Ongoing Merger Conflicts & Condemns, Feb 23 2020

Xerox’s acquisition of HP Inc remained unknown as HP shareholders doubt Xerox’s profitability and management — wondering if merger would hurt the business internally.


Famed activist investor Carl Icahn, who holds just over a 10% stake in Xerox and almost a 5% stake in HP, has reportedly been one of the deal’s biggest advocates. Xerox and HP have both struggled in recent years, spinning off different ventures to leave behind an aging printing business that remains profitable for now — though earnings are dwindling every year.

Xerox would be buying into two markets that are slowing: printing and PCs. Cash speculates, “Does Xerox really want to do that?”

Stock Price Performance (1Y)
Source: Morningstar, SEC Filing

Xerox (Acquirer)

Xerox is an American global corporation that sells print and digital document products to both consumers and business across financial and governmental sectors. With over 78.2% of the sales made in the United States, Xerox centralizes and heavily relies in the North America economy. Since 2018, aggregate demand of printing service has pulled back as the popularity of digital and cloud documentations, as a historical brand Xerox is looking for ways to diversify its operations and mitigate the fact that the printing service market has started to decline.

Last year, they have implemented a large transactional IT sales arrangement from its XBS organization which had offset partial of the decline in net sales in printing services by elevating its cost management strategy. According to Q3 2019 reports published November 2019, its diluted EPS has increased from $0.83 in 2018 to $2.27. In addition to a clean balance sheet whereas it has an interest coverage ratio of 16.54x and it was barely leveraged with a D/E ratio of 0.89x.

Thus, Xerox has constantly at a position of seeking potential mergers/acquisitions with rivals and supply chains. In 2018, Xerox has proposed a merger with Fujifilm Holdings Corp but it has scrapped away because of the strong oppositions from activist investors.

HP Inc (Target)

HP inc is a historical leading global provider of personal computing and other access devices, imaging and printing products, and related technologies, solutions and services. The business identifies its products/services into Personal and Printing with respective strategy focus. Through realizing the stagnating signs of consumer demand in personal computing and printing services, HP has begun to invest more into its DaaS infrastructure and 3D-printing industry to complete more competitively.

In early October, HP Chief Executive Enrique Lores announced a restructuring plan that would yield annual cost savings of $1 billion. HP also plans to cut as many as 9,000 employees, or 16% of its workforce.

In the last HP’s 10-K report, despite their net earnings has fallen from 9.1% of sales to 5.4% of sales, their gross margins has indeed rose 0.8% which implies a recognition of its cost-saving strategy implementation in personal computing products. The biggest cost driver of the business isn’t an operating cost, in contrast it is the interest expense from its highly leveraged capital structure. Its -4.3x debt to equity ratio and 2.86x interest coverage ratio has been hindering the business to grow and reinvest its capital earned.

Expected Outcome

HP and Xerox are retooling their businesses as demand for printed documents declines. Xerox’s management expected that the merger could lower expenses by more than $2 billion, this a merger is also one of the prime examples of horizontal mergers whereas companies consolidate themselves to expand its product mix and digital infrastructure.

The relationship between HP and Xerox is not as great as it seemed as mentioned that the takeover bid had rejected by HP twice and it is still not confirmed at the moment due to disputes among both parties about the takeover price. HP has criticized Xerox for its “aggressive and rushed tactics” and commented that Xerox is trying to replace the entire HP board.

If the merger is successfully held, both companies would face huge integration problems as both companies are still under restructuring process at the moment, given the cost synergies and the historical brand reputation of both brands. The new company would still need to encounter the risk of shifting consumer demand especially in the printing industry.

Implication & Analysis

Two key playing factors of the due diligence and the likelihood of the merger are Carl Icahn’s opinions and HP’s reluctance towards the merger. Carl Icahn, who is an activist investor with a net worth of $17.7 billion according to Forbes, he holds an 11% stake in Xerox and almost a 5% stake in HP. He was one of the reasons why Xerox has failed to merge with Fujifilm Holdings, at this merger he has advocated for the merger and pinpointed that Xerox’s CEO John Visentin should be appointed as the CEO of the new company.

On the other hand, HP’s attitude towards the merger is not necessarily positive even though they have accepted the merger deal, after rejecting Xerox’s offers twice in 2019. HP’s shareholders have doubted if Xerox is profitable and clean by itself, due to the fact that they have reported less revenue in 2019 comparing to 2018, also the fact that they are undertaken restructuring process at the moment. They called Xerox “A Company Of Questionable Value”, and started to question the upside of the deal.

In February 17, Xerox has upped its takeover offer from $22 a share to $24 a share, implying a 33% upside on the stock price before the merger was announced in October. However, the management of HP Inc said the original offer “significantly undervalues” its company and they will be forced to “seriously consider” due diligence over the increased offer price from Xerox. The management fit between these companies do not seemed align and might not able to integrate smoothly as investors might have thought.


HP and Xerox merger are meant to diversify their product mix under the slowing industry and support them to remain competitive. However, due to investors pressure and management conflicts from both side it’d be difficult for Xerox to correctly value and identify the potential synergies and the actual valuation of HP Inc.

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