Xerox’s $32 billion Acquisition of HP

By Christopher Gvenetadze and Alessandro Carleo (Bocconi University), Gustaf Baavhammar and Chris Leung (University of Warwick) | 09/02/2020


Overview of the deal

  • Acquirer: Xerox Holdings Corp.

  • Target: HP Inc

  • Estimated Value: $31.7 billion

  • Proposal date: 6th November 2019

  • Acquirer Adviser: Citi

  • Target Adviser: Goldman Sachs

The merger will enable the two companies to combine their resources and consequently support their strong presence in the future with the creation of an unprecedented corporate IT empire on a market where the demand for printers and related products such as ink has decreased in the recent years. For Xerox, the most attractive element of the deal must be the resulting combined sales from print supplies and services, which will exceed $20 billion where HP carries an operating margin above 16%. Furthermore, following the 19% decline of HP’s stocks in the past 12 months, leading to a market cap of $29.97 billion, the timing for an acquisition by Xerox seems reasonable. In contrast to HP, Xerox had a positive run during this time period by showing a 29% lift of its stock resulting in a market capitalization of $8.20 billion.

“Our industry is long overdue for consolidation, and those who move first will have a distinct advantage. We look forward to expeditiously moving this process forward and creating additional value for shareholders.” - Caroline Gransee-Linsey, Xerox Director of Corporate Communications.

The strategic rationale for a deal is largely to cut costs for two companies struggling to navigate the accelerating erosion of the traditional printing business. Analysts estimate that the savings from a merger could be $1.5 billion a year or more. Over the years, HP’s business model for its desktop consumer and corporate printing business has been to sell printers at no profit or a loss, but make money on selling a steady stream of replacement cartridges, called aftermarket supplies.

Company Details (Acquirer: Xerox Holdings Corp)

Xerox Holdings Corporation operates as a holding company. The Company, through its subsidiaries provides printers, scanners, supplies, and accessories. Xerox Holdings serves health care, insurance, government and retail sectors worldwide.

- Founded in 1906, Rochester, NY, USA

- CEO: Giovanni Visentin

- Number of Employees: 40,000

- Market Cap: $8.2 billion - EV: $10.3 billion        

- LTM Revenue: $9.1 billion - LTM EBITDA: $1.7 billion

- LTM EV/Revenue: 1.13x - LTM EV/EBITDA: 6.1x

Company Details (Target: HP Inc)

HP Inc. provides imaging and printing systems, computing systems, mobile devices, solutions, and services for business and home. The Company offers products which include laser and inkjet printers, scanners, copiers and faxes, personal computers, workstations, storage solutions, and other computing and printing systems. HP sells its products worldwide.

- Founded in 1939, Palo Alto, CA, USA

- President/CEO: Enrique Lores

- Number of Employees: 40,000

- Market Cap: $31.7 billion - EV: $32.3 billion        

- LTM Revenue: $58.8 billion - LTM EBITDA: $4.9 billion

- LTM EV/Revenue: 0.55x - LTM EV/EBITDA: 6.6x

Projections and Assumptions

Short-term consequences

Shares of HP Inc. rallied 9.5% in midday reaching $21.67 but ultimately pared earlier gains of as much as 18%, after The Wall Street Journal reported that the potential buyout bid from Xerox Holdings Corp. would be below $23 a share.