November 22, 2019

Hostile Deals: Xerox Gives HP a “Bear Hug”

Xerox turned up the heat on its unlikely bid for HP yesterday when it sent a letter to HP’s board stating its case for a deal & threatening to “take its compelling case to create superior value for our respective shareholders directly to your shareholders” unless HP agreed to allow Xerox to conduct due diligence.

That’s a good old fashioned “bear hug” – a letter designed to maximize the pressure on a target’s board to move forward with a deal.  It usually includes some kind of a threat to launch a hostile bid unless the bidder gets a favorable response from the board within a short period of time.  These aren’t always made public – at least at first – but they’re always drafted with an eye on their ultimate public disclosure.

I’ve got to admit, I’m a sucker for these letters.  Xerox’s is one of the more aggressive of the genre – sometimes called a “grizzly bear hug” – because it laid out price & terms and immediately made the letter public.  About a decade ago, the NYT published an article called  “The Art of the Bear Hug”, which recounts prominent examples of the use of bear hug letters.  Here’s an excerpt with a little history about how this practice got its start:

This unusual letter-writing practice dates back to the early 1980s. Bruce Wasserstein, Lazard’s chairman and a longtime player in the mergers game, tracks the practice back to 1982, when Boone Pickens sent a bear hug letter to Cities Service, a small oil company.

Mr. Pickens made “an offer directly to Cities’ C.E.O. and announced it to the world,” Mr. Wasserstein wrote in his book “Big Deal.” “The likelihood of that happening was slim. However, that wasn’t the point. Pickens just wanted to build pressure on Cities’ incumbent managers and board of directors.”

And that last sentence summarize what these things are all about.  Bear hug letters are ultimately a pressure tactic to get a target’s board to the negotiating table.  That’s why they prominently feature some spin about the premium being offered and the other wonders associated with the combination. Xerox’s letter is no exception.

But it’s not all about the spin.  These letters are often intended to create disclosure issues for the target under the federal securities laws and they may also implicate state takeover statutes – which can sometimes be a trap for the unwary for a bidder who doesn’t pay close attention to the wording of the bear hug.

Xerox’s threat to go hostile isn’t its only leverage point with HP – and it’s probably not even close to being its most significant one. After all, activist Carl Icahn holds a big stake in both companies & is on record as supporting a combination.

John Jenkins