Xerox Offer For HP Not Enough, Analysts Say

Xerox (NYSE: XRX) has sweetened its offer for HP (NYSE: HPQ) by two dollars per share, upping the price to $24.00. Previously the offer for HP had been $22.00 in what had started out as an acquisition effort in November 2019.

Since then, the Xerox offer has become a highly leveraged hostile takeover attempt, with Xerox announcing an attempt to replace the HP board with eleven of its own nominees. A number of analysts have speculated that the higher offer might be enough to convince HP to open discussions with Xerox.

The debt load of the combined entity would be burdensome

Meanwhile, with the HP board in opposition, Xerox is going directly to HP stockholders with their offer, which the company says it will put into play on March 2, 2020. However, it’s not clear that the higher Xerox offer for the much larger HP will be enough sweeter for stockholders to bite, because there are some substantial questions about Xerox’s ability to integrate HP into its operations.

Wells Fargo analyst Aaron Rakers said in a research note that the takeover would require an offer of at least $25.00 per share.

“We continue to view Xerox's year 3 run-rate synergy target of $2 billion as ambitious and believe that the debt load of the combined entity would be burdensome,” Rakers said.

Rakers, in a separate interview, also noted that Xerox, which is primarily a printer company, would be trying to take over HP, whose printer division is already under significant pressure, and which is working to restructure its operations accordingly. He also said that computer division is seeing an increase in sales, which could raise the value of the company.

When the merger was first proposed in November, the HP board refused, citing poor revenue on the part of Xerox, anticipated future declines, a lack of synergy and the fact that the exit from the Fujifilm joint venture leaves a hole in its strategy.

Rich Smith, a contract writer and analyst for the Motley Fool said that he doesn’t expect HP stockholders to go for the Xerox offer.

“It’s a tiny company trying to buy a much larger company,” Smith said, “and I don’t think they’d like it.”

Smith said that it would take massive debt for the acquisition to happen. “Xerox already has more debt than HP, and it’s a much smaller company.”

Smith added that the additional debt could increase the financial strain to the point that dividends would be cut which he said would not go over well with stockholders.

Some analysts have suggested that if the merger did take place, Xerox would spin off HP’s successful computer division, and absorb the printer division.