There has been recent speculation about the possibility of Hewlett Packard (HP) making an acquisition bid for Xerox, its print industry rival. Analyst Toni Sacconaghi of Bernstein Research has highlighted three reasons why HP might consider such a move: the change in market valuations for both companies since Xerox's failed hostile takeover bid, the potential for substantial synergies, and the need for HP to continue its growth trajectory.
The Math Makes Sense
During the COVID-19 pandemic, HP's business has experienced significant growth due to increased demand for PCs and home printers. In contrast, Xerox has faced challenges in the office printer and copier market. As a result, Xerox's market capitalization has dropped by 43% since the initial takeover bid in November 2019, while HP's market cap has grown by 34%. This difference in valuation presents an opportunity for HP to acquire Xerox at a 30% premium using $5 billion in debt.
The acquisition would bring together the annual free cash flow of $500 million to $600 million from Xerox and the potential for synergies between the two companies. This combination could result in accretive economics for HP. Additionally, the acquisition would position HP as a leader in A3 printing, providing a competitive advantage in the market.
Substantial Synergies
Combining HP and Xerox would create approximately $1 billion worth of synergies. Although this is only half of the $2 billion in potential synergies that Xerox had initially proposed, it still represents a significant value. Both companies have already undergone significant cost-cutting measures in recent years, making further synergies achievable.
Keeping the Growth Going
HP has been experiencing strong growth in recent quarters, particularly in its PC and print businesses. However, there is a question of what will happen to HP's business once the pandemic-driven demand subsides. Acquiring Xerox could help HP sustain its growth momentum and plan for integration while riding solid financial results. The resultant accretion could take hold once HP begins to face tougher comparisons.
Analyzing hewlett-packard (hpe) stock price: trends, factors, and analyst targetsFrequently Asked Questions
- Does Xerox own HP?
- What is the proposed deal between Xerox and HP?
- Why is HP considering acquiring Xerox?
No, Xerox does not currently own HP. Xerox made a hostile takeover bid for HP in late 2019, but the deal fell through.
The proposed deal between Xerox and HP was a cash-and-stock transaction valued at $39 billion. Xerox offered $140 in cash and 0.149 Xerox shares for each HP share.
HP is considering acquiring Xerox due to the change in market valuations, the potential for synergies, and the need to sustain its growth trajectory.
The possibility of Hewlett Packard acquiring Xerox presents an intriguing opportunity for both companies. The change in market valuations, potential synergies, and the need to continue growth make this a compelling proposition for HP. However, it remains to be seen whether HP investors would embrace such an acquisition given the challenges in the print industry. Nonetheless, the consolidation of HP and Xerox could result in a stronger and more competitive entity in the printing industry.
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