What Made HP Dismiss Xerox's Hostile Takeover Bid Again?

HP Inc. (NYSE:HPQ) rejected another hostile take-over bid from Xerox (NYSE:XRX) recently, arguing the offer undervalued the personal system (PC) maker. In a Mar 5 SEC filing, HP revealed that its board of directors has unanimously declined Xerox’s $24 a share cash-and-stock offer.

Per the SEC filing, Xerox had commenced an unsolicited exchange offer for HP’s all outstanding shares on Mar 2. Per the offer, HP shareholders would have got $18.40 per share in cash and 0.149 Xerox shares for each stock of the personal system maker.

This was Xerox’s second attempt to acquire HP in less than six months’ time. Earlier last November, it had put forward a $22 a share cash-and-stock offer on HP board’s table. However, HP had rejected the offer at that time too stating similar reasons.

To protect itself from any hostile acquisition, HP implemented poison pill last month, in an attempt to prevent investors from amassing more than 20% stake. In addition, it announced an aggressive plan to return $15 billion to shareholders over the next three years through dividend payments and share repurchases.

Why Did HP Reject Xerox Offer Again?

HP has cited a number of reasons for declining Xerox’s hostile takeover bid. The Palo Alto-based company stated that it has consulted Goldman Sachs (NYSE:GS) and Guggenheim Securities to determine the deal’s financial worth. Both investment research firms are of the view that Xerox’s offer is inadequate from a financial point of view.

HP also believes the alliance would disproportionately benefit Xerox shareholders. Additionally, HP’s board questioned Xerox’s operational inexperience in handling PCs, 3D printing, and digital manufacturing businesses. The inadequate experience could lead to risks and uncertainties for the combined companies.

According to HP’s SEC filing, Xerox’s cost-saving initiatives have come at the expense of long-term value creation. Also, the printer and copier machine maker’s estimated synergies, including cost-cuts, exceed reasonably achievable levels.

The HP board also pointed out Xerox’s huge outstanding debt and low cash levels. As of Dec 31, 2019, Xerox had $4.3 billion of outstanding debt and cash and cash equivalents pf $2.7 billion. In comparison, HP ended first-quarter fiscal 2020 with cash and equivalents of $4.2 billion and outstanding debt level of 3.9.

The latest rejection is a big blow to Xerox, which has been battling declining markets for the printer and copier business, as well as rising costs.

Nonetheless, we believe there is still some possibility that these companies could combine their businesses in the coming months. Both firms have agreed to schedule an in-person CEO meeting next week, in order to look for merger possibilities.

We consider a merger would bring real advantage as both companies lack certain capabilities. The combination would help HP in foraying into the corporate copier business where Xerox shines. It would help the PC maker to cater all office equipment needs of an organization. Similarly, Xerox could penetrate in the home-printing business with HP’s expertise in making smaller printers and printing supplies.

Notably, both firms have been witnessing declining sales in their respective spaces. Longer life-cycle and availability of alternative devices are denting PC sales. Meanwhile, longer life-cycle, cloud-storage and its anywhere accessibility, and rising awareness for environment-friendly and paper-less work culture are thwarting printer and copier machine demand.

Xerox believes the combination could help both companies overcome the above-discussed challenges. Additionally, it expects a $2-billion cost-synergy from the merger.

Why is Canon Against the Deal?

Earlier this week, Canon Inc. (NYSE:CAJ) warned of cutting all of its ties with HP, if Xerox succeeds in acquiring the PC maker. The two companies have been in business relations for more than 35 years now, and the PC maker accounts for nearly 14% of Canon’s annual sales.

The Tokyo-based printer and copier machine maker is in direct competition with Xerox. A merger agreement between HP and Xerox would create a massive competitor to Canon. Therefore, Canon warned on Mar 4 to snap all ties with HP if Xerox succeeds in acquiring the PC maker.

According to a Nikkei Asian Review report, Xerox-HP merger would create a competitor with double the size of Canon, posing a real threat for the Japanese office equipment maker’s existence over the long run. Canon currently holds approximately 15% market share in the multi-function printers, copiers, and other office equipment market.

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