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HP Rejects Xerox’s Offer as ‘Too Low’—What Next?

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Xerox Holdings (XRX) stock fell in the premarket session on November 18 after HP (HPQ) rejected its takeover offer. On November 17, HP’s board of directors unanimously rejected Xerox’s takeover offer of $22 per share. Both companies’ stocks are trending lower in the trading session today.

HP stock closed 0.25% higher to $20.18 on November 15. The stock was trading 16.5% below its 52-week high of $24.17. Meanwhile, it was trading 26.7% above its 52-week low of $15.93. Xerox stock closed up 0.8% on November 15 and ended up at $38.94.

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Xerox’s acquisition proposal

On November 5, Xerox offered HP a bid price of $22 per share. At an offer price of $22 per share, Xerox valued HP at around $33.5 billion, inclusive of debt. After receiving the acquisition proposal, HP said in a statement on November 6 that it would work “with an eye towards what is in the best interest of all our shareholders.”

Why did HP reject the acquisition proposal?

After reviewing the offer, HP’s board stated in a letter to Xerox CEO John Visentin that the bid offered was “too low.” Though HP did agree on the consolidation benefits, it determined that the offer price was not in the best interest of the HP shareholders. The board also stated that Xerox’s $22 per share offer significantly undervalued the company. The HP board also mentioned in the letter that the deal would burden the combined company with massive debt. The PC maker was also concerned about Xerox’s declining revenue.

Jim Cramer, CNBC’s Mad Money host, was also unsure of the deal. Cramer was skeptical of the deal’s structure—how could a small company buy one three times larger? As of November 15, Xerox had a market cap of $8.42 billion. HP, on the other hand, had a market value of $29.9 billion.

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Xerox’s plan of financing the deal

Xerox had planned to pay HP with 77% cash and 23% stock. Xerox would provide $17 per share in cash and 0.137 Xerox shares for each HP share. The printer maker had also discussed financing the deal with Citigroup, according to Reuters. Additionally, Xerox ended its long-standing dispute with its joint venture partner Fujifilm Holdings and sold its stake in Fuji Xerox.

Fuji Xerox was a joint venture between Xerox and Japan’s Fujifilm Holdings. However, on November 8, Xerox sold its 25% stake in Fuji Xerox to Japan’s Fujifilm Holdings for $2.3 billion. The company had expected to utilize the sale proceeds in funding the HP deal. Other than acquisitions, Xerox could also use the proceeds to reward shareholders with dividends and buybacks or reduce its debt.

What’s next for HP-Xerox?

After refusing the takeover offer, HP is now considering a bid to acquire Xerox. The PC maker stated that the combination of the companies has potential benefits. HP added in its statement, “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.” Xerox, however, has yet to respond to becoming an acquisition target instead of an acquirer.

On November 13, activist investor Carl Icahn bought a 4.24% stake in HP, according to the Wall Street Journal. Icahn also owns a 10.6% stake in Xerox. Earlier, Icahn was insisting that HP agree to Xerox’s offer. However, we believe the transaction would be more appealing if HP made an offer to buy Xerox. A deal between them would surely benefit the billionaire investor.

Icahn believes the combination of the two office hardware giants would bring in substantial synergies. As told by sources in a Reuters report, the deal would create an office technology supply giant. The combined company could bring in at least $2 billion in cost savings annually, per reports.

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