FILE - In this May 24, 2016, file photo, Hewlett-Packard products are on display at a store in North ... [+]
After blocking Xerox's planned merger with Fujifilm last year and taking control of its board, activist investor Carl Icahn is now pushing for a merger with HP, arguing that a union could yield big profits for investors. Icahn owns a 10.6% stake in Xerox as well as a 4.24% stake in HP.
“I think a combination is a no-brainer,” Icahn said to The Wall Street Journal. “I've found over the years that these types of companies that are in shrinking industries tend to decline much more slowly than many markets participants may predict while continuing to generate substantial amounts of cash,” Icahn said.
Xerox last week made a $22 per share bid for HP that values the company at $33 billion. HP, a company more than three times Xerox’s size, has confirmed the bid but has not disclosed the offer price. The offer includes $17 billion in cash and 0.137 Xerox shares for each HP share. Xerox currently trades at a market value of about $8 billion, while HP is valued at around $27 billion.
HP and Xerox businesses are shrinking
HP was formed in 2015 by the split of Hewlett-Packard into two separate companies. HPE retained the core enterprise business, such as servers, storage, and networking, while HP took on the PC, printer and hardware unit. HP was profitable until this year (Q1, Q2, and Q3), when the general downturn in printing, coupled with competition from remanufactured print supplies, dented profits. Last quarter, HP generated two-thirds of its revenue from its personal systems business, which sells PCs and workstations, and the rest from its printer’s business, which sells hardware and supplies. The growth of both businesses slowed to a crawl over the past year.
HP is currently struggling with its printer business, which expanded in 2016 with the acquisition of Samsung's printer unit. Wall Street is also worried that HP may face pressure next year as the business PC refresh cycle comes to an end.
HP has asked its senior executives at a regional level to leave as a part of its global restructuring program and is reducing the workforce by 9,000 and save $1 billion a year in expenses. HP announced in a statement that “the fiscal year 2020 restructuring plan to simplify its operating model and become a more digitally enabled company.”
Like HP, Xerox is also in decline, with little investments in potential growth areas like 3D printing. From 2016 to 2018, Xerox's sales fell 9% to $9.8 billion. Xerox's core businesses (sales, services, maintenance, and rentals) all remain weak, and it's too heavily dependent on cost-cutting measures to drive its earnings growth.
HP Xerox Synergies
HP has strength in printers and Xerox in copiers.
Xerox doesn’t have a presence on the fastest-growing areas of print: digital production of labels, packaging, and signage. HP, Xeikon and now Konica Minolta are leaders in short-run label printing and converting lines powered by digital. Xerox has no cohesive offerings in the packaging sector apart from the ability of iGens to make folding cartons. HP is massively strong in digital production color print, especially labels with HP Indigos.
HP is not strong on office and ‘copier-based’ production print. This is Xerox’s forte and generates good recurring revenues for the company. The ‘copier’ type of businesses is dominated by Xerox, Konica Minolta, Canon, Ricoh, and others.
HP and Xerox are both American companies with a commonality of culture, bourse listings, and language. Xerox is full of former HP execs in senior management. Xerox believes it can achieve at least $2 billion in annual cost synergies by creating an office technology supplies giant.
There’s no crystal ball but an HP-Xerox unification ticks a lot of boxes for both organizations. At the same time, the merger doesn’t alter the reality that the market for both PCs and print is in decline.
