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Shared Investors Make HP-Xerox Deal ‘More Likely,’ Expert Says

'I can say that based on my own research ... the more of the same shareholders they have, even passive shareholders like index funds, the deal is more likely to happen,’ says Thomas J. Chemmanur, professor of finance at the Carroll School of Management, Boston College.

As Carl Icahn calls on HP shareholders to rally around the proposed merger with Xerox, it appears many top investors share ownership in both companies.

Five of the top 10 investors—The Vanguard Group, State Street, BlackRock, Icahn Associates and Geode Capital—combined own 23 percent of HP with $6.08 billion invested. That same group owns 31.86 percent of Xerox, with $2.39 billion invested.

Thomas J. Chemmanur, who has taught at the Sloan School at MIT, Duke University, and is currently a professor of finance and Hillenbrand Distinguished Fellow at the Carroll School of Management, Boston College, told CRN that shared investors make a deal between the two more likely.

“When you have common institutional investors, that generally increases the chance,” he said of a merger. “Nobody can predict what will happen in this particular case. That is what we have found in other events. We find that when the two companies involved have more common institutional investors, that makes the alliance more likely to happen. In that context, I can say that based on my own research ... the more of the same shareholders they have, even passive shareholders like index funds, the deal is more likely to happen.”

[Related]: Bad Blood: Years Of War Between Icahn And HP’s Law Firm]

Meanwhile, Martin Wolf, president of martinwolf M&A Advisors, one of the top channel investment advisory deal-makers, told CRN the shared investors “is the only thing that made it interesting.”

“If it wasn’t for shared ownership, this wouldn’t be interesting any longer,” he said. “I think Carl Icahn is a genius. But Carl Icahn also supported putting Ozark Air Lines together with TWA for the same reasons. But he was wrong. He thought by putting Ozark and TWA together he’d have scale and a great value [and] he did not.”

The institutional investors declined to comment about a potential merger of HP and Xerox when reached by CRN, with spokeswomen from The Vanguard Group and State Street providing statements.

“We have a longstanding policy where we don’t comment on individual companies or votes,” said a spokeswoman for The Vanguard Group, which owns 8.54 percent of HP and 10.28 percent of Xerox.

A spokeswoman for State Street, which owns 72 million HP shares, or 4.86 percent of the company, and 4.24 percent of Xerox, said, “We don’t comment on individual companies or holdings as a matter of policy, so we won’t be able to help here.”

Wolf said it’s not clear if Xerox and HP together would be stronger.

“Are you adding two dogs and creating a kennel, or are you creating something of value?” Wolf said. “No one wants to have more scale making wagons right before the automobile. … If you conclude it’s better to combine the businesses, can you take out costs which are achievable?”

Icahn and Xerox expect to achieve $2 billion in synergies through a merger, but in a Nov. 24 letter to Xerox, HP was skeptical of that figure.

“Our review of synergies based on public information and the limited information you have shared does not support achievable synergies of the scale you suggest, and it appears that your assumptions include significant savings that are already included in each company’s independently announced cost reduction plans,” the letter from HP’s board to Xerox stated.

Wednesday Icahn called on shareholders to demand “immediate action” from HP’s board, penning an open letter that outlined what he sees as the benefits of the two companies coming together.

“I can say without exaggeration that the combination of HP and Xerox is one of the most obvious no-brainers I have ever encountered in my career—one where activism should not even be necessary at all because the merits of the combination are so obvious to everybody involved,” he wrote. “I implore all HP shareholders who agree with me to reach out to HP’s directors to let them know that immediate action is necessary to explore this opportunity NOW while there is still a willing counterparty on the other side.”

Though talks between the two companies have been ongoing since August, HP has pushed back against Xerox’s offer of $22 a share, telling the copier king that HP can grow without a merger.

“We have great confidence in our strategy and the numerous opportunities available to HP to drive sustainable long-term value, including the deployment of our strong balance sheet for increased share repurchases of our significantly undervalued stock and for value-creating M&A,” HP’s letter to Xerox states.

Icahn told HP shareholders not to bet on it.

“It is absurd for the HP board and management team, with such a history of underperformance and missteps, to claim to have had a sudden epiphany and now expect shareholders to trust them to execute a standalone restructuring plan rather than to even explore an opportunity to enter into a combination that could bring about a much needed $2+ billion of cost synergies and possibly save the company,” Icahn wrote.

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