The shares of Xerox Holdings Corp (XRX: NYSE) declined 1.55% or $0.61 to close at $38.69 yesterday after the board of directors of HP Inc (NYSE: HPQ) collectively brushed away the acquisition bid made by the digital document products enterprise as it undermines shareholders interest. Furthermore, HP also believes that a takeover by Xerox will bring down its overall valuation. HP closed flat at $20.11 yesterday.
Norwalk, Connecticut-based Xerox revealed its interest in acquiring HP on November 6th in a combination of cash and stock deal. Xerox offered HP $22 per share, with 77% of the bid in the form of cash and the rest 23% in the stock. In figures, Xerox was ready to pay $17 in cash and 0.137 Xerox share for each share of HP.
However, HP’s Board rejected the offer after due consideration. In its letter rejecting the offer, HP’s Board pointed out that the stringent acquisition terms, unreliable nature of the offer and likely effect of debt on the valuation of the company has made the offer unattractive.
HP’s Board has included the following statement in its official letter to John Visentin, Xerox’s CEO. “In reaching this determination, the Board also considered the highly conditional and uncertain nature of the proposal, including the potential impact of outsized debt levels on the combined company’s stock.”
Last month, HP, as part of its overall restructuring plan, said that it would slash between 7,000 and 9,000 jobs by the end of FY 2022. Through these measures, HP hopes to save $1 billion per year. The job cuts would represent roughly 16% of its total workforce of 55,000 across the globe, as per data provided by FactSet.
With a market cap of $27 billion, HP is three times the size of Xerox, which operates in more than 160 countries.
HP’s Board also questioned the long-term viability of the Xerox business. In its letter to Visentin, the Board wrote, “We note the decline of Xerox’s revenue from $10.2 billion to $9.2 billion (on a trailing 12-month basis) since June 2018, which raises significant questions for us regarding the trajectory of your business and future prospects.”
The Board also believes that a thorough analysis of attainable synergies from a possible merger is required to decide on the issue. For that, HP prefers to have close interaction with the top management of Xerox, in addition to assiduous information. HP hopes to assess the merits of a possible deal with the aforesaid details and interaction with Xerox management.
HP was established after the enterprise business of Hewlett-Packard was spun off into Hewlett Packard Enterprise, which offers data storage hardware, servers, etc.
Notably, famous activist investor Carl Icahn, who holds a 10.6% stake in Xerox, acquired a $1.20 billion stake in HP. Icahn is one of the prominent investors who was working behind the screen for a merger of the two enterprises as he believes that a combined entity would add an increase to shareholder’s value.
The rejection of the bid by HP is expected to turn the stock of Xerox bearish.
Technically, the stock has started declining after facing resistance at 40. The stock is also making a bearish divergence with the MACD indicator. Therefore, we are expecting the stock to lose ground in the days to come.
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