An open letter in reply to Carl Icahn’s appeal to HP’s shareholders
A hostile takeover business model
In a letter to HP Inc.’s shareholders, to which he recently added an improved offer, corporate raider Carl Icahn offered to use Xerox Holdings Corp (in which he has an 11% stake) to take over print leader HP (in which he has a 4.24% stake). The merger, according to Icahn, would be a model of synergy that could yield over $2 billion in cost savings.
This would appear to offer a handsome net asset value for the shareholders. But the business model behind Icahn’s tender offer is based on a tradition that peaked in the last quarter of the twentieth century, whose purpose is to serve capital market traders at the expense of the other stakeholders. This model gave rise to the management philosophy that was adopted three decades ago by captains of industry such as General Electric’s CEO Jack Welch, executives for whom the purpose of a corporation is to “deliver value to its shareholders.” That purpose, when realized, involves leveraging current assets at the cost of mortgaging the corporation’s future.
The process of a hostile takeover, leveraged by bank loans, is supported by two executive arms: a CEO who carries out cutbacks, and a financing bank. To complete the takeover, the company recruits a CEO who specializes in cutting expenses and short-term “efficiency measures” (under the slogan of “operational excellence”). In order to repay the bank debt to finance the purchase, management has to yield corporate profits as quickly as possible, even if the short-term outcomes are achieved at the expense of the corporation’s resilience and growth.
Efficiency that is not effective
Well, Mr. Icahn, the business environment has changed, and your offer to the HP shareholders is outdated. The value of a business corporation is measured by the level of its effectiveness – the value it creates for its clients over time. In the language of Wall Street traders, your offer could be called a gift to “short” option traders (perhaps that includes you), who enjoy the eroding stock value of declining businesses.
Even if the move succeeds, it will serve only a few (from the world of finance) at the expense of many: you, the CEO who carries out the program, the middlemen (“investment banks”), and the financers. And who will look out for the interests of all the other stockholders (95.75%), who are saving for the long-term? Who will guarantee the employees’ and suppliers’ sense of engagement and belonging? And above all – what about maintaining its customers’ loyalty? Does the corporation have any more important asset?
Do you know an HP customer who will lovingly accept a cut in the quality of service? Does your offer contain an encouraging message to mobilize the manufacturing, service and logistical employees to continuously carry out improvement measures? Can you offer the employees a more inspiring vision than “voluntary retirement?” And what about the suppliers who have become partners in the company’s growth?
A sense of instability kills innovation
It is natural that when a business environment changes (such as the print industry today), employees and suppliers experience a sense of impermanence and insecurity. The role of effective leadership is to navigate the storm and serve as an anchor, a framework, and a stable basis for the activity of the company’s members and suppliers. A hostile takeover neutralizes the existing leadership and threatens the company’s existence.
Mr. Icahn, you are failing to realize that the real assets of these two high-technology organizations are not in the corporation’s books but in the workers’ heads. The threatening prophecy of a hostile takeover is realizing itself and your letter is already making waves: many of HP’s most experienced product development, marketing, and operational employees are working on their resumes, and that’s just the beginning. Fear and demoralization among people strangle motivation for innovation, sense of belonging, and commitment to improvement.
The dramatic change the print industry is undergoing in the disruptive age of digital technology requires adjustment. As an HP (and Xerox) stakeholder, it behooves you to support the management and workers through the test of innovation and adjustment to the print revolution in the digital age. HP’s resilience will result from its leadership’s ability to mobilize its people and suppliers to design and assimilate an innovative and bold business model.
Irrigate or harvest? Sustainable growth is possible
Look around you, Mr. Icahn, and learn from entrepreneurs who developed a business model based on disruptive technology, creating value for their customers by mobilizing their workers, suppliers and community: Steve Jobs, who was thrown out of Apple in the 1980s by the proponents of the business model you represent, and went back to it in the late 1990s to reinvent Apple. Jeff Bezos, who saw gaining its customers’ trust as the purpose of Amazon’s existence (“To be earth’s most customer-centric company”). Bezos pursued organic growth by purchasing brands and distribution systems in the areas of fashion (Zappos) and food (Whole Food), combined with a vision of a global market, where people anywhere could find any product they wished to buy online. You can also learn from Warren Buffett, whose long-term investment policy focuses on supporting growth-driven managements by creating value and building trusting relationships with their clients.
Leave HP’s leadership alone. Instead of dealing with preventing a hostile takeover, the company management should focus on gaining the trust of its people – customers, employees and suppliers. Yielding value for the customers is the only tested recipe for yielding genuine value to the shareholders and all stakeholders.
Boaz Tamir, ILE.
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