Computer and printer giant HP Inc. has confirmed that it is in talks with Xerox Holdings Corp. about a possible merger.
First reported by the Wall Street Journal Nov. 5, HP confirmed one day later that a deal for the much smaller Xerox to take HP over could be in the works. Citing unnamed persons familiar with the deal, the newspaper reported that Xerox is considering a cash-and-stock offer to acquire HP. The copier company would offer a premium over HP’s current stock price of approximately $19 per share, the newspaper reported, stating that further details were not available.
On Thursday, CNBC reported that Xerox had offered $22 a share in a deal comprised of 77 percent cash and 23 percent stock. Citing sources familiar with the deal, CNBC said HP shareholders would end up owning 48 percent of the company.
“We have had conversations with Xerox Holdings Corporation from time to time about a potential business combination. We have considered, among other things, what would be required to merit a transaction. Most recently, we received a proposal transmitted yesterday,” Palo Alto-based HP said in a statement, offering no additional comment on the deal.
The disparity in size between Xerox, with a market capitalization of $8.4 billion and nearly $10 billion in 2018 revenues, and HP, with a $28.6 billion market capitalization and $58.7 billion in revenues, might seem at first blush to make such a takeover unlikely. Hewlett-Packard officially split into two companies in 2015. HP got printers and PCs, while servers and enterprise software went to HP Enterprise.
Brighton Securities chairman George Conboy nevertheless sees an 85 percent likelihood of Xerox making a formal bid and puts the likelihood of a deal going through at 60 percent.
One big point in the deal’s favor is that Xerox is expected to be flush with cash after completing a $2.3 billion deal to sell long-held stakes in its joint venture with Fujifilm Holdings Corp. That sale was announced a day before news of Xerox’s possible takeover of HP broke. Announced along with that deal was Fujifilm’s decision to drop a $1 billion lawsuit against Xerox. Additionally, Xerox has been promised financing by an unnamed major bank, according to the Wall Street Journal article.
But more important than financing is the not entirely hidden hand of Carl Icahn, an activist investor, Conboy says. A billionaire with a 10.6 percent stake in Xerox, Icahn helped usher out Xerox’s previous management and oversaw the installation of new CEO John Visentin, Conboy notes.
After buying into Xerox, he says, Icahn pushed out the copier company’s previous managers and board, “who did nothing for years but oversee the company’s shrinkage and ensure themselves of fat paychecks.”
HP, which sells laptops, PCs and printers, and Xerox, which sells large-scale copiers used by commercial printers and other high-volume users, are not precisely in the same business. Still, as purveyors of products whose markets are mature, the companies share a similar profile. To grow, both need to ramp up efficiencies and take share from competitors rather than expand into new markets or create new products, Conboy says.
How a merger might play out locally is not entirely clear. To some extent, Xerox and HP both rely on the “razor blade model” in which recurring revenues—toners in Xerox’s case and printer inks for HP—count as much or more than initial sales of products that regularly require refills of a key component.
Some workforce reductions and facility closings are virtually routine in manufacturing firms’ mergers and acquisitions, however.
Conboy says a merged Xerox and HP company could see Xerox’s well-established Webster toner manufacturing operation as a good candidate to take over or expand HP’s ink-making operation. Or, it could see folding Xerox’s toner operation into HP’s larger ink production facilities as the smarter move.
Will Astor is Rochester Beacon senior writer.