The American tech industry might have a genuine David vs. Goliath merger battle on its hands.
In a bold move for a fading tech star with widespread brand recognition but a minuscule valuation, WSJ reports that Xerox has set its sights set on a takeover of HP – another fading tech star with widespread brand recognition – best known for its printers and laptops after splitting from its enterprise business a few years back. Per the exclusive report, the relatively tiny Xerox, which has a market cap of just $8 billion, is preparing to make a mixed cash-and-stock offer for HP. With a valuation of $27 billion, HP is worth more than 3x Xerox, and any bid would need to incorporate a premium over HP’s current market value.
Xerox has reportedly received an informal funding commitment from what WSJ describes as “a major bank”, and some analysts are arguing that a deal between the two disparate companies makes sense. Both companies are household names that have struggled to adjust to the tech industry’s constantly-evolving landscape. With the need for printed documents on the decline (many young people don’t even own a personal printer, once one of HP’s signature products), both Xerox and HP need to cut costs and shrink to survive.
Evercore ISI analyst Amit Daryanani told BBG that the potential synergies and “softer macro environment for printing” make sense. However, the bigger obstacle is the large gulf between Xerox’s valuation and HP’s, as mentioned above. XRX would need to raise a “considerable” amount of debt, or issue a “significant” amount of equity, to finance the deal. Given the size mismatch, Jeriel Ong, an analyst at DB, said any cash-and-stock offer for HP would likely be “heavier” on the cash. Though there is a history for these types of “asymmetrical” deals in the space: the Dell-EMC tie-up resulting in a highly levered Dell Technologies is one.
Estimates project that a combined company would have a combined annual Ebitda of between $6.5 billion and $8 billion.
Based in Norwalk, Conn., Xerox’s primary business remains largely unchanged since the 1990s: It primarily makes large printers and copiers, with most of its business coming from renting and maintaining the machines. Palo Alto-based HP, meanwhile, sells mainly smaller printers and printing supplies. It’s also one of the largest PC makers in the world.
After a recent change at the top ranks, HP said earlier this month that it would implement a restructuring plan that would shrink the company’s workforce by 9,000.
Xerox’s takeover campaign comes at a pivotal time for the company: It recently settled a lawsuit filed by Fujifilm for breach of contract after pulling out of a planned merger. It also sold its 25% stake in a joint venture with the Japanese firm for $2.3 billion. It also agreed to sell a majority stake in a smaller joint venture to an affiliate of Fuji Xerox, according WSJ.
Billionaire Investor Carl Icahn, who owns a 10.6% stake in Xerox, has been lobbying for years for the company to make major changes. In 2015, he warned that Xerox would “go the way of Kodak if there aren’t major changes.” I.e., go bankrupt.
Last year, Icahn and another investor, Darwin Deason, scuttled a planned merger with Fujifilm, and seized control of Xerox’s board. At the time, they argued that the deal undervalued Xerox.
Wed, 11/06/2019 – 07:55
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Author: Tyler Durden