Xerox Stays True To Word – Takes HP Takeover Offer Directly To Shareholders

This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

Xerox Holding Corporation (NYSE:XRX) has been aggressively courting HP Inc (NYSE:HPQ) for a takeover. Xerox's CEO Mr. John Visentin promised to take his company's acquisition offer directly to HP's shareholders if the company's management did not respond favorably to his offer and requests for due diligence. Well, Mr. Visentin has stayed true to his word as Xerox has highlighted the benefits of a combination with HP in a 33-page presentation aimed at investors.

Xerox Takes Takeover Offer Directly To HP's Shareholders - Claims Its Offer Price Of $22/Share For HP Is At 29% Premium Over HP's $17/Share Volume Weighted Average Share Price

In the presentation, Xerox (NYSE:XRX) has broken down the details of its offer, and highlighted the benefits that HP's shareholders will receive should they agree to a takeover offer. Additionally, Xerox has also shed light on how it plans to proceed in case its acquisition of HP is approved by the company's shareholders.

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Xerox states that its offer of $22/share offers a 29% premium over HP's volume-weighted average share price of $17. Xerox also claims that following the acquisition, HP's shareholders will have a 48% stake in the new company, and this stake alone is valued at $14/share. When added to the $17/share cash value that HP's shareholders will receive from the acquisition, the total pro forma implied value of the offer is at $31/share, as per Xerox.

To reach an equity value of $14/share for the new entity, Xerox (NYSE:XRX) has added its and HP's net income for the calendar year 2019 with an assumed pre-tax $2 billion in cost-saving synergies (after-tax value of $1.7 billion). The company's financial team has then subtracted the total interest expense for the acquisition to reach a $5 billion Pro-forma net income for the new entity. This net income translates into an equity value of $14/share for HP's shareholders after volume-weighted average price-to-earnings multiple and HP's shares outstanding have been accounted for.

Xerox has reached an implied equity value of $14/share for the new entity.

Xerox States That Its $22/share Offer To HP Shareholders Exceeds Analysts' Expectations For Company

To further boost its attempt of taking over a company that's nearly three times larger, Xerox (NYSE:XRX) has cited analysts' estimates for HP (NYSE:HPQ )on the 5th of November, 2019. Slides seen by Wccftech quote analysts from Evercore, Credit Suisse, Wells Fargo and Goldman Sachs highlighting concerns about HP's cost savings model, with Evercore stating that "$1.0bn gross savings by end of FY22...most of this will be offset by organic headwinds and investments, so see minimal help on EPS."

The Norwalk, Connecticut based photocopy machine seller has also quoted price targets from the aforementioned banks and from Citi, JP Morgan, Credit Suisse, Deutsche Bank and Morgan Stanley to highlight that a $22/share offer made to Xerox is above price targets set by all these firms. Goldman's price target for HP sits at $14/share, and five of the eight banks quoted by Xerox have set a $20/share price target for HP on the aforementioned date.

To assuage investor concerns about the new entity being steeped in debt following its creation, a concern that's also been raised multiple times by HP's board, Xerox is citing healthy free cash flow Pro-forma (after formation). With synergies, Xerox believes that the new company's Net Debt/EBTIDA for 2019 will be 3.2x; one decimal place below the median 3.3x ratio for competitors including Dell, IBM, Broadcom and others. Xerox also states that $2 billion of run-rate cost synergies will be achieved within two years of the transaction, and once the new entity has been de-levered (rid of its debt), then shareholders should expect a capital return policy between 50% and 75%.

Xerox has compared its gross savings to HP's for justifying a takeover offer.

Xerox Highlights Plan To Deliver $2 billion Cost Synergies Through HP's Takeover Within 24 Months Of Deal

Most importantly, Xerox (NYSE:XRX) has highlighted how it plans to proceed if its takeover attempt is successful. Within two years of the deal, Xerox intends to streamline six departments and the new entity's selling and other general administrative expenditures. As per the details, Xerox will make changes to the following departments, with the expected synergies and their origins listed below department heads:

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Shared Service Centers: Manufacturing: IT and R&D: Delivery: Supply chain & procurement: Org design & benefit costs: SG&A:
$100 - 150 million $500 - 700 million $500 - 700 million $280 - 400 million  $200 - 300 million $120 - 150 million $300 - 400 million
Optimize productivity and workforce

Supplier rationalization and rate reduction

Reduce application portfolio

Technical service hub

Supply chain transformation

Reduce layers, increase spans, address low performers

Streamline and consolidate common functions

Process simplification

Internal system consolidation and process standardization

IT investment strategy

Reduce third-party spend

Optimize supplies, parts and freight

Design organization & operating model to new strategy

Consolidate facilities

Reduce gap cost benchmarks

Organization optimization

Harmonize benefits and reduce cost

Rationalize sales coverage

Consolidate vendors

Getting into the details, Xerox hopes to bring down the new entity's suppliers to 3,000, simplify SKU inventories by 20% and reduce information technology expenditures by 0.5%. The company eagerly stresses that if it were provided with the necessary due-diligence, then it'll be able to ascertain more areas for the synergies. Finally, Xerox also highlights that its and HP's product portfolio is complementary, and therefore the new entity will be able to cover a larger number of customers than they could on their own. Some of the areas that the company believes will benefit from the takeover include A3 office equipment, production mono cut sheet, B3 entry color cut sheet and color continuous feed.

At the time of writing, Xerox Holding Corporation (NYSE:XRX) is trading at $37.37, down by 1.06% from yesterday's closing. HP Inc (NYSE:HPQ) is trading at $20.48, with the price has dropped by 0.07% over yesterday's closing.

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