Sunday Strategist: Here’s Why Xerox Wants to Buy HP

(Bloomberg Businessweek) -- I started covering what's now called Xerox Holdings Corp. in 1982, when I was 24 years old and I opened a correspondency for the Associated Press in Rochester, N.Y. Xerox was already past its glory days. It was known for having lost most of its copier market share to the Japanese. It had invented—but never exploited—the key computing technologies that went into the Macintosh computer, which came out in 1984. Some of my headlines from those years: “Xerox Unveils High-Volume Copier.” “Xerox Renews Office-Automation Drive.” “25 Years After the ‘914’, Xerox Faces New Tests.”

Considering how many things have gone wrong for Xerox along the way, it’s amazing that it’s healthy enough to mount a credible offer to buy another faded legend, Hewlett-Packard Co. What's even more amazing is that its stock price has jumped since the news of a possible deal broke. It closed on Nov. 8 at $38.35 a share, up from $36.37 a share on Nov. 5. Often in a merger, the stock of the acquiring company goes down because investors fear it's overpaying. 

The optimism of Xerox shareholders appears to be based on projected savings. A merger that eliminated duplication would enable the combined companies to save costs in shrinking businesses. Xerox makes printers and copiers, while HP (having spun off its server business) makes printers and personal computers. Given the combined companies’ large market share, the deal might also invite the scrutiny of antitrust authorities.

Here’s what Bloomberg Intelligence analyst Robert Schiffman said about the possible deal: “A merger with HP would create a behemoth printing and PC maker with nearly $70 billion in revenue. Though top-line growth challenges may remain in the intermediate term, synergies could help boost annual free cash toward $5 billion and enable future deleveraging.” 

In an interview, Schiffman said, “The benefit from Xerox’s perspective is that neither company is overlevered at this point.” Xerox will end up carrying a lot more debt if the deal goes through because it's proposing to pay HP shareholders mostly in cash, a commodity that isn't exactly lying around its Norwalk, Conn. headquarters. If instead Xerox paid mostly in its own shares, it would have to issue so many of them that HP shareholders would end up controlling a majority of the combined company.

That raises the question of why, if a merger makes financial sense, HP isn’t the acquiring party. That might still happen, Schiffman says. The problem for HP is that its board took a look at Xerox earlier this year, when it was essentially on the auction block, and decided not to bid. For HP to bid for Xerox now when the price is significantly higher would be hard to swallow.

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To contact the editor responsible for this story: Silvia Killingsworth at skillingswo2@bloomberg.net

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