Printer and copier company drops hostile takeover bid amid pandemic
The chase is over. Xerox is giving up its hostile takeover of rival HP as economic uncertainty resulting from the COVID-19 pandemic is making the $34 billion deal untenable, the company said in a statement yesterday.
The Lowdown: Xerox says macroeconomics more than the fundamental principles of the proposed merger are what’s causing it to back off the hostile takeover. The value of Xerox’s stock is down nearly 44% in the past month as the effects of the COVID-19 pandemic tore through markets around the world.
The Details: In ending its pursuit, Xerox says it will not nominate a slate for HP’s board this summer, instead ending attempts to merge the two companies. While Xerox blames the economic downturn, which could contract global GDP up to 35% (annualized) in the second quarter, it does cast blame on HP for delaying meaningful discussions that could’ve led to a merger prior to the pandemic.
The Impact: HP, which has steadfastly rejected the necessity or the value of the proposed Xerox merger, says it’s in good financial standing and is pursuing its strategic vision. Over the next two years, HP plans to cut up to 7,000 jobs through a restructuring that will result in more than $1 billion in operational cost savings. Prior to the pandemic, HP pledged to buy back more than $16 billion in stock to return value to shareholders. The stock buyback plan would’ve made it more difficult for Xerox to succeed in its leveraged takeover. HP’s stock is down nearly 20% over the past month.
Background: In November 2019, Xerox surprised the technology market with a bid to acquire its larger rival HP. Xerox planned to borrow $24 billion and apply another $11 billion stock to take on HP, which is three times its size in market cap value and five times its size in annual gross revenue. Xerox, backed by activist investor Carl Ichan who owns 10% of both companies, justified the merger with estimates that it would save the combined organizations $2 billions annually in operating costs and generate $1 billion in new revenue.
The Buzz: “While it’s disappointing to take this step, we are prioritizing the health, safety, and well-being of our employees, customers, partners, and other stakeholders, and our broader response to the pandemic, over and above all other considerations,” Xerox said.
“We have a healthy cash position and balance sheet that enable us to navigate unanticipated challenges such as the global pandemic now before us, while preserving strategic optionality for the future,” HP said in a statement.
Channelnomics Point of View: On paper, merging HP and Xerox made sense. Combining the two printer giants had some economies of scale that would result in cost savings. However, few in the business or channel saw the necessity or the practicality of the deal. HP and Xerox have vastly different operating models and cultures. While they have some overlap in channels, HP tends to skew toward traditional technology resellers and integrators, while Xerox’s channel is mostly printer and office equipment dealers. Many in the channel feared the merger would cause more disruption than benefits.