Carl Icahn's HP-Xerox Moves: 5 Big Things To Know

The activist investor’s stake in HP could be a signal that he’s open to HP acquiring Xerox, instead of the other way around.

In revealing a sizable ownership stake in HP Inc., activist investor Carl Icahn has indicated he may not be dead set on Xerox being the acquirer in the deal.

The ownership stakes in both companies might actually signal that Icahn is open to the "more realistic" outcome of HP—the far-larger company in the deal—acquiring Xerox instead, one top HP partner told CRN.

[Related: 5 Reasons HP Might Oppose The Xerox Takeover Bid]

A week ago, Xerox made a takeover offer for HP that is reportedly worth $33 billion in cash and stock, or about 23 percent higher than where HP started the month. HP had a market capitalization of $28.94 billion as of Wednesday, compared to Xerox's market cap of $8.23 billion.

Combining Xerox and HP would bring together the leaders in printer and copier devices at a time when the industry is waning.

What follows are five key things to know about Icahn's moves related to the proposed HP-Xerox merger deal.

Icahn's Stake In HP

Icahn told the Wall Street Journal that he owns a 4.24 percent stake in HP Inc., worth about $1.2 billion, and said he bought the shares between April and August of this year.

Icahn told the Journal that he halted his HP share purchases in mid-August once he reached the "typical toehold stake"—prior to reaching 5-percent ownership that would have necessitated a disclosure. "He said he doesn’t typically buy more than 5% unless he is prepared to launch an activist campaign, and at that time he hadn’t yet made a decision to run a campaign at HP," the Journal reported.

In a statement provided to CRN, HP said: “We are aware of Carl Icahn’s investment and are committed to doing what is in the best interests of all HP shareholders.”

Icahn "Isn't Set" On A Xerox Takeover

Xerox's takeover offer reportedly would give HP shareholders a 48 percent stake in the combined company. The Journal quoted Icahn as saying that the combination of Xerox and HP is a "no-brainer," and that he believes "very strongly in the synergies."

The leadership teams of both HP and Xerox do see a rationale for a merger, Bloomberg reported earlier this week. However, there are major disagreements over the specifics—such as which company would be the acquirer in the deal and which of the two management teams would run the combined company, according to the report.

Icahn is apparently keeping an open mind on those issues. Icahn said “he isn’t set on any particular structure, an apparent nod to comments from some analysts that a purchase of Xerox by HP may make more sense," the Journal reported.

"More Realistic Approach" Of HP Buying Xerox

Top HP partners have questioned the proposed takeover of the company by Xerox, raising issues ranging from Xerox's inexperience in the PC market to differences in the two companies' channel approaches.

Among them has been Harry Zarek, president and CEO of Compugen, No. 57 on CRN's 2019 Solution Provider 500, who previously told CRN that "this proposed move by Xerox has only negative outcomes for HP’s channel partners."

However, on Thursday, Zarek said that Icahn's disclosure of an investment in HP is an encouraging sign.

"It's good to see that Icahn has also invested in HP. It means that he doesn’t necessarily want Xerox to take the lead and he is open to the more realistic approach of HP acquiring Xerox. That would make sense," Zarek said in an email to CRN.

The risk would be "if HP takes its eye off the PC business and allows the other OEMs to take advantage of a distracted HP," he said. "Keep in mind the PC business is still generating about $1.7 billion in operating profits as of Q3FY19. The synergies in the combination of the two companies in cost savings of $2 billion is very compelling and is the real momentum behind making a deal.”

Xerox CEO’s Role

Previously, Icahn was a central figure in dissolving Xerox's planned merger with Fujifilm in 2018. Instead, John Visentin, a longtime Icahn loyalist, took over as CEO of Xerox.

According to the Journal report, it was Visentin's idea—not Icahn's—to bring the takeover offer to HP. Additionally, Icahn told the Journal that the Xerox board is "calling the shots" in the HP takeover bid, and that his two representatives aren’t actually taking part in the deal deliberations.

Fujifilm Constraints

When Icahn started purchasing HP shares in April, a merger with Xerox would not have been an option “given constraints in the copier company’s longstanding partnership with Fujifilm," the Journal reported. Instead, Icahn “believed the shares were undervalued and could possibly benefit from activism” because of HP’s strong cash flow and minimal debt, the report says.

Earlier this month, Xerox sold off its Fuji Xerox stake to Fujifilm for $2.3 billion.

HP and Xerox also have been working together more closely this year. In June, HP and Xerox announced an agreement for Xerox to source certain A4 devices as well as entry-level A3 devices from HP. The deal represented a continuation of an OEM arrangement that Xerox previously had with Samsung, prior to HP's acquisition of Samsung's printer business in 2017.

"The decision was not so much about whether we wanted to establish the relationship or not, it's about how much we wanted to expand it. The print market is a market that is not going to be growing significantly, which really means that all of us have to look for opportunities to combine our assets in a more efficient way. And this what this deal is really putting on the table," said Enrique Lores, formerly the president of HP's printing business, and now the company's CEO, in an interview with CRN in June. "It enables us to sell Xerox a big part of our portfolio, and enables them to integrate it into their offering. So it helps both companies to grow, and helps both companies to be more efficient."

The Xerox takeover bid came just days after Lores took the helm as CEO of HP and the company began rolling out a reorganization and restructuring plan meant to improve efficiency and support investment in key areas.