Breakingviews: Xerox buying HP is upside-down

Xerox successfully became a verb, but the company could struggle to redefine corporate finance. The $8 billion digital printer has made an offer for HP, the $27 billion computer maker, according to the Wall Street Journal on Wednesday. A takeover premium would only make sense with massive cost cuts. And if they’re that big, then HP should be on it already.

Xerox has a few reasons to be thinking of something daring. It just resolved a long-running dispute with Japan’s Fujifilm. It also has pushy investors Carl Icahn and Darwin Deason on its shareholder roster and represented on its board. The company has an informal financing commitment for part of a potential purchase of HP, too, according to the Journal.

Boss John Visentin can also point to stronger share-price performance than his counterpart at HP, Enrique Lores, a 30-year veteran who took over the top job less than a week ago. Over the past year Xerox owners have made a total return, including dividends, of over 30%, while HP’s are more than 15% in the red. There’s industrial logic by the ream, too. A combined company could sell Xerox copiers, HP printers and related services to customers, and wield added clout with suppliers.

But the numbers are always going to be a challenge when it’s a minnow buying a whale – rather than the other way around. If Xerox were to pay a 30% premium over HP’s market value on Tuesday, about equal to its own market capitalization, and could fund about half the purchase price with debt, then Xerox shareholders would own about a third of the combined company. Absent any value creation, they’d start about 30% worse off, according to a Breakingviews calculation.

Then come the benefits. When Fujifilm and Xerox talked about merging in early 2018, they expected cost cuts amounting to around 7% of combined revenue. Xerox’s top line plus HP’s print segment revenue add up to about $30 billion. Take a round 5%, and that could mean $1.5 billion of annual savings, worth some $12 billion once taxed and capitalized. If achieved, that would get Xerox owners well into the black.

Of course if there’s so much fat at HP, whose print unit boasts double the sales of Xerox, excising some of it is a job HP’s bosses should already be doing.

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