Carl Icahn Takes HP to Task Over Xerox Offer Refusal

For a while back in November, speculation over the possibility that HP NYSE: HPQ was about to get bought out by Xerox NYSE: XRX was running rampant. However, that speculation was abruptly shut down when HP made it clear it was rejecting the takeover bid and carrying on business as usual. This was a move that left Carl Icahn downright furious, who demonstrated the same with an open letter to shareholders earlier today, castigating the HP board for its decision.

A Metaphorical Vote of No Confidence

If the upper-level leadership at HP was quaking in its collective boots following this letter, it would be with good reason. Icahn owns 4.24% of outstanding shares in HP, which marks Icahn as a fairly serious force in any kind of shareholder voting initiative.

It was plain that Icahn was not happy about the move to shut down Xerox's takeover bid, and since Icahn also owns roughly 10.85% of Xerox outstanding shares, it represents a move he might well have had some personal connection to. The letter offered tangible evidence of his displeasure at the move, including such notable phrases as “...simply a delay tactic aimed at attempting to preserve the lucrative positions of the CEO and members of the board...”, and referring to an HP restructuring plan as “...rearranging deck chairs on the Titanic.”

Icahn also noted that “...the market, shareholders, and analysts met (the HP restructuring plan) with extreme indifference,” a point that further derails anything like confidence in the current board's efforts.

Just to twist the knife, Icahn ended his flagellation of the HP board by going over their heads directly to the shareholders, appealing to “...all shareholders who agree with...” him to turn their attention directly to the HP board to pursue the deal “...while there is still a willing counterparty on the other side.”

Not Without its Reasons

Not long ago, we took a look at HP, defining it as a “tale of two companies.” Our look made it clear that HP rejected the takeover bid on the basis that it didn't give the fullest value to HP's shares, which would have been a bad deal for shareholders.

Additionally, our examination pointed out the HP board's noting of a revenue crash at Xerox; Xerox had lost around $1 billion in revenue since the summer. Perhaps worst of all, the refusal referred to a “highly conditional and uncertain” offer involved, which actually left the door open for a potentially higher offer later on.

Indeed, that revenue crash doesn't exactly seem to have slowed, either; recently we examined Xerox after plans to sell its Fuji Xerox stake to Fujifilm OTCMKTS: FUJIY, a move which was forecast to drop Xerox's forecast earnings per share (EPS) from $3.40 to $3.30, both of which were well below consensus estimates of $4.05.

Greed, or Good?

Thus, in the aftermath of the Xerox offer, we're left with two sides to the story. We have Icahn, who believes that HP should have taken the buyout offer, which at last report represented a fairly healthy premium per share—Xerox was offering $33 per share, up from HP's then-price of $29, now currently hovering around $20 as of this writing—and would have been good for shareholders. Shareholders including himself, most likely, who would have gained $4 per share for the entirety of his holding, not to mention whatever effect the HP business would have had on Xerox's shares. Since Xerox had been bleeding profitability as it was, gaining HP's lineup of computer, printer, and other business might have given Xerox a real edge in the office computing market.

On the other side, we have the HP board, who did turn down the offer, but not entirely. The refusal seemed, at the time, willing to collaborate with Xerox on other potential operations, as well as a potential for a buyout later with a somewhat better offer. This move also protects the board and CEO's current positions, which are likely as lucrative as Icahn thinks.

Determining just who's right in this package is difficult since both sides can make a reasonable case yet also have personal stakes. More than anything, this deal illustrates the complexity involved in such efforts, with motivations from all over contributing to the final outcome.