Wall Street Analysts Weigh In on Xerox’s Bid for HP

With Xerox’s announcement this week that it will submit a higher offer for HP Inc. next month, several Wall Street analysts have discussed the pros and cons of an acquisition and the likelihood of it occurring.

(For a little background, Xerox first made an offer for HP in November 2019. Then, in a hostile bid for a takeover, Xerox management criticized the HP board of directors for refusing the offer, and is now appealing directly to HP shareholders. Xerox will also seek to nominate 11 members to HP’s 12-member boards at HP’s next shareholder, the date of which HP hasn’t yet set.)

Wall Street Perspective

According to Forbes, Wells Fargo analyst Aaron Rakers said in a research note that the takeover would require an offer of at least $25.00 per share for HP. Xerox’s current offer stands at $24 per share.

Rakers also seemed skeptical of Xerox’s claim that a merger would save some $2 billion, stating that it’s “ambitious,” and that the “debt load of the combined entity would be burdensome.”

An analyst for the Motley Fool, Rich Smith, also said that he doesn’t expect HP stockholders to go for the Xerox offer.

“It’s a tiny company trying to buy a much larger company,” Smith said, “and I don’t think they’d like it.” He also referred to the “massive debt: that merged company would take on, as Xerox would be borrowing $24 billion to buy HP. He also said that Xerox currently has more debt than HP, even though Xerox is a much smaller company. That could mean, he said, that the additional debt would result in lower dividends to shareholders.

According to the Washington Post, HP’s net debt represents just 0.1 times earnings before interest, taxes, depreciation and amortization (EBITDA). “To fund the acquisition, Xerox would most likely increase debt at the combined entity to more than four times EBITDA, essentially using up HP’s own debt capacity.”

According to CRN, previously, Morgan Stanley analyst Katy Huberty wrote that many HP shareholders actually see significant risks in merging with Xerox, including Xerox’s declining revenue. She also wrote that a $26 per share price for HP would have a “greater likelihood of success.”

HP Shareholders Weigh In

In her research note, Huberty did note that HP shareholders may be open to Xerox – if the price is right, writing: “In our conversations with HP investors over the last few months we’ve heard fairly consistent messaging: 1) it feels like there is a lot of risk in combining with a company whose revenue base is shrinking, whose management team is still relatively new, and whose balance sheet is not investment grade quality, and therefore the offer would have to be higher than $22 to offset the potential risks, and 2) but at the right price, one that HP cannot achieve in the near-to-medium term on its own, investors appear to be willing to engage with Xerox.”

HP Share Price on the Rise

The one winner out of all of this so far is HP’s share price. As the chart below shows, the price of HP shares has risen substantially since Xerox first made its offer, while Xerox’s has basically stayed at the same level. Another winner: investor Carl Icahn, who is behind the Xerox bid to acquire HP and has stock in both companies.

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