January 8, 2020

Breakingviews: Xerox colors in its avant-garde HP outline

by Breakingviews.

Activist investor Carl Icahn is one step closer to catalyzing a deal between Xerox and HP. The copier group has persuaded banks to commit to funding $24 billion of debt for its $33 billion bid to buy its much larger rival. That makes the offer more credible and puts pressure on HP to talk – or to come up with something better.

The logic of putting Xerox and HP together is solid enough. Under Chief Executive John Visentin, Xerox has spent 18 months cutting costs and exiting a soured alliance with Japan’s Fujifilm. Icahn, a shareholder and a driver of much of that activity, more recently also acquired a stake in HP. Even the printer maker itself has said it recognizes the potential benefits of consolidation.

Yet the company led by Enrique Lores has poured cold water on Xerox’s $22-a-share offer. It has resisted opening its books, and reckons it has other ways to add value for shareholders. True, if a deal happens there’s more obvious logic to HP being the acquirer. That would avoid the heavy borrowing that Xerox is proposing to take on so that its shareholders hold the majority of the combined company.

HP hasn’t made any counterproposal so far, though. And Xerox’s new firepower, provided by Citigroup, Mizuho and Bank of America, adds weight to its bid. Xerox might have to go back to its lenders for more if it wants to dangle a higher offer; per the usual M&A choreography, HP may want to see a bigger price before agreeing to negotiate.

Be that as it may, Xerox’s latest move ought to focus the minds of HP’s directors. The company’s shares have remained stubbornly below Xerox’s offer price for nearly the past year. If selling to Xerox isn’t the right way to maximize value for HP’s owners, Lores and his colleagues need to lay out what is.

If they can’t make a more persuasive case than they have to date – whether that’s turning the tables and trying to buy Xerox, other merger options, cutting costs and borrowing more aggressively, or anything else – even previously loyal shareholders may eventually be tempted by Xerox’s offer, especially now they know there’s real cash behind it.

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