The management of HP Inc. will be forced to “seriously consider” due diligence over the increased offer price from Xerox, but the offer is still likely not high enough to accomplish Xerox’s hostile takeover, according to a research note from Wells Fargo analyst Aaron Rakers.
Xerox on Monday upped its takeover offer to $24 a share, from $22 a share previously.
[Related: HP Calls Xerox ‘A Company Of Questionable Value’ After Earnings Results]
Despite being the far smaller company, Xerox is seeking to win over HP shareholders to support its takeover. Last month, Xerox also disclosed plans to nominate a new slate of HP board members that would be amenable to combining the printer and copier giants.
HP’s board of directors has repeatedly rejected the deal since its was first proposed by Xerox in November.
While the HP board has said the original offer “significantly undervalues” its company, the board has criticized numerous other elements of the proposal–including the large amount of debt that Xerox would need to raise to finance the deal. HP has not yet commented on the new Xerox offer.
In his research note, Wells Fargo’s Rakers said that the new offer “will likely force” HP to consider additional due diligence being sought by Xerox, according to financial website Seeking Alpha, which cited the note in a report.
Still, Rakers argues that combining the two companies will necessitate at least $25 per share from Xerox, and possibly more, according to the report. Additionally, Xerox’s targeted synergy of $2 billion from the deal is “ambitious,” Rakers said, according to the report. Rakers also continues to believe that “the debt load of the combined entity would be burdensome.”
CRN has requested a copy of the full note. Xerox and HP declined to comment on the Wells Fargo note.
The new Xerox offer is comprised of $18.40 in cash and 0.149 shares of Xerox for each HP share. The original offer was $17 in cash per share and .137 shares of Xerox.
The $24 per share pricing represents a 41 percent premium to HP’s unaffected 30-day volume weighted average trading price of $17, Xerox said in its announcement. Xerox said it has met with “many of HP’s largest stockholders” and that there is interest in combining the two companies.
“The tender offer announced today will enable these stockholders to accept Xerox’s compelling offer despite HP’s consistent refusal to pursue the opportunity,” Xerox said.
However, Xerox is still “likely” to offer more money, analysts at Cross Research said in a research note.
“We continue to see HPQ as an attractive investment based on a solid management team and well-planned business strategy. Moreover, we expect HP will lever its balance sheet to fund a more significant share repurchase,” the Cross Research analysts said in the note. “Finally, we think it likely that this is not Xerox’ final offer.”
Although “fiducially required to consider this new offer, we believe HP Inc.’s Board will likely refuse it. Based on prior commentary, HP believes the transaction fundamentally undervalues the company,” the note said. “Specifically, we believe no effective value is ascribed to the nascent – but fast growing and industry leading – 3D print business.”
Another key issue is that Xerox “piggybacks on HP’s balance sheet for funding and P&L for the overwhelming share of cost synergies,” the Cross Research analysts said. “In addition, we assume HP management will point to Xerox’ recent earnings results with topline down 5% y/y (net of a one time payment), as a material risk, as cost reductions can only go so far in driving profit.”
Previously, Morgan Stanley analyst Katy Huberty wrote that many HP shareholders actually see significant risks in merging with Xerox, including the company’s declining revenue. She also wrote that an offer of $26 per share for HP would have a “greater likelihood of success” in the note last month.
“That being said we think Xerox faces risks on both sides of the coin in pursuing a deal for HP. In the event Xerox closes a deal for HP, the complexity of absorbing a company 4x as large raises the risk of integration issues, which the market is likely to penalize given Xerox’s high debt levels (5.4x net leverage post-deal) post-close,” she wrote. “Conversely, not pursuing a deal means Xerox would have to rely on organic means to stabilize revenue, a risk unto itself.”
In a statement in January, HP sought to make a distinction between activist investor Carl Icahn–who owns a 4.24 percent stake in HP–and the company’s other shareholders. Icahn also owns 10.6 percent of Xerox shares, and he was central to the installation of Visentin, a longtime loyalist, as CEO of Xerox in 2018.
“We believe that Xerox’s proposal and nominations are being driven by Carl Icahn, and his large ownership position in Xerox means that his interests are not aligned with those of other HP shareholders,” HP said in the statement. “Due to Mr. Icahn’s ownership position, he would disproportionately benefit from an acquisition of HP by Xerox at a price that undervalues HP.”
The latest development comes on the heels of Xerox nominating a full slate of candidates who would fully replace HP’s board of directors, if they are selected at a shareholder vote this summer. In January, Xerox said that it had won loan guarantees for as much as $24 billion from three banks.
