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HP-Xerox: What Happens Next?

Xerox is planning to take a tender offer directly to HP shareholders in early March, while HP may be readying a share buyback to help maintain shareholder loyalty.

After months of escalating back-and-forth statements from Xerox and HP Inc., the hostile takeover drama is about to put some of its supporting characters front-and-center: HP shareholders.

On Monday, Xerox revealed that it plans to ask all HP shareholders to sell their shares through a tender offer, starting "on or around" March 2.

[Related: HP Calls Xerox 'A Company Of Questionable Value' After Earnings Results]

To help entice shareholders, Xerox also said it will raise its takeover offer to $24 a share, from $22 a share previously. The new offer amounts to a $34.9 billion acquisition bid--based on the latest disclosure of outstanding shares in HP, on Nov. 30--up from $32 billion originally.

Xerox said it has met with "many of HP's largest stockholders" and that there is interest in combining the two companies. The price just hasn't been right so far, Xerox acknowledged.

"The ask we hear most consistently from HP's investors is for greater equity ownership in the combined company," Xerox said in a FAQ page on its xplushp.com website.

As of this writing, HP has not yet commented on Xerox's new acquisition offer.

HP's board of directors has repeatedly rejected the deal since it was first proposed by Xerox in November.

While the HP board has said the original offer "significantly undervalues" its company, the board has criticized numerous other elements of the proposal, as well--including the large amount of debt that Xerox would need to raise to finance the deal.

Despite being the far smaller of the two companies, Xerox is seeking to absorb HP in order to bring together the largest players in the copier and printer markets at a time when the industry is waning.

Whether or not the $24 per share price will be compelling for HP shareholders is unclear. According to a research note from Wells Fargo analyst Aaron Rakers, the offer is still not high enough. Combining the two companies will require at least $25 per share from Xerox, and possibly more, according to Rakers.

Similarly, analysts at Cross Research said in a research note it is "likely" that this will not be Xerox's final offer. Xerox declined to comment further beyond its news release Monday.

Another probable upcoming move is a significant repurchasing of shares by HP, the Cross Research analysts said. Share buybacks are often used by companies to boost their stock price and provide investors with returns. HP has recently mentioned share repurchases as an alternative option for creating shareholder value, versus accepting the Xerox takeover.

As for the tender offer, Xerox will need 50.1 percent of HP shares to complete the offer, the Cross Research analysts said--adding that they are unaware of arrangements Xerox may have with any major HP shareholders, other than activist investor Carl Icahn. The tentative March 2 timeframe for the tender offer may be meant to follow HP’s fiscal first quarter earnings report, which does not yet have a scheduled date but usually occurs in February.

Beyond that, Xerox plans to nominate a new slate of HP board members at HP’s 2020 annual meeting, but that date has not been announced yet, either.

Previously, Morgan Stanley analyst Katy Huberty wrote in a research note that many HP shareholders actually see significant risks in merging with Xerox, including the company's declining revenue. She also wrote that an offer of $26 per share for HP would have a "greater likelihood of success."

“That being said we think Xerox faces risks on both sides of the coin in pursuing a deal for HP. In the event Xerox closes a deal for HP, the complexity of absorbing a company 4x as large raises the risk of integration issues, which the market is likely to penalize given Xerox's high debt levels (5.4x net leverage post-deal) post-close," she wrote in the note last month. "Conversely, not pursuing a deal means Xerox would have to rely on organic means to stabilize revenue, a risk unto itself."

In a statement last month, HP sought to make a distinction between Icahn--who owns a 4.24 percent stake in HP--and the company's other shareholders. Icahn also owns 10.6 percent of Xerox shares, and he was central to the installation of Visentin, a longtime loyalist, as CEO of Xerox in 2018.

"We believe that Xerox’s proposal and nominations are being driven by Carl Icahn, and his large ownership position in Xerox means that his interests are not aligned with those of other HP shareholders," HP said in the statement. "Due to Mr. Icahn’s ownership position, he would disproportionately benefit from an acquisition of HP by Xerox at a price that undervalues HP."

For its part, Xerox said on the FAQ web page that "we are continuing to meet with HP shareholders to explain the rationale for this transaction and our actions."

"Now HP shareholders will have the opportunity to make their own determination," Xerox said on the page.

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