March 27, 2020

Breakingviews: Xerox-HP deal is dead for now

by Breakingviews.

At a time when investors crave safety and predictability, a highly leveraged $35 billion hostile takeover is always going to lose its shine. Xerox’s bid for HP is effectively dead, at least for now. Industry consolidation can wait.

True, a falling market ought to make a mostly cash bid at a premium seem even more alluring. Xerox’s offer for its printer-making rival was worth just over $21 per share on Wednesday, almost $6 above where HP’s shares were trading. But those numbers are illusory. A global pandemic has wiped away one-quarter of HP’s value this year so far, and half of Xerox’s.

And even if HP investors fancied the $18.40 per share of cash in Xerox’s offer, they probably wouldn’t get their payout until the end of the year. Xerox boss John Visentin hasn’t yet raised all the money, nor got his own shareholders’ approval to do the deal.

HP said on Wednesday that it simply isn’t interested in discussing any deal right now, which – as well as continuing the acrimonious back and forth – rules out a friendly version of the merger. Conveniently, but also correctly, HP boss Enrique Lores now has bigger issues to deal with as the U.S. and world economy are ravaged by the Covid-19 pandemic.

Visentin has similar immediate problems to address, like what’s going to happen to his 27,000 or so employees as businesses everywhere shut down. The last thing he needs is to go into a likely recession with a hard-to-execute merger that would come with debt initially approaching 5 times EBITDA.

Both companies’ printer businesses are shrinking and Xerox reckons it could cut out $2 billion of costs a year if the companies combine. But the logic for consolidation will still exist in a year, or two.

The rational thing would be for Xerox to walk away from its ongoing tender offer and its effort to replace HP’s board, and perhaps come back at a less feverish time. Company chiefs behind the roughly $60 billion of hostile deals still dangling worldwide, according to Refinitiv data, will be having similar thoughts.

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