The Hostile Takeover

This decade indeed has started with a bang. Currently, the financial world is witnessing one of the most iconic hostile takeover of Hp by Xerox attempt. In an audacious move to acquire its competitor HP, Xerox has gone “all in” its hostile takeover attempt. 

Initially, Xerox had tested HP’s patience by making a cash-and-stock offer at a premium to its market value of about $27 billion. This attempt had become public in November but at that time, many analysts doubted Xerox’s ability to pull off the coup. One cannot blame them too because it is a unique case of a shark trying to swallow a blue whale. In one word, unthinkable. 

HP's Revenue is on the decline
HP’s revenue per fiscal quarter is taking a dive

Xerox has $9 billion in revenue when compared to HP’s whopping $58 billion. Xerox has a market cap of $8 billion. HP has a market cap of $31 billion. According to Yahoo Finance, HP’s stock tumbled by 9.2% after the company announced a massive restructuring which involved the elimination of 9000 jobs. The stock took a steep dive of 21% after Xerox publically announced its intention to pull off the hostile takeover. On the other side of the spectrum, in 2019, Xerox enjoyed a massive 84% increase in share price due to the success of the cost reduction programme initiated by the management.

Xerox's revenue has taken a steep dive over the years resulting into hostile takeover
Xerox’s revenue has taken a steep dive over the years

The Takeover Drama!!

HP hasn’t been forthcoming to the proposed buyout by Xerox. In a letter to HP, CEO of Xerox holdings, Joh Visentin hit sharply the top Management of Xerox. Here’s an excerpt from the letter:

 “Dear Chip and Enrique,

Your refusal to engage in mutual due diligence with Xerox defies logic.

We have put forth a compelling proposal – one that would allow HP shareholders to both realize immediate cash value and enjoy equal participation in the substantial upside expected to result from a combination. Our offer is neither “highly conditional” nor “uncertain” as you claim. It does not contain a financing contingency, and the combined company is expected to have an investment-grade credit rating.

The potential benefits of a combination between HP and Xerox are self-evident. Together, we could create an industry leader – with enhanced scale and best-in-class offerings across a complete product portfolio – that will be positioned to invest more in innovation and generate greater returns for shareholders. 

The market clearly understands the industrial logic of this transaction. HP and Xerox shares are up 9.5% and 6.6%, respectively, since the date our proposal was first made public. We have already received inquiries from several HP shareholders and are encouraged by their interest in our offer.

Nevertheless, rather than engage with us in three weeks of customary mutual due diligence, HP continues to obfuscate and make misleading statements”

HP Hits Back on the Takeover by Xerox

The management of HP too didn’t mince its word. In a public statement, HP said,

 “Xerox’s results do not alleviate the fundamental concerns about the continued revenue declines and health of the Xerox business. The fact remains: Xerox is relying on HP’s balance sheet to advance its proposal, which significantly undervalues HP and would require our shareholders to exchange the value of our businesses and the opportunities afforded by our balance sheet for stock in a company of questionable value and exposed to meaningful risk, due to inordinate leverage and sustained declining performance.”

According to a Wall Street Journal report, the deal is being driven by billionaire investor, Carl Icahn, who owns approximately 11% of Xerox. Since 2015 he has been lobbying for radical changes. In 2017, he launched a board fight to restructure the company. He famously said that Xerox would become Kodak if change doesn’t take place. In 2018, he and Darwin Deason, another major shareholder, scuttled Xerox’s planned merger with Fujifilm, took control of its board and replaced its CEO with Mr Visentin. To make sure the deal takes place Icahn has raked in a 5% stake in HP

Fujifilm sued Xerox in June 2018 for breach of contract and estimated damages of more than $1 billion. Fujifilm’s lawsuit alleged Xerox unlawfully terminated the merger due to pressure from Messrs. Icahn and Deason, who argued the deal, undervalued Xerox. Xerox is expected to get a $2 billion windfall from its sale of 25% stake in the Joint Venture Fuji Xerox with fuji films.

What’s Next after the Takeover of HP by Xerox?

To sweeten the deal and woo the shareholders, Xerox has revamped its offer for the hostile takeover of HP by Xerox. Xerox’s latest offer comprises of-$18.40 in cash and 0.149 Xerox shares for each HP share — valuing the company at about $35 billion. According to a Reuters report, this new offer puts a lot of pressure to recover costs as a combined entity. The same reports suggest that HP is likely to question the fundamentals of this new deal due to the high financial leverage involved as it could hurt the interests of the shareholders.

On its Part, Xerox is trying its best to pull off the Xerox’s hostile takeover of HP. It has announced that it plans to nominate eleven independent board members so that it can take care that the new deal isn’t rebuffed again.

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Would the merger work? Koala’s Take

A lot of things have to go right for this merger to work. It’s not the first time that Xerox has tried to buy its way out. In 2009, Xerox bought Affiliated Computer Services, a business process outsourcing company, for $6.4 billion. Unfortunately, it didn’t work out. In 2016, ACS was spun off as Conduent (CNDT), which now has a $1.3 billion market cap. HP too has gone down a similar router. In 2011, HP bought UK software maker Autonomy for $11.1 billion. Within one year it had to write down $8 billion for that deal. With both the companies currently struggling to even sustain their current revenues it’s difficult to fathom how it would lead to a massive turnaround in fortunes for both the entities.