In a story filled with great names from technology’s past, Xerox (NYSE:XRX) has made an unsolicited bid to put HP (NYSE:HPQ) in play. The Xerox board met Nov. 5 to consider an offer for HP, which now makes PCs and printers. HP acknowledged receiving a bid Nov. 6. In response, shares promptly rose 6%.
But this is not your grandfather’s Xerox, nor your father’s Hewlett-Packard. Today’s Xerox is only in the business of selling and servicing copiers to enterprises. Sales have been sliding for years and came to just $9.2 billion last year, with net income of $672 million. HP is much larger, and has more than three times Xerox’s $8.4 billion market capitalization.
So how would this deal work?
Xerox earned $230 million, or $1.08 per share fully adjusted, on revenue of $2.2 billion in the September quarter. For the quarter ending in July, HP earned $1.2 billion, 78 cents per share fully diluted, on revenue of $14.6 billion.
The proposal is right out of the 1980’s, when Wall Street sharpies bought out industrial companies using debt repaid with their own assets.
The bid would start with the sale of Xerox’s stake in Fuji Xerox, and related operations, back to Fujifilm (OTCMKTS:FUJIY), another name from the past. Xerox would collect $2.3 billion in cash from Fuji, once the primary competitor to Eastman Kodak (NYSE:KODK) in camera film.
Xerox said it has a bank’s blessing for loans to make the HP transaction happen. Xerox’s U.S. Securities and Exchange Commission Form 8-K report showed it had $3.2 billion of debt at the end of September, on total assets of $14.7 billion.
While the deal would take some financial engineering, Xerox could make it work, then use layoffs and other synergies to repay the loans. That would start with the $5 billion of cash HP already had on its books in July, plus potential borrowings from a balance sheet that had $4.7 billion in long-term debt on $32.4 billion of assets.
HPQ Stock in Play
What the bid reveals is just how undervalued HPQ stock is. A market cap of $28.5 billion on revenue of $58.7 billion sounds more like a retailer than a tech company. Investors haven’t been attracted by a 16 cent per share dividend, yielding 3.3%. Maybe that $5 billion in operating cash flow, up from $3.2 billion in 2016, can be put to better use.
This may just be the start of the story. Charles Gasparino of Fox Business tweeted that the bid may be a ploy by investor Carl Icahn to make HP buy Xerox. Icahn took over the Xerox board last year, killing a bid by then-CEO Jeff Jacobson to merge with Fuji.
Since that deal Xerox stock had gone precisely nowhere until August, when rumors of another big deal started floating on the street.
The Bottom Line
Technology has become, in some ways, as old as steel.
Xerox dates from 1906, but got its real start after World War II when inventor Chester Carlson invented a process of copying images using electric charges on a photoconductor plate. Hewlett-Packard was founded, in a garage in 1939, to make test equipment for radios.
Both companies had their heydays in the 1970’s. Back then Xerox’s Palo Alto Research Center demonstrated the first modern PC and Steve Wozniak offered the first Apple (NASDAQ:AAPL) design to HP five times.
Having Carl Icahn kill both companies with debt may be a fitting end to a corporate version of Grey Gardens. HP must now decide whether it will listen to the junk man. He’s singing.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL.