforts became more capable, and it also became clear that most companies are far more valuable as companies than they are as asset repositories. Often, when you acquire an intellectual property asset, you also need the team that created it, and it is far harder to package that up if the team is fleeing a corporate raider like Carl Ichan.

Is HP Massively Undervalued?

The only way you can make the numbers work is if the firm you are acquiring is massively undervalued but, if that is the case, then one of the defenses for the attacked firm is to point this out and allow the market value for the firm to rise to its real value. HP appears undervalued because the market doesn’t see the upside to their printing efforts and printing is under a market decline cloud now. I don’t think it is massively undervalued. While it has significant long-term upside in areas like Fluid Dynamics and 3D-printing, which could—and likely will—transform healthcare and manufacturing, we are still years out from that revolution and the spike in HP’s valuation that would result.

Carl likes to flip companies quickly, and waiting for this eventual benefit seems inconsistent with the way he operates, and while there was a massive potential to sell HP’s intellectual property to companies in China, with the Coronavirus outbreak, that path appears blocked for at least a year.

Does Carl Icahn Instead Want To Force HP To Buy Xerox?

This strategy just recently emerged as Carl Icahn, who still appears to be driving this effort, floated the idea himself. He took over what appears to be a controlling interest in Xerox but has had trouble finding a buyer for the firm given it really seems to be a ship without a rudder at the moment, and few large investors are that interested in a copier company. A company that is in the printing/copier business might, for a price, find value in Xerox, but it would be a really low price, and HP has been advancing in the copier space just fine.

But HP might be willing to pay more to avoid defending against a hostile takeover. However, using a hostile takeover to drive an asset sale comes close to the definition of extortion, which most senior executives learn early on to avoid. The reason is that if people know you give in to approaches like this, they are more likely to use them against you, so fixing a tactical problem like the hostile takeover this way could open HP up to a lot of strategic pain later.

It appears he made a bad investment in Xerox and now wants to force HP into taking it off his hands. That just seems wrong.

Wrapping Up

I think Carl’s initial plan was to sell HP’s undervalued assets to overseas buyers, but that plan went into the dumpster when the Coronavirus made acquisitions a far lower priority than just keeping the doors open. So, to recover, Carl Icahn appears to have shifted to getting HP to overpay for Xerox thus providing him with the return on his investment he anticipated when he mistakenly bought control of that company and so he doesn’t look like an over-the-hill corporate raider who is no longer able to execute.

Being older myself, but fortunately way younger than Carl (65 vs. 84), I can appreciate the need for him to save face, but I don’t think HP will be willing to overpay for an asset to stop Carl from shutting the company down. The acquisition path—given the potential buyers for HP assets—are effectively gone or no longer tenable, making it likely that not only will HP see this as an extortion attempt they should avoid, but they’ll also see the threat has evaporated along with the potential buyers for either HP or Xerox’s assets.