December 3, 2019

Breakingviews: Carl Icahn just needs any Xerox-HP deal

by Breakingviews.

If HP and Xerox merge, activist investor Carl Icahn will be richer for it. The irascible billionaire owns shares in both equipment makers. How much money he makes depends on who buys whom, and how. But even if Xerox’s ambitious $33 billion bid for HP is replaced by a deal that’s the other way around, Icahn – and other shareholders in both companies – will do just about as well.

Start with the basic idea that the office-equipment stalwarts are worth more together than apart. Xerox, which proposed a deal on Nov. 5, reckons it can cut $2 billion of overlapping annual costs, which taxed and capitalized on a multiple of 10 should create around $16 billion of new value. Add that to their combined market capitalizations before talks were first leaked, and the total prize is worth a little over $50 billion.

Xerox says it will take its offer of $25 billion in cash and 48% of the merged company straight to HP investors. That’s risky, in large part because Xerox would have to borrow so much to buy its much larger peer that the combined enterprise would be heavily loaded with debt. If the companies can stop bickering, the more logical alternative is for HP to buy Xerox.

Assuming HP offered the same 20% premium it just rejected from Xerox, all in stock, it would end up with nearly three-quarters of the merged company. Both sets of shareholders would benefit from the cost savings, but without the lashings of debt needed to fund the $25 billion cash payout in Xerox’s offer. That’s better for both sides.

Breakingviews calculates that whether Xerox buys HP or the other way around, Icahn’s 11% stake in Xerox and 4% in HP – worth about $2 billion altogether before any deal – should, combined, be worth about 50% more after a merger. Under these assumptions, there’s another uncanny symmetry, too, with every Xerox shareholder potentially some two-thirds better off and HP investors gaining nearly 40%, whichever way around the deal happens.

HP could also raise debt to pay for an all-cash bid for Xerox. That might not be quite as lucrative for Icahn, but he would still make a lot of money. And if Xerox goes hostile with its improbable plan, he may get nothing.

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