Last month, I called aging tech titan HP (NYSE:HPQ) a buy, not necessarily anticipating Xerox (NYSE:XRX) would try to acquire it, but because Xerox's interest highlighted HP's value. If Xerox sees potential upside in HP at its current price, investors should too.
It's become clear in the meantime that HP's Board of Directors isn't interested, or at least not interested in Xerox's current offer of $22 per share in cash and stock. On the flip side, it doesn't appear the Carl Icahn-led suitor is ready to take "no" for an answer. Xerox responded to HP's second rejection letter on Nov. 26 with even firmer plans to take its buyout case directly to shareholders rather than to HP's board of directors -- in other words, a hostile takeover.
Strong-armed deals, not unlike friendly mergers, sport a mixed track record when it comes to improving overall value. In this particular case though, the rhetoric has turned alarmingly nasty. Between veiled (and not-so-veiled) insults, harsh criticisms, and the bruised egos some sharp-tongued retorts have created, it's tough to imagine any deal between Xerox and HP being one that's amicable enough to create a better, more potent organization.
Them's fightin' words
The latest in the sordid saga: For a second time, on Nov. 25, HP's board has rejected Xerox's acquisition offer for HP shares at $22 apiece, saying it undervalues the organization. Xerox responded, also for a second time, warning HP's Board of Directors on Nov. 26, "We plan to engage directly with HP shareholders to solicit their support in urging the HP Board to do the right thing and pursue this compelling opportunity."
And were it just that verbiage, it's just the expected boilerplate rhetoric one would expect when one organization is more enthused about a merger than the other party. In this case though, the back-and-forth has been unusually rough. For instance, the most recent letter from Xerox to HP (and the last public piece of the discussion) opened with a blunt "Your refusal to engage in mutual due diligence with Xerox defies logic."
Translation: You're being foolish by not pursuing this possibility.
The verbal sparring was well underway before the two most recent responses though. Xerox Vice Chairman and CEO John Visentin cleverly added to their letter dated Nov. 21, "Frankly, we are confused by this reasoning in that your own financial advisor, Goldman Sachs & Co., set a $14 price target with a 'sell' rating for HP's stock after you announced your restructuring plan on Oct. 3, 2019. Our offer represents a 57% premium to Goldman's price target and a 29% premium to HP's 30-day volume-weighted average trading price of $17."
Translation: Your own people are saying we're being too generous.
Then again, Visentin's jab wasn't actually the first punch thrown in this street fight. As part of HP's explanation for its decision penned on Nov. 18, the board wrote, "We note the decline of Xerox's revenue from $10.2 billion to $9.2 billion (on a trailing 12-month basis) since June 2018, which raises significant questions for us regarding the trajectory of your business and future prospects."
Translation: Your business is failing, so you've got some major things of your own to figure out first.
The barbs indicate a certain level of hostility already exists, but in HP's defense, they also cut straight to the heart of the matter by raising questions Xerox has yet to answer. Chief among those questions is, what's the upside of melding these two names into one? Xerox partially answered the question in its initial overture, telling HP's management and board of directors that it could cull $2 billion worth of overlapping expenses. HP isn't impressed though, and understandably so. Its letter from Nov. 24 explains, "Our review of synergies based on public information and the limited information you have shared does not support achievable synergies of the scale you suggest, and it appears that your assumptions include significant savings that are already included in each company's independently announced cost reduction plans."
Translation: The cost-culling you're talking about was going to happen anyway, so, whatever.
Make lemonade out of lemons
Any union that takes shape from here is going to be built on a wobbly foundation. HP's top brass clearly isn't on board with the idea, and a hostile takeover runs the risk of splitting shareholders into two camps pitted against one another. Ditto for the two companies' workforces, who would need to work together but may already be fostering some resentment of one another. Insults have supplanted negotiation. and that won't be soon forgotten. Nevermind the fact that Xerox has yet to explain what sort of new products or product enhancements it could cultivate through such a merger.
Rather than ride out what's sure to be a shaky merger, investors may be best served by selling into any strength spurred by the takeover effort and washing their hands of the whole thing. It's not what I wanted to see happen, but it doesn't look like HP is going to get a chance to work through its own turnaround plans.
And, if for some reason the hostile takeover effort isn't successful, one can always wade back into an HP position once the dust has settled.