Was HP Wrong to Reject Xerox’s Takeover Offer?



Carl Icahn wants HP (HPQ) shareholders to agree to the takeover bid from Xerox Holdings (XRX). On Wednesday, Icahn wrote an open letter to shareholders and pressured them to accept Xerox’s offer. HP has turned down Xerox’s $22 per share takeover offer twice. The company said that the deal is undervalued.

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Icahn’s views on the HP and Xerox deal

Icahn is among Xerox and HP’s largest shareholders. While he already has a 10.6% stake in Xerox, he recently owned a 4.24% stake in HP. He wants to push HP to merge with Xerox. Notably, Icahn bought a stake in HP on November 13.

According to Icahn, the deal is a “no-brainer.” He thinks that HP shareholders should reconsider the deal. Icahn mentioned in his letter that there isn’t a reason for the company to reject the Xerox’s $22 per share offer. He added that HP’s board unreasonably refused “to engage in a customary mutual due diligence process.” Meanwhile, he’s surprised by the company’s refusal. HP’s management only agreed to the deal’s potential benefits last month.

According to Icahn, HP’s standalone restructuring plan won’t revive the company. HP plans to reduce its workforce to cut costs and boost profitability, according to the restructuring plan announced in October. The company would remove around 7,000–9,000 employees by fiscal 2022. As a result, the company plans to save about $1 billion annually. The consolidation will likely yield over $2 billion in cost synergies.

Icahn is pressuring HP’s board to take up the opportunity. The proposed merger could yield significant profits for investors.

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Why the deal is important

Currently, HP and Xerox are suffering from declining paper demand amid the transformation to the digital era. Digitalization has dented both companies’ printing businesses. Xerox has been underperforming due to its weak revenues in the printers and copiers business since 2012. In the third quarter, Xerox’s revenues fell 6.5% YoY. The revenues will likely continue to decline by 6% YoY in 2019.

HP has experienced sluggish revenue growth for the past seven quarters. The company blamed soft sales in its printing business for the overall decline in revenues. The company’s printing business has been impacted by weak printer supplies. In the fourth quarter, the company’s printing revenues fell 5% YoY on a constant-currency basis. The supplies revenues also fell 7% on a constant currency basis. So far, the stock has only gained 1.85% this year as of Thursday.

The deal would be a significant move in the printing industry and a win for both companies. Combining HP and Xerox could provide substantial cost savings for both companies. The agreement would also create a more balanced portfolio of printer offerings.

Also, the merger would help Xerox compete with Canon and Ricoh. The deal could help the company expand in Asia, where HP has a strong presence.

Why HP doesn’t favor the merger

HP has rejected Xerox’s acquisition proposal twice. Xerox offered a deal price of $22 per share on November 5. On November 24, the company rejected Xerox’s offer despite the warning from Xerox about going hostile. On November 17, HP rejected Xerox’s proposal bid of $22 per share. The company thinks that the bid price of $33.5 billion significantly undervalues it. However, the deal value of $33.5 billion is more than three times Xerox’s market capitalization. The deal value was more than HP’s market value, which stood at $30.1 billion as of Thursday. Xerox’s market value stands at $8.2 billion.

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Although Xerox disclosed that it would pay in cash and stock, HP still doubted the deal’s funding. Xerox planned to get a loan from Citibank to fund the deal. Also, Xerox sold its 25% stake in Fuji Xerox, the Fujifilm joint venture, to finance the merger. According to HP, Xerox’s funding plans would raise the already-high debt levels. Besides, the company didn’t like Xerox’s idea to sell the stake in Fujifilm’s joint venture. The company also pointed out that Xerox didn’t provide clarity on its cash-raising ability. In addition to falling revenues, HP mentioned in the letter on November 24 that the consolidation would result in an “outsized debt burden.” Jim Cramer, CNBC’s “Mad Money” host, didn’t favor the merger.

Future plans

Currently, HP’s board seems to be confident about its business model. The company plans to create value for its shareholders. As we noted last month, the company’s new CEO started after Dion Weisler decided to leave. CEO Enrique Lores plans to make HP more efficient and bring new opportunities in the printing and personal systems segments. On November 1, during an interview with CRN, Lores said that he’s “very optimistic about the future of our personal systems business.” The company will focus on selling innovative and premium computers to gain revenues. In the fourth quarter, personal systems revenues grew 4% YoY (5% in constant currency). Lores is also confident about the company’s 3D printing business.

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Notably, HP is reorganizing its business model to revive its printing business. Starting in October 2020, the company will change the way it sells its printers and supplies. The company will offer printers, with higher pricing, that can use third-party supplies. Notably, the subsidized printers will be available if they are locked to HP-branded supplies, according to a CRN report. In the interview, Lores that the reorganization will be used “to remove our dependency on supplies from a profit perspective and rely on the other components of the system, especially in those areas like hardware, where we have a strong competitive advantage.”

Looking at the points mentioned above, we think that HP wants to unlock more opportunities under its new leadership. The company wants to transform its print business model, boost its personal systems segment, and slash its workforce to become profitable. If HP’s efforts are successful, it would enhance the company’s value. Regarding the Xerox deal, HP might consider acquiring Xerox, according to a Reuters report, due to the potential benefits from consolidating.


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