HP's Jet Metal 3D Printing Technology.
The back and forth between Xerox Holding Corporation (NYSE:XRX) and HP Inc (NYSE:HPQ) reached a new level today as the Norwalk, Connecticut-based company has officially published a list of directors that it will push forward for election at HP's upcoming shareholder's meeting. The list consists of executives with areas of expertise ranging from mergers and acquisitions to banking, legal and finance.
The photocopy and office equipment manufacturer has currently made an acquisition offer of $22/share to HP Inc's board and shareholders. HP's management has been stubborn in its efforts to refuse Xerox's price and consistently stated that the price undervalues HP and is therefore against the best interests of the company's shareholders.
For its part, Xerox has steamrolled ahead and provided HP's shareholders with detailed plans of what it believes is an opportunity capable of providing them with an equity value worth $14/share. Now, in response to its tactic of aiming to force out current board members, an HP spokesperson has stated that Xerox's tactics are self-serving. As per the complete emailed statement, HP believes that:
These nominations are a self-serving tactic by Xerox to advance its proposal, which significantly undervalues HP and creates meaningful risk to the detriment of HP shareholders.
Xerox 6500 in 1973.
HP Maintains Offer By Xerox Undervalues It and Does Not Serve Shareholder Interests
Xerox's $22/share offer to HP has a cash component of $17/share, and it's this area that the Palo Alto, California-based company's management has consistently stated will hurt shareholder interests. HP has been trading around for $22.08 on the market today, and the $14/share equity value boost that Xerox promises HP's shareholders is based on a price-to-earnings multiple reflecting Xerox's smaller size. HP has 1.5 billion shares outstanding at the time writing, while Xerox has 229 million shares of its common stock floating on the market and a higher share price.
However, when Xerox's cash offer of $17/share is combined wth the implied equity value of $17/share, this takes the total offer made by the office equipment manufacturer to HP's shareholders higher than the officially quoted $22/share. It is also higher than what the market currently deems HP to be worth.
Xerox promises that the deal will result in a 12.7% gross margin for the new entity, higher than what both companies can comfortably achieve at the moment. This will be possible through the utilization of both companies' strengths to create a balanced portfolio of products.
Xerox's premium calculations are based on a 30-day Volume Weighted Average Price for HP at November 5, 2019; Xerox Shareholder Presentation.
In its proposal, the company highlights that it sees the potential to cut down supplier size, cut IT costs, reduce SKU burden by streamlining logistics and bring down logistics costs by 30%. Naturally, these measures will not sit well with what HP's current management has in mind for the company, and it's up to them to convince shareholders about how these reductions will, in the long run, reduce the combined entity's value to lower than what HP is currently trading for on its own on the open market.
At this point, it's also important to keep in mind that Xerox plans to pay $24 billion for the entire deal through binding commitments made with a host of investment banks including names such as Citigroup and Mizuho. For reference, the $17/share cash portion of its offer translates roughly into $25.5 billion, so it's clear that Xerox will have to generate additional funds for the deal too, and from sources that it has not publicly stated as part of the deal. One wonders if Mr. Carl Icahn will step in here help Xerox and its chief executive officer Mr. John Visentin to make up for the shortfall.
For reference, Xerox had $1.084 billion in cash and $4 billion in long term debt at the end of its latest fiscal year. Cash is generally used by companies to fund working capital requirements.
HP Inc's revenues have remained consistent over the past quarters but increasing costs have hurt net income. Source: Koyfin
HP's board has previously used its argument that Xerox's offer is undervalued to state that it will not proceed with the company's requests for due diligence. The board worries that the more debt Xerox takes for the deal, the larger the new entity's leverage will be. Which, if you're astute then you'll realize, will end up reducing the implied equity value benefit of $17/share that Xerox is offering HP shareholders.
Now it'll be up to Xerox's board nominees to convince HP's shareholders to give them and Xerox a chance at a time when HP is busy introducing changes to its top-line products. At the Consumer Electronics Show this year HP introduced the HP Elite Dragonfly notebook featuring 5G connectivity, a new Spectre x360 and the Envy 32 All-in-One desktop personal computer.
The company's revenues have steadily grown over the years since 2016 when it stood at $49 billion. Through its latest strategy shift, HP hopes to breathe new life in its printer and ink cartridge sales and focus on 3D printers.
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HP Unfettered By Xerox – States Hostile New Move Is “Self Serving Tactic” - Wccftech
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