Xerox Mulls Takeover of HP – Can This Buyout Succeed Given that HP is Three Times Bigger?

Nov 6
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In a bold move designed to breathe new life into ailing business units, Xerox Holdings Corp. (NYSE:XRX) – the American corporation that sells print and digital document products and services – is reportedly gunning for a takeover of HP (NYSE:HPQ) – the iconic manufacturer of printers and PCs – according to the Wall Street Journal.

Xerox is currently mulling a blend of cash and stock-based offer in order to acquire HP which, interestingly, has a market capitalization over three times greater than that of Xerox. Even so, uncertainties abound as any bid that Xerox submits will have to offer a premium over HP’s current capitalization of $27 billion.

HP Upgraded To $24/Share As Wall Street Optimistic On Xerox Offer

By any measure, this acquisition will not be a walk in the park for Xerox. Nonetheless, a few factors do bolster the company’s odds. On Tuesday this week, Xerox concluded an agreement with Japan’s Fujifilm Holdings Corp. to peddle a slice of their joint venture for $2.3 billion. Moreover, the company has also received an informal funding commitment from an unspecified major bank. Additionally, the recent dismissal of a $1 billion-plus lawsuit filed against Xerox by Fujifilm will result in the dissolution of the corresponding accounting provisions, thereby, freeing up much-needed cash. The lawsuit 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. In the wake of the scuttling of this deal, Fujifilm had alleged a breach of contract and, consequently, sued the American company for damages in June 2018.

Xerox primarily manufactures large printers and copy machines and most of its annual revenue – to the tune of almost $10 billion – comes from the lease and maintenance of these machines. 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. 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.

Should the merger succeed, both companies will benefit from synergy cost savings to the tune of about $2 billion and would get to explore new avenues of growth. It should be noted that the share price of Xerox is up 84 percent so far this year amid the launch of a cost-cutting program, better-than-expected third-quarter earnings last week, and improved 2019 outlook. Conversely, HP’s shares are down 10 percent this year while the S&P 500 has gained over 16 percent so far.

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