Xerox Stock Rallies as HP Hints It Might Make a Takeover Bid -- Barrons.com
By Eric J. Savitz
Last November, when details were first trickling in on the unusual Xerox Holdings plan to bid for the much-larger HP Inc., Bernstein analyst Toni Sacconaghi speculated that the real goal of the offer might have been to goad HP to turn around and buy Xerox. That approach, he wrote in a research note at the time, made "a lot more financial sense" given that HP's market cap is so much bigger -- now $34 billion for HP versus $7.7 billion for Xerox.
A lot has happened since Xerox (ticker: XRX) first offered $22 a share in cash and stock for its bigger rival in the printing business. HP (HPQ) said no. Xerox said it secured financing for the deal. HP said no. Xerox said a deal would generate huge financial synergies. HP said no. Xerox announced a board slate, raised its bid to $24 a share, and threatened a proxy fight. HP said no, no, and no. Over the past few days, HP issued a poison-pill rights offering, announced a plan to buy back 50% of its stock to boost shareholder value, and again told Xerox "no."
But amid a flurry of announcements yesterday, HP also said that it "is reaching out to Xerox to explore if there is a combination that creates value for HP shareholders that is additive to HP's strategic and financial plan." To read between the lines, that suggests HP might be interested in a deal in which it buys Xerox, as Sacconaghi wrote last year.
On HP's post-earnings conference call with investors Monday, Sacconaghi asked CEO Enrique Lores about that possibility. Lores dodged the question -- but he didn't say no.
"At this point, Toni, I don't think that who buys what is a real conversation," he said on the call. "We need to make sure that the valuation of the two companies is fair based on the value that both companies are going to be bringing to the joint entity. We need to make sure that the resulting capital structure makes sense for the businesses where we will be operating and we need to make sure also that there is a fair, a clear assessment of what the synergies are. This is, I think, the important conversation for our shareholders. Once we clarify that, then who, how, are things that will be discussed after that."
That hint prompted Sacconaghi to ask in a research note today to ask whether HP will now buy Xerox.
"While HP implicitly stated it wouldn't accept an offer from Xerox regardless of price," he writes, "management did appear to express potential interest in buying Xerox instead, citing $1 billion in synergies, and indicated they were reaching out to Xerox to explore opportunities."
Sacconaghi calculates that buying Xerox for $11 billion -- about a 30% premium -- could add 40 to 80 cents (17%-35%) to HP's earnings per share, depending on the mix of cash and stock, and that HP could still proceed with its huge buyback plan on top of buying Xerox without compromising its investment-grade debt rating.
HP generates about $5 billion a year in earnings before interest, taxes, depreciation, and amortization, he notes, and synergies from buying Xerox could add another $2 billion to 2.5 billion, with only a few hundred million dollars in incremental annual interest expense.
A spokesman for Xerox yesterday said the company had no comment on HP's announcements.
It is telling that on a horrific day for the stock market -- the S&P 500 lost more than 3% -- Xerox shares jumped 4.6%, to $36.46. HP shares rallied 5.7%, to $23.35, as investors reacted positively to HP's stronger-than-expected earnings report and aggressive stock-buyback plan.