Holy shemoly!

When I was telling you that Carl Icahn was directing the offer from Xerox for HP, it turns out I didn’t have all the information. Because the other shoe just dropped.  (And, since I wrote this- yet another one, see below.)

Icahn not only owns more than 10.6% of Xerox- he owns 4.24% of HP. The stock was acquired between the two A’s (April and August), and it’s currently worth about $1.2 billion. He stopped at that level, so he wouldn’t have to report his holdings. (Reporting is required when one acquires or owns 5% of a company’s stock.)

And, it is claimed that his guy, John Visentin, was the proponent of the merger. Over the course of this year (2019), Visentin, as the new chief of Xerox, has been working with HP- having it supply the A4 and A3 devices it sells. (Xerox had an OEM arrangement with Samsung, but as I already explained, Samsung sold it’s printer business to HP back in 2017.) And, that offer came almost immediately after HP replaced its CEO, putting Enrique Lores at the helm.

(You do recall that the demand for printed documents of any sort is a shrinking business- whether it’s copiers or printers. And, Xerox hopes to slash $640 million in expenses over the next 12 months, while HP expects to pare $ 1 billion. Xerox makes the bulk of its $ 10 billion in gross revenue from renting and maintenance of its units- not for the sale of printers or copiers. HP generates about $ 58 billion in turnover from the sale of PC’s printers [which it sells at or below costs], and printing supplies [those ‘razor blades’ that make tons of profit, so no gains on the printers is not a big issue].)

But, now that the deal’s on the table, Icahn’s goal in this bid may be to have Xerox open the door- only to have HP be acquirer. (He does believe the merger is a “no-brainer”, replete with “synergies”.) Which would make more sense since it is thrice the size of Xerox. (Xerox’ market cap is $ 8.23 billion; HP stands at $ 28.94 billion.) And, Mr. Icahn would have a bigger windfall if the reverse deal (HP acquired Xerox) went through. (His Xerox holdings amount to 2/3 of value of HP stock he owns, even though he controls a higher percentage of outstanding stock.)

The original proposed deal was for about $ 33 billion in cash and stock. (Think about that figure for a second… $17 a share in cash and 0.137 Xerox share for each HP stock share.) Which would have provided a 20+% jump in the value of HP stock.

If Xerox were to acquire HP, the stockholders of HP would retain 48% control of the merged entity. (It also means that Icahn would own 13% of the merged entity.) And, while the two firms do agree that a merger could make sense, HP is of the opinion it should be the acquiring company, not Xerox. Plus, it feels its management is the better choice for the subsequent entity.

But- the other shoe…

HP just said no to the deal.  Stating that it significantly undervalues HP and offers no special value to its stockholders.  It also doubted the stability of the merged company, given all this debt Xerox would take on so it could acquire HP.

But…. (wait for it)

“We recognize the potential benefits of consolidation…[W]e are open to exploring whether there is value to be created for HP shareholders through a potential combination with Xerox.”

Yup.  As I suspected.  There is great value (according to HP- and me) should HP acquire Xerox.

Oh.  This is an interesting business case.

 

HP Response