Xerox Merger Of HP: The Good, The Bad, And The Ugly

Xerox merger of HP

The chief executive of Xerox has planned his plan of action for a hostile takeover of HP after the company refused an acquisition proposal over $30bn.

HP evaluated a takeover proposal first submitted on 7 November. However, its management announced earlier this week that the bid considerably undervalued the business and wasn’t in the most beneficial interest of its shareholders. Xerox’s CEO John Visentin responded to HP to oppose this, recommending rather the company’s valuation represents a significant premium on the target share price set by the firm’s financial analysts Goldman Sachs.

The debate also focuses on what Xerox describes as “one-way” due diligence, in which HP has asked that Xerox does customary checks ahead of a merger, but has refused to reciprocate. The firm has now set a time frame for HP to agree to mutual due diligence by Monday 25 November, or Xerox will take its case directly to shareholders.

The Xerox Board of Directors is resolute in pursuing the intended acquisition of HP to completion quickly without considerable delay. Xerox is confident that it would receive overwhelming support from HP shareholders for swiftly moving forward to complete the transaction. The company submitted that any merger of this type demands mutual diligence efforts from both parties, which involves appraising several areas, such as auditing financial information, assessing technology and patents, examining legal issues, and illustrating the effect on the workforce. These analyses are usually conducted by both parties in mergers and acquisitions to give any proposed deal a higher probability of success, with decision-makers equipped with as much information as possible.

HP said in its rejoinder that the $30 billion bid was highly qualified and unlikely, given its likely impact of colossal debt levels on the combined stock. Further, HP referred to Xerox’s falling revenue between June 2018 and June 2019. Xerox asserts it continues determined to proceed with the acquisition due to favorable market conditions and the “powerful opportunity” for the shareholders of both companies. 

HP and Xerox controlled the tech landscape around 20 years ago, but have grappled with obtaining a notable footing in today’s market. HP, which has battled since HPE split away in 2015, has recently started on an extensive plan to restructure its business to replicate its past fortunes. The $1 billion restructuring plan, announced by its new CEO Enrique Lores, included thousands of job losses and a radical restructuring of the company.

HP and Xerox businesses are shrinking

HP was profitable until this year (Q1, Q2, and Q3), when the general downturn in printing, coupled with competition from remanufactured print supplies, dented profits. Last quarter, HP generated two-thirds of its revenue from its systems business, which sells PCs and workstations, and the rest from its printer’s store, which sells hardware and supplies. The growth of both companies slowed to a crawl over the past year. 

HP is currently struggling with its printer business, which expanded in 2016 with the acquisition of Samsung’s printer unit. Wall Street is also worried that HP may face pressures from next year as the business PC refresh cycle comes to an end.

Like HP Inc., Xerox is also in decline, with little investments in potential growth areas like 3D printing. From 2016 to 2018, Xerox’s sales fell 9% to $9.8 billion. Xerox’s core businesses (sales, services, maintenance, and rentals) all remain weak, and it’s too dependent on cost-cutting measures to drive its earnings growth.

Xerox Merger of HP – Synergies

HP has strength in printers and Xerox in copiers.

Xerox does not have a presence on the two fastest-growing areas of print: digital production of labels, packaging, and signage. Xerox has no digital label offering of its own. HP, Xeikon, and now Konica Minolta are leaders in short-run label printing and converting lines powered by digital. Xerox has no cohesive offerings in the packaging sector apart from the ability of iGens to make folding cartons. HP is massively reliable in digital production color print, especially labels with HP Indigos. 

HP is not active in office and ‘copier-based’ production print. Xerox, Konica Minolta, Canon, Ricoh dominates the ‘copier’ type segment.

HP and Xerox are both American companies with a commonality of culture, bourse listings, and language. Xerox is full of former HP execs in senior management. Xerox believes it can achieve at least $2 billion in annual cost synergies by creating an office technology supplies giant. 

There’s no crystal ball of certainty, but an HP-Xerox, or parts of Xerox, unification ticks many boxes for both organizations. At the same time, the merger does not alter the reality that the total addressable market for both PCs and print is in decline.