Icahn has a history of investing in struggling firms and pushing them to make changes that unlock shareholder value, like selling themselves off (whole or in part), spinning off businesses or making big changes at the board and management levels. He tends to arrive on the scene when things look particularly bleak. For instance, he bought a 7.56% stake in natural gas producer Chesapeake Energy (NYSE: CHK) shortly after news broke last spring that CEO Aubrey McClendon could be in a conflict of interest due to $1.1 billion in personal loans he took out.
He has since upped his stake in Chesapeake to 8.98%, at a cost of roughly $951 million. That makes him the company’s second-largest shareholder, after Southeastern Asset Management. Along with Southeastern, he has so far managed to replace four members of Chesapeake’s board and strip McClendon of the chairmanship.
This isn’t Icahn’s first involvement with the company. As Investing Daily’s Ari Charney pointed out in a June 2012 article, on December 10, 2010, Icahn revealed that he’d amassed a 5.8% interest in Chesapeake at an average price of $22.80 a share. He then pushed the company to unload non-core assets and then promptly sold 90% of his interest for an average of $30.91 a share in the first quarter of 2011.
Hewlett-Packard Is a Different Animal
Which brings us back to Hewlett-Packard. The company finds itself in a particularly grim situation these days. It recently reported yet another quarter of big losses as computer users continue to switch to mobile devices and away from PCs. What’s more, the home-printer market is rapidly contracting as consumers shy away from printing documents and simply view them on their mobile devices instead. Together, PCs and printers accounted for 48% of HP’s sales in its latest quarter.
Worse, Hewlett-Packard was forced to write down its investment in software maker Autonomy Corp. by $8.8 billion in the latest quarter due to what the company called “serious accounting improprieties, disclosure failures and outright misrepresentations” prior to its purchase of Autonomy in 2011.
It was the second big writedown for Hewlett-Packard in a matter of months: in August, it took an $8-billion charge on the division of the company that was formed by its 2008 purchase of Electronic Data Systems Corp.
So what would Icahn do to stop the bleeding at Hewlett-Packard, provided he gets a voice on the company’s board? A likely possibility is that he’d push HP to split up, perhaps by separating its PC business from its enterprise server division.
There are a couple of roadblocks to this strategy, however. For one, it’s similar to a plan that Hewlett-Packard announced—and later backed away from—in 2011. That approach, conceived by former CEO Leo Apotheker (who was also behind the Autonomy purchase), would have seen HP sell or spin off its core PC business.
A breakup would also go against current CEO Meg Whitman’s strategy of turning Hewlett-Packard around not by splitting it up but by slashing its costs, streamlining its product lineup and focusing on corporate clients.
Icahn’s Track Record Is Mixed
What impact could Icahn’s involvement have on HP’s share price? In his June Investing Daily article, Charney cited a study of past Icahn targets that was published in the Journal of Applied Corporate Finance in 2010. After eliminating companies for which data is no longer available, researchers were left with a sample of 33 Icahn-targeted stocks.
The data showed that these stocks typically jump between 7% and 17% around the time that Icahn discloses his investment. If his involvement results in the target being acquired or taken private, shareholders typically see a return of about 25% between the disclosure date and the time the deal closes.
For those firms that continue as independent companies, however, the study found that shareholders “experience significant negative abnormal returns of about -60 percent during the 18 months following the disclosure of Icahn’s initial investment.” The researchers attribute this to “the failure of Icahn to achieve substantial changes in the target company’s strategy, financial policy, or governance, which sends a negative signal to the market about future performance and causes the target company’s share price to drop significantly.”
The study also found that Icahn is effective in achieving his stated objectives—such as adding his nominees to a company’s board, pushing for a sale of the firm or spinning off assets—about 30% of the time.
Bottom line: Assuming that Icahn is, in fact, purchasing a stake in HP and that his involvement were to result in a 25% boost to the company’s share price—as the above-mentioned study suggests is plausible—it would only push the stock up to about $18.16 from its current level of $14.53. That’s still well below its year-ago level of $27.84 and far short of its 52-week high of $30.00.
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