Bernstein’s analyst Toni Sacconaghi launched the provocative idea in a research note on Friday.
Not so long ago, it was the other way around. In November 2019, Xerox (ticker: XRX) embarked on an ill-fated five-month campaign to acquire HP (HPQ), which never seemed very interested in the proposal.
The original idea was that there were synergies by combining two major players in corporate printing. But the proposal was a whale-swallowing minnow situation, which would have required Xerox to take substantial leverage to buy out its much bigger rival. After much back and forth, Xerox dropped the idea in March 2020, blaming the impact of the pandemic.
Sacconaghi noted that since Xerox first pioneered the idea of a combination, its market capitalization has been cut in half, while HP’s market value has appreciated by 34%. He believes there is now “compelling” logic to HP’s acquisition of Xerox.
He wrote that HP could buy Xerox at a 30% premium for $ 5 billion in debt, adding less than $ 250 million in annual interest charges, while getting $ 500-600 million in free cash flow. from Xerox. He thinks a deal could add as much as $ 1.10 per share in earnings for HP by 2024, “even under very conservative assumptions.”
Sacconaghi noted that HP CEO Enrique Lores told a recent conference in Bernstein that the office printing industry is likely to see further consolidation and that this area will be part of “business. value creation ”from HP.
The analyst conceded that he was not sure investors would be in favor of an HP / Xerox combination. “Many would view HP as doubling down in an industry in secular decline, with the risk that the multiple of HP will decline and offset the increase in profits,” he wrote.
But he also noted that the situation is very different from when Xerox offered to buy HP. On the one hand, HP’s business has exploded, as demand for PCs skyrocketed during the pandemic and its consumer printer business strengthened. But Xerox, wholly dependent on the desktop printer market, has had to contend with widespread office closures.
“The result is that not only [Xerox] significantly cheaper, but HP would be the main architect of the combination today and would have full control over management and the board, ”he wrote.
Sacconaghi added that investor Carl Icahn, who was one of the main drivers of the drive to merge the two companies, sold his 4% stake in HP but increased his stake in Xerox to 16%, from 11 % at the time of the original Xerox offer. for HP in 2019.
HP declined to comment. Xerox could not be reached immediately for comment.
In afternoon trading, HP shares rose 1%, to $ 30.66. Xerox rose 0.7%, to $ 23.99.
Write to Eric J. Savitz at [email protected]