This Week in Imaging: Why Xerox Probably Won’t Be Acquiring HP

by Kathleen Wirth · Published November 15, 2019 · Updated November 15, 2019

Continuing our thoughts from last week, we’re going to go out on a limb and say we think it unlikely that HP Inc. will accept Xerox’s buyout offer.

The reason why is that we tend to think that HP is aware of the many pitfalls that could befall it should Xerox purchase it, one of which would be the complexities of merging two large such companies, a problem HP experienced itself in the past when it acquired Compaq (an acquisition that resulted in a large drop in HP’s value and thousands of job losses).

Next, HP may be hesitant to become under the thumb of investor Carl Icahn (who also disclosed this week that he purchased a 4.25 percent stake in HP this year). Icahn is notorious for strong-arm handed business tactics, and has improved some businesses, but not others. For instance, he asset-stripped TWA in the 1980s, selling TWA’s assets to in order to repay the money he borrowed to purchase the company. (TWA later filed for bankruptcy three times and finally was acquired by American Airlines. Note also that Xerox would also have to borrow at least about $20 billion in order to purchase HP.) More recently, Icahn was instrumental in forcing Motorola to split up – convinced that investors would find its parts more valuable than the whole – something he’s implied about Xerox and a strategy that would also likely apply to an HP-Xerox company.

One business in particular that may be ripe for sale in Icahn’s eyes is HP’s innovative PC group. Although PC sales have been slowing in the last several year, HP’s PC group actually brings in more revenue than its printer group. And, in most cases, the acquiring company – in this case, Xerox – is the one that makes the decisions, and word is, Xerox is seeking to have its Icahn-backed CEO, John Visentin (ironically a former HP executive) appointed CEO of a new merged company. There’s also the fact that if Xerox kept the PC group, Xerox has little experience in the PC market – and the little experience it has didn’t work out well with its Alto PC back in the 1980s. HP might lose its PC group or have it mismanaged.

Meanwhile, while HP has had a bit of a bumpy road recently, mainly due to lower supplies revenue (itself due to lower print volumes, especially in the SOHO segment, and competition from cheaper clone supplies). But it has come up with a restructuring plan that has merit, and which, among other things, would involve selling higher-priced printers, but lower-cost supplies – the latter for better competing with cheap third-party toner and ink supplies. At the same time, HP continues to expand into A3 office, industrial printing, commercial printing, and 3D printers for the industrial sector, which is expected to reach $7 billion by 2024 at a CAGR of 27 percent, the last of which seems to hold promise, particularly because HP is targeting the more lucrative industrial printing, not the less-lucrative prototyping. Moreover, a new CEO, Enrique Lores, just took over the helm at HP on November 1st, and we can expect that he would at least like to get a better look at HP first before ceding control of HP to Icahn-managed Xerox.

Xerox has reportedly given HP a month to respond to its offer, but we suspect in the end, this merger won’t happen for these reasons.

Could HP still be interested in purchasing Xerox? According to CNBC, in late August, HP began holding talks with Xerox discussing an HP acquisition of Xerox, talks that continued after the departure of CEO Dion Weisler. However, HP wanted more time, another three months, but Xerox discontinued talks, and then came up with an offer to buy HP.

Ultimately, while the idea of a “power-house” HP-Xerox company seems appealing, for the reasons we’ve outlined, HP may more and more be getting cold feet for this deal. Of course we could be wrong, and it’s true the industry has been on the consolidation track for decades, but we don’t see a leveraged Carl Icahn buyout in HP’s best interests, and we don’t think HP will either.

On an admittedly very cynical note, maybe Xerox isn’t hoping HP will actually take it up on its offer, but instead made the offer in hopes that Xerox’s share price would rise, which it has. Xerox’s share price has now risen to about $38 in the wake of the offer – which is very close to the Icahn goal of $40 per share, which he’s said is his goal for selling Xerox. HP is said to have been inquired about purchasing in late 2017, and stated recently that it occasionally holds talks about a “merger.” Is Icahn hoping this is the push it needs – and at a price close to his goal?

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