HP Rejects Xerox’s Purchase Bid While Raising the Prospects for a Counter Offer

Nov 18
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A significant development took place this Sunday for investors of HP (NYSE:HPQ) and Xerox (NYSE:XRX). Through a statement that was released to the press, HP’s board of directors rejected the $33.5 billion takeover bid from Xerox and, concurrently, indicated the possibility of a counter purchase offer should Xerox make available its books for HP’s perusal.

In its takeover bid, Xerox had offered a purchase price for HP at $22 per share which, in turn, marks a share price premium of almost $2 relative to the Friday’s closing price of HP’s stock at $20.18. Moreover, the bid consisted of 77 percent cash and 23 percent stock which translates to $17 in cash and 0.137 Xerox share for each share of HP.

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HP’s board of directors, however, concluded that the bid significantly undervalued the firm and, consequently, was not in the best interests of the shareholders: “We note the decline of Xerox’s revenue from $10.2 billion to $9.2 billion (on a trailing 12-month basis) since June 2018, which raises significant questions for us regarding the trajectory of your business and future prospects,” read the board’s statement.

Nonetheless, by taking into account the benefit from synergy cost savings to the tune of about $2 billion, the board highlighted the possibility of a counter purchase offer for Xerox by HP: “With substantive engagement from Xerox management and access to diligence information on Xerox, we believe that we can quickly evaluate the merits of a potential transaction.”

Many analysts, in the wake of Xerox’s bid submission for HP, had acknowledged the accrual of benefits from synergy cost savings. However, some had also pointed to the challenges that the move entailed, particularly, when taking into account the dissimilar offerings and pricing models employed by these two firms.

Xerox primarily manufactures large printers and copy machines and most of its annual revenue – to the tune of $9.2 billion – comes from the lease and maintenance of these machines. It also has $14 billion in total assets, as of the third quarter of 2019.

HP, on the other hand, sells mainly smaller printers and printing supplies and is also one of the largest PC makers in the world with annual revenue of over $58 billion in the last fiscal year that ended in October 2018. The company also reported $32 billion in assets, as of the third quarter that ended in July of 2019.

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In 2015, HP split off from Hewlett Packard Enterprise Co. – which sells servers, data-storage gear and related services to corporate clients. Lately, the company has been struggling with its printer business segment (read our previous coverage here for additional context). Previously, HP used to sell its printers at a discount and then charge a hefty margin for the associated ink cartridges. This model, however, no longer works as users are able to buy these cartridges at a much lower rate from cheaper vendors. Therefore, the company plans to change this model as part of the broader restructuring. It will now allow its customers the option to buy printers at a discount and will then ‘lock’ such printers to the company’s cartridges by employing technological safeguards against third-party cartridges. Moreover, in order to revive its fading stars, HP is also slashing 16 percent of its workforce as part of a restructuring plan that is meant to cut costs and boost growth in sales.

Xerox had submitted a bid for HP, a company more than three times its size, on 5th of November following the dismissal of a $1 billion-plus lawsuit filed against Xerox by Fujifilm. This dismissal resulted in the dissolution of the corresponding accounting provisions, thereby, freeing up much-needed cash for the acquisition offer. The lawsuit had emerged when Xerox scrapped a $6.1 billion deal to merge with Fujifilm last year after lobbying by two of its main investors, Carl Icahn and Darwin Deason.

It is important to note that HP’s stock price, which had been down by as much as 10 percent year-to-date, has surged by 9.67 percent to $20.18 (as of Friday’s close) in the wake of the purchase offer submission by Xerox but still remains substantially below its 2019 high of $23.91. Also, HP's market capitalization currently stands at $30.25 Billion while that for Xerox is presently at $8.36 billion. Due to this development over the weekend, investors should expect a surge in the trading volume of both of these stocks today. As a reference, HP's three-month average volume is currently at 14.08 million shares while that of Xerox is at 2.14 million.

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