A long-running drama continues over Xerox’ desire to buy HP. Xerox upped the ante early in the new year, announcing that it has secured binding financing commitments in the amount of $24 million. The dispute, with long-time shareholder activist Carl Icahn at its center, shows that: (a) the corporate world continues to adjust to the digital revolution and the rise of such consequences as the paperless office; and (b) there is money to be made, or at least risked, in the effort to outguess the corporate managers as to the directions of that transformation.
On Dec. 4, 2019, Carl Icahn wrote an open letter to the shareholders of HP Inc., the successor company to the old Hewlett Packard.
At this time, Icahn owned 4.24% of the outstanding common shares of HP, as well as just less than 11% of the outstanding common shares of Xerox. He took over the board of directors of Xerox last year with help from Darwin Deason.
Icahn wanted the other shareholders of HP, especially, to know that he believes firmly in what he called the “industrial logic of combining these two great American businesses.”
A Restructuring Proposal
This was a month after Xerox had first publicly confirmed that it had received an offer from HP. The board of the printing company was, and remains, opposed to the offer from the historic manufacturer of copiers, and Icahn said that he could not attribute HP “recalcitrance” to “any real confidence in its standalone restructuring plan, which the market, shareholders and analysts met with extreme indifference.”
HP’s restructuring plan includes a new focus on 3D printing and premium PCs, a more centralized management of the marketing channel with a “disciplined channel partner program,” and increased hardware prices. The plan’s guiding idea is that customers will be encouraged to choose between discounted printers with HP-branded supplies on the one hand or full value printers that are more flexible about their suppliers on the other.
This is a move away from what is sometimes called the razor-and-blades model of pricing. HP will offer a higher priced “razor” than before, because the razor will no longer have to be serviced, and in effect subsidized, by its own “blades.”
The restructuring plan also involves a reduction in staff. HP expects a reduction in its total headcount of about 8,000 by the end of the third quarter of 2022. The cuts will come about, the company says, through the automation of back-end operations and the consolidation of corporate functions.
This is the restructuring in which Icahn has little confidence. He says that it reminds him of the fate of Eastman Kodak, the company that was dominant in the market for photographic film through most of the 20th century yet which struggled, beginning in the 1990s, with the advent of digital photography.
Analysts Not Thrilled by Restructuring Plan
Icahn is unquestionably right that Wall Street’s analysts have shown little confidence in the plan. Goldman Sachs, for example, set a target price for HP stock at just $14 after it was announced. Xerox had offered a mixed cash-and-stock bid that valued each share at $22.
But let us return to the Kodak analogy. Kodak, in Icahn’s reading, “wasted a great deal of valuable time by coming up with one ill-fated plan after another,” failing to act decisively as its industry was being transformed. Kodak entered Chapter 11 in January 2012 and, although a company with the same name emerged from bankruptcy in September 2013, it was in truth a new creature.
Rather than experience Kodak-style death throes, then, Icahn proposes that HP shareholders embrace the union with Xerox, which may involve $2 billion or more of cost synergies.
One of the arguments HP has made is that the Xerox, a much smaller company than HP, may not be able to line up the capital necessary to make good on its offer. With the announcement Jan. 6, Xerox sought to put an end to that case for recalcitrance. In a letter posted on the company’s corporate website, Xerox CEO John Visentin said that the financing commitment from Citi, Mizuho, and Bank of America, comes without any due diligence conditions.
HP does have another argument available. It should ask: why will a combination with Xerox help? If the movement to paperless offices is the problem, then why is a hook-up with Xerox, which like HP has a business model based on the paper in offices, a solution?