HP Has 3 Good Reasons To Make Xerox Acquisition Bid: Analyst

Xerox’s reduced valuation and the need to keep HP’s business growing could be among the motives for HP to consider acquiring its print industry rival, according to analyst Toni Sacconaghi of Bernstein Research.


HP Inc. has a number of reasons to consider making an acquisition bid for Xerox, driven by the change in market valuations for both companies since Xerox’s hostile takeover for HP fell apart, analyst Toni Sacconaghi of Bernstein Research wrote in a note to investors Friday.

While it’s unclear if HP investors would embrace an acquisition of Xerox, given the struggles of the print industry, the increase in HP’s valuation and decrease in Xerox’s valuation since the hostile takeover ended suggests “increasingly compelling” math for such a deal, Sacconaghi wrote.

HP CEO Enrique Lores has also discussed the likelihood of print industry consolidation ahead, and has previously indicated that he was only against the Xerox deal terms and not against the overall concept of combining with the company, Sacconaghi wrote.

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[Related: HP Partners: Pandemic Would‘ve Been A ‘Terrible Time’ For Xerox Takeover]

HP declined to comment. CRN has reached out to Xerox for comment.

Xerox ended its hostile bid to acquire HP in late March of 2020, several weeks after COVID-19 cases had begun to spread significantly in the U.S. The copier giant said the decision resulted from the pandemic and the “resulting macroeconomic and market turmoil.”

Xerox’s proposed $34.9 billion cash-and-stock deal for HP had been pegged to a Xerox stock price of $37.68 a share from Feb. 6, 2020. Xerox’s shares closed at about half that level on March 31, 2020—leaving a massive gap in the company’s proposed acquisition deal for HP.

HP’s board of directors had repeatedly rejected the takeover deal since it was first proposed by Xerox in November 2019, saying the deal would “compromise the future of HP and the value of shares of HP common stock.”

In his note to investors on Friday, Sacconaghi outlined three major reasons why HP might consider making a Xerox acquisition bid.

The Math Makes Sense

HP and Xerox have had vastly different fortunes during the pandemic. While HP’s business has surged amid the demand for PCs and home printers, Xerox has struggled on account of its focus on the office printer and copier market.

Since the initial takeover bid in November 2019, Xerox’s market capitalization has dropped 43 percent, to $4.58 billion as of Thursday; HP’s market cap has grown 34 percent to $36.46 billion, Sacconaghi noted.

HP could potentially acquire Xerox for a 30-percent premium, using $5 billion in debt, which would add Xerox’s $500 million to $600 million in annual free cash flow as well as the creation of synergies between the two businesses, Sacconaghi wrote. That adds up to “accretive economics,” he wrote.

Additionally, bringing in Xerox would “catapult” HP into the leader position in A3 printing, he wrote.

Ultimately, “the HP-XRX consolidation math appears increasingly compelling at XRX’s current valuation, particularly if HP and XRX are able to capture material synergies, which both companies identified previously,” Sacconaghi wrote.

Substantial Synergies

Speaking of synergies, Sacconaghi estimates that combining the two companies would result in about $1 billion worth of synergies.

That’s only about half of the $2 billion in potential synergies that Xerox had touted during its takeover bid, but still enough to help the acquisition math make sense, he wrote.

Still, he noted that HP and Xerox have both already undergone significant cost-cutting in recent years.

Keeping The Growth Going

HP has been generating strong growth in recent quarters, particularly in the first and second quarters of its fiscal 2021. For instance, in its fiscal second quarter, ended April 30, HP reported that revenue jumped 27.3 percent from the same period a year earlier. Revenue for the quarter reached $15.9 billion, beating the Wall Street analyst consensus estimate by $900 million.

The results have come as HP’s commercial PC business has returned to growth for the first time in more than a year, and the company has also seen significant growth in its consumer PC business and in both its commercial and consumer print businesses.

However, Sacconaghi wrote that there is reason to consider what happens to HP’s business once the “everything at home” boom comes to an end. The question of “what happens on the other side of the pandemic” is a major one, he wrote.

“HP’s business is booming, but [that] sets up very difficult compares – particularly in its PC business – looking forward,” he wrote.

A desire to continue the growth could increase the likelihood that HP would be open to acquiring Xerox, according to Sacconaghi.

“Acquiring XRX sooner than later would also allow HPQ to plan for integration while riding solid financial results, and the resultant accretion could take hold once HP begins to lap tough comps,” he wrote.

Xerox’s stock price was up less than 1 percent, to $23.97 a share, as of Friday afternoon Eastern Time, while HP’s stock price was up 1.3 percent to $30.74 a share.