On Monday, Xerox Holdings Corp (NYSE: XRX) revealed a financing commitment with the aim to ease concerns that it is unable to fund its HP Inc (NYSE: HPQ) buyout proposal. In order to remove any doubt and prove it is capable to take over its much larger rival, Xerox secured binding financing commitments worth $24 billion from Citigroup Inc (NYSE: C), Mizuho Financial Group Inc (NYSE: MFG) and Bank of America (NYSE: BAC).
The Takeover Saga
Xerox has a market cap of $8 billion whereas HP's kingdom is valued at $30 billion but this isn't the common ‘big fish eat little fish' scenario. The $33.5 billion takeover bid was daringly offered by Xerox in early November. This cash-and-stock offer was rejected twice HP who felt that $22 per share is not in the best interest of its shareholders and furthermore, that it significantly undervalues their company.
When the executives rejected the proposal yet again in late November, they criticized Xerox's aggressive approach and questioned its 10 percent decline in revenue since last year, further showing concerns about Xerox's financial abilities to pursue this merger. But Xerox has now shown publicly its capability to pursue this value enhancing opportunity. And although profitable for now, when it comes to printing, earnings are dropping year after year as both companies are struggling and spinning off different ventures in order to leave this aging business behind.
According to Xerox, this deal would save both companies $2 billion in costs over the next two years and would boost revenue for $1.5 billion over the next three years.
Xerox strongly believes that this union would result in valuable synergy to both parties: increasing the addressable market as well as shareholder returns, ease debt and drive innovation that both companies desperately need to survive in the new era as the printing business continues to age. Moreover, Xerox also finds that it is strong in areas where HP has key market gaps, such as managed services. It obviously presented its value-creating case successfully to the big banks, winning their vote of confidence.
But what will it take to win over HP? Now that the major concern is resolved, some shareholders might rethink Xerox's proposal. But here's an even bigger question. If successful, what does Xerox intend to do with HP's PC business which accounts for the majority of HP's revenues, and moreover, why does it want to get further into not only one but two markets that are slowing down? Or maybe Xerox knows something about printing and PCs that we don't and this very same reason could also be behind HP's self-confidence.
But Xerox has now shown the money and the ability to get its agenda though so this saga is far from over.
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