HP says activist investor Carl Icahn is behind Xerox’s $33.5 billion proposal to take over its larger rival and warned: “His interests are not aligned with those of other HP shareholders.” Icahn – who owns 10.9% of Xerox and has a 4.2% stake in HP - has urged HP shareholders to accept the Xerox proposal.
- Andy McCourt takes a closer look at the proposed deal.
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| Carl Icahn "would disproportionately benefit from an acquisition of HP by Xerox," says HP |
HP confirmed that Xerox intends to nominate a full slate of 11 candidates to replace HP’s entire board of directors at the company’s next annual meeting - the latest move in Xerox’s bid to take control of HP. Xerox previously submitted an unsolicited proposal to acquire HP - HP’s Board unanimously rejected the deal.
“We believe that Xerox’s proposal and nominations are being driven by Carl Icahn, and his large ownership position in Xerox means that his interests are not aligned with those of other HP shareholders,” HP said in a statement. “Due to Mr. Icahn’s ownership position, he would disproportionately benefit from an acquisition of HP by Xerox at a price that undervalues HP.
“We believe these nominations are a self-serving tactic by Xerox to advance its proposal, that significantly undervalues HP and creates meaningful risk to the detriment of HP shareholders.
The board of HP reiterated its belief that "value creation" for HP shareholders is not dependent on a Xerox combination. "There are numerous opportunities available to HP to drive sustainable long-term value. These include the execution of HP’s strategic plan, and the deployment of its strong balance sheet for increased share repurchases of its significantly undervalued stock, and for value-creating M&A. Xerox’s proposed transaction attempts to use HP’s financial capacities for the benefit of Xerox shareholders.
“We believe that Xerox’s proposal and nominations are being driven by Carl Icahn, and his large ownership position in Xerox means that his interests are not aligned with those of other HP shareholders. Due to Mr. Icahn’s ownership position, he would disproportionately benefit from an acquisition of HP by Xerox at a price that undervalues HP.
“Mr. Icahn has meaningful influence over Xerox and its Board of Directors given this ownership position; the role he played in the appointment of Xerox’s current CEO, who is a former Icahn consultant; and the ties Mr. Icahn has to members of the Xerox Board, including Xerox’s Chairman, an Icahn employee.”
HP says it will continue to take all appropriate actions to protect the best interests of HP shareholders.
“HP’s Board includes world-class directors who bring relevant skills and proven experience in advancing HP’s strategy across personal systems, print and 3D, and driving sustainable, profitable growth and value creation. This expertise includes: developing and implementing cost cutting plans to support both profitable growth and brand competitiveness in global markets as demonstrated by HP’s performance over the past three years, which includes $10.5 billion in revenue growth and $12.9 billion in cumulative cash flow from operations.”
HP’s board will review the proposed Xerox nominees, and respond in due course, it said. The date of the 2020 Annual Meeting has not yet been announced.
In December, Xerox shareholder the Miami Firefighters Relief and Pension Fund sued Icahn, alleging he bought $1.2 billion worth of HP shares with prior knowledge that Xerox was considering acquiring HP.
Commentary below by Andy McCourt
2015 and 2016 were seminal years for both HP and Xerox - this is the time period where their respective 'services' businesses were separated from the main businesses selling hardware. Xerox spun off what is now called Conduent - and around USD$6.5 billion in revenues while HP spun off Hewlett Packard Enterprise and a little over USD$30 billion in revenues. So how have the two fared since separating its business services sectors into new companies?
- Xerox annual revenue for 2019 was $9.07B, a 6.2% decline from 2018
- Xerox annual revenue for 2018 was $9.83B, a 4.24% decline from 2017.
- Xerox annual revenue for 2017 was $10.265B, a 4.7% decline from 2016.
- Xerox annual revenue for 2016 was $10.771B, a 6.05% decline from 2015.
- Xerox annual revenue for 2015 was $11.465B a 9.57% decline from 2014
- HP annual revenue for 2019 was $58.756B, a 0.49% increase from 2018.
- HP annual revenue for 2018 was $58.472B, a 12.33% increase from 2017.
- HP annual revenue for 2017 was $52.056B, a 7.91% increase from 2016.
- HP annual revenue for 2016 was $48.238B a 6.27% decline from 2015
- HP annual revenue for 2015 was $51.463B a 7.7% decline from 2014
While both companies suffered revenue declines in the first two years of splitting - HP recovered to post annual gains from 2017-19 but Xerox has seen declining sales for 5 years. For 2020, there is the additional impact of losing its 25% share of profits from Fuji Xerox, with the disolution of the joint venture with Fujifilm, although of course this share was sold for USD$2.3 billion, a windfall for Xerox.
The respective companies' product offerings also bear comparison:
Xerox is mostly active in A4 and A3 cut-sheet Office, MFP and Production print devices, support and consumables. There is little wide format, mostly its Docuwide CAD/GID/AEC devices and some re-selling of Epson, Fujifilm, Mutoh and Esko products. The labels and packaging sector - two of print's fastest growth sectors - has been overlooked, as has textile printing.
HP has A4 and A3 cut-sheet Office, MFP and Production print devices, support and consumables, but adds Label and Packaging presses, a broad array of wide format including super-wide and textile printing with its new Stitch line - also soft signage with HP Scitex machines. HP Indigo has successfully addressed vertical markets in Packaging and Converting and reports say that HP will release 40 new graphics products at drupa in June, where it is the largest exhibitor by far. Professional printing is seen as a growth area, while office, transactional and MFP-type printing is declining. Consideration is being given to a 'subscription' model where a monthly fee gives you printers plus consumables, but this would tend to bypass resellers and print-for-pay customers.
The picture then is, one of a company with limited product offerings and failure to address growth markets; in annual decline (Xerox) attempting a leveraged buyout of a much larger company in a similar marketspace, experiencing annual growth,albeit modest (HP). Certainly, under John Visentin, Xerox's financial metrics have improved but declining sales persist and will decline further without a more comprehensive mix of products and a strategy to replace Asia-Oceania sales channels set to be lost when the Fuji Xerox jv is dissolved fully.
This all begs the question 'Is this a rescue job to save Xerox from a Kodak style fate?' If Xerox suceeds in buying HP it wins; if HP conceeds that it must put an offer in to buy Xerox, it still wins and especially the larger shareholders like Carl Icahn, who always wins.
Sure, shareholders of publicly traded corporations deserve dividends and shares of the spoils - Xerox stock traded at over $37 today. If you had invested $10,000 in late 2018 when they were trading around $17, you'd have around $22,000 if you sold now. But this alone does not ensure long-term viability and success, there are many cases where stock prices have been pumped and then dumped and companies left wallowing.
The difference I see is that HP can keep doing what it does, invent new graphics and IT technologies and bring them to market, disrupt traditional print methods with digital change and, while not being the most stellar stock on Wall Street, can continue to do 'okay.' Xerox on the other hand has lost its inventive mojo and recent acquisitions have not gone well - Impika inkjet for example. It's best commercial graphics products have been made by the jilted Fujifilm. It's now playing a numbers game in an increasingly competitive field where revenues are declining and the 'golden goose' of recurring 'click' revenues is not what it once was.
What is going on now is probably not the beginning of the end but the end of the beginning of a long drawn-out battle that will change our industry.
