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Decoding the Xerox-HP Acquisition Battle

When two big names with ever-shrinking fortunes in sections of a business ecosystem that they’ve pervaded for decades fight a battle of attrition, it becomes rather tough to figure out which of them is David and which Goliath. You guess it right, when Xerox, a name synonymous with printers and copiers began making overtures to acquire HP, a leader in personal computing and printers, our immediate thought would be that in a reversal of the myth it’s Goliath that needs divine help from David!

And why so? Because the narrative that prevailed for many years was of HP eventually acquiring Xerox, which is why when reports of the latter making concerted bids for the former unraveled in the media, there was an element of surprise. More due to the fact that it was Xerox bidding for HP and not because the industry was surprised at a merger move at this juncture, given that the printing industry isn’t exactly hale and hearty at this point in time and consolidation was very much the way forward.

Therefore, the question that emerged was this: How is it that HP, with a market value of $27 billion, is sought to be acquired by Xerox, whose market value stood at less than a third at $8 billion? How did David suddenly acquire carnivorous tastes? Actually, what made Xerox even consider such a move? Well! As they say, tough times require tough decisions.

What’s Up with Xerox?

HP has been through some major changes in recent months, with Dion Weisler stepping down as CEO, and a major restructuring announced shortly after — all of which went into effect from November 1. While the company still managed to cope with its profit margins, the senior leadership was shattered as a result of which doomsday predictions were in abundance.

Coming to Xerox – which has been reeling under a deep financial crisis for some time now, its revenue started to decline since 2016 when it began to split with Conduent, its software arm. The company also took an aggressive cost-cutting measure in the form of layoffs to improve its financial trajectory. Not to forget the company’s recently closed merger of Fujifilm that was a failed attempt – resulting in Fujifilm pursuing a $1 billion lawsuit against Xerox on grounds of deal violation. Amidst all these controversies, its interest in acquiring HP seems to be rather out of place.

What’s on the Table?

On November 6, Xerox offered to acquire HP through a combined cash and stock transaction valued at roughly $33 billion. Xerox’s offer essentially translates to HP’s market value as HP’s shares are down approximately 10% this year; although the company’s annual revenue is nearly $58 billion. Through the deal, the much smaller entity, Xerox, which is valued at $7.9 billion, would acquire HP’s entire business, including its Printing and PC business, as a means to drive increased shareholder value.

The offer to buy HP primarily serves as a financial opportunity for Xerox, (led by billionaire activist and investor Carl Icahn), who holds a 10.6% stake in Xerox and 4.24% stake in HP, has been pushing for a merger of the two companies) that would acquire HP’s inkjet as well as its PC business. Meanwhile, HP’s drive to potentially accept the offer would have more to do with its shareholders than the profit from Xerox’s technology capabilities and channel assets.

In addition to the financial implications, there are several confirmed factors with Xerox’s potential acquisition of HP. The current outcome of the deal include HP shareholders would retain a 48% stake in the new Xerox-HP combined business; the companies are reportedly not agreeing on post-acquisition management structure, which could delay merger that could result in Xerox becoming the largest printer cum copier vendor and the second largest PC vendor globally with the completion of this deal.

What Does Xerox Get?

Judging by the nature of the deal, industry experts believe that from Xerox’s point of view, the company is primarily focused on growing shareholder value.

A deal with HP should translate to significant revenue and profit growth for Xerox, which recently launched a range of cost cutting initiatives globally. It would be able to further scale up the company following the acquisition. The other interesting thing to note is that as Xerox is looking to diversify, the deal would enable the company to position itself as a top global PC vendor and not simply a reseller partner to the OEM. Additionally, Xerox could leverage its expansive dealer network to further grow sales of HP’s strategically important A3 Managed hardware portfolio.

From HP’s point of view, the deal would merely provide an opportunity to create shareholder value, given that company has been struggling to stay profitable by focusing on internal cost reduction and massive restructuring efforts, necessitated by the rapidly declining print revenue.

The Twist in the Tale

Barely a week of Xerox’s bid, HP  announced that its board unanimously rejected Xerox’s takeover offer. HP’s board felt that the offer significantly undervalued HP and ultimately was not in the best interest of its shareholders to accept the offer. According to a Techradar report, after HP turned down its first offer to buy the company, Xerox is now planning to go ahead with its hostile bid by taking its $33.5bn offer directly to its rival’s shareholders.

In an open letter sent to shareholders of HP, Xerox CEO John Visentin said the Board’s refusal to engage in mutual due diligence with Xerox defies logic. He also tried to dispel HP’s concerns that Xerox would be unable to finance the transaction while stressing on the need for mutual due diligence between the two large enterprises.

HP had earlier said that it would be willing to explore a merger if Xerox was able to provide due diligence information. At this moment, Xerox is considering a response to HP’s letter, written by its independent board chairman Chip Bergh on behalf of their shareholders, in which it claimed that there are “significant concerns about both the near-term health and long term viability of your (Xerox’s) business” while once again raising concerns about how Xerox would potentially finance the deal.

While there is uncertainty in the air, the only fact that has emerged thus far is that both Xerox and HP are seeking strategic solutions focused entirely on improving their toplines and profit trajectory while ensuring that their shareholders remain in a positive frame of mind. However, the moot question that remains is how would the merger, if at all it takes place, be managed given that HP is the bigger entity.

But as Constellation Research analyst Holger Mueller told SiliconANGLE puts it succinctly by suggesting that Xerox’s opportunistic takeover attempt is a direct result of the uncertainty HP is currently facing. “It’s never good for an enterprise when the less profitable business grows and the more profitable business shrinks, and that’s the case for HP at the moment and the management needs to find an exit and a new growth strategy,” he says.

Moreover, Xerox’s vision of a complete business solution provider is compelling for enterprise executives who would like to simply purchasing channels and seek synergies for the future of their employees, says Mueller while suggesting that Xerox indeed has a better case of acquiring HP than the other way around.

With the PC and printer/copier industry showing no signs of buoyancy and unlikely to do so, given that both are becoming redundant in today’s enterprise space, would a merger even help these two enterprises, whichever way they look at it?

Maybe, there aren’t any Goliaths in this story.

It remains to be seen whether two Davids can co-exist as a single entity and reap whatever little that’s left on the land that’s growing barren by the day.

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