Tuesday, November 26, 2019
The Shadow Pill is a Powerful Thing
You've likely seen that Xerox is has been making sounds about acquiring HP. Last week HP rejected Xerox's unsolicited $33 billion to acquire it in a letter that characterized the offer as significantly undervaluing the company. While it left the door open to a possible deal, the letter suggested that a deal (if any) would likely involve HP acquiring Xerox and not the other way around. That letter was followed up by a second letter from the HP board to Xerox making it clear that the answer is "no" (not even a 'no, thank you'). Both letters go quite a way to pointing out the deficiencies of Xerox as a transaction partner, paving the way for Unocal should it come to that.
Well today, Xerox responded with a "Chip & Enrique" letter of its own reiterating its offer and threatening to engage directly with HP shareholders. The Xerox board stopped short of saying to would actually launch a hostile tender offer for HP. Why? Because the shadow poison pill is a powerful thing.
John Coates pointed out over a decade ago that every company has a "shadow pill". A poison pill can be adopted by a board very quickly with no requirement that they get stockholder approval. Consequently, even though HP doesn't have a pill in place now, it could have one in 15 minutes. Xerox knows that, so no hostile offer is forthcoming. Rather, by engaging with HP shareholders they are hoping to get HP to come to the table to negotiate a deal on Xerox's terms. Market pressure to take the deal will, they hope get this across the finish line. Goshen and Hannes argued in a paper last Spring that these kinds of market forces are, by now, more powerful in terms of corporate governance than the law. Of course, they still have the option of launching an old-fashioned proxy fight, but it shouldn't actually be necessary if HP's institutional shareholders think the deal is one worth pursuing.