Breakingviews: HP-Xerox could turn into battle of logic over ego

It’s hard to fault the logic, on paper, of Xerox’s idea of merging with HP. The U.S. printer maker admitted as much as it politely rejected its copier-making rival’s $33.5 billion cash and share takeover approach on Sunday. The problem is that the deal that’s on the table looks cockeyed. Fixing it would involve both companies putting their egos aside.

HP should be buying Xerox, not the other way around. The financial contortions the $8.4 billion Xerox is proposing in order to come out with a 52% stake of the merged company make little sense. The deal would raise $25 billion of debt to pay a huge cash sum to that company’s investors. For two companies whose core businesses are on the wrong side of history, leveraging up to almost 5 times estimated EBITDA is unwise.

Carl Icahn, the activist investor, has labelled a combination a “no-brainer.” It’s presumably just as easy for Icahn and other big investors to see that HP should be the one paying a takeover premium. Icahn, Vanguard and BlackRock together own 27% of Xerox, but 18% of HP, according to Refinitiv data. That means they would effectively receive roughly 50% more of any premium than they collectively pay. It goes the other way for State Street, which has around 4% of Xerox, but only slightly.

The question then is who runs the thing. Enrique Lores, HP’s chief executive, is brand new in the job, but spent years running the company’s declining print business. Xerox boss John Visentin is 18 months into his tenure, but the company’s shares had risen around 12% between May 2018 and Nov. 5 of this year, the day before the idea of merging the two companies, then worth $35 billion, became public. He previously worked for HP, and is an Icahn loyalist. Visentin looks the best person to lead a merged company.

All that suggests a deal that puts HP investors and Xerox management on top could be the best thing for shareholders. In an ideal world, the companies would probably wait. A year from now, Lores will have shown his mettle or lack thereof, and Xerox will have had a chance to address its own declining revenue. Icahn and others may favor a deal today, but patience would ensure what emerges from the output tray is clearer.