This article is written by Jessica Kaur, a first-year student currently pursuing B.A. LL.B. (Hons.) at Rajiv Gandhi National University of Law, Punjab. Here, she discusses Xerox’s proposal to acquire HP and its pros and cons for the two companies.

Introduction

A story that has captured the attention of investors and businessmen since the last couple of months is the printer and photocopier company Xerox’s attempt to acquire HP, a company dealing in printers and personal computers. HP’s resistance to the proposal has made Xerox consider taking the path of a hostile takeover. If finalised, this deal would completely change the future course for the two companies and have far-reaching effects on the printer industry.

In this article, we shall first understand what an acquisition is and in what ways it can take place; then we’ll move on to the story till date of Xerox’s attempt to acquire HP and the consequences of this deal if it comes through.

What is an acquisition?

An acquisition, also called a takeover, refers to the process through which one company purchases a major stake in another company, thereby acquiring control over it. The company making the purchase is called the acquirer or the bidder, while the company being acquired is called the target.

A takeover, of course, involves payment of a specific amount of money by the acquirer in return for the target company. The acquirer can pay this money in the form of cash (raised through a loan or through issue of bonds) or in the form of giving shares of its own company.

An acquisition is different from merger (a term often heard alongside it) in terms of the relationship between the corporate entities. While merger involves an agreement between the two companies to come together and become a single legal entity, an acquisition involves the purchase of a smaller company by a larger company. It, therefore, is a combination of unequals.

Types of acquisitions

An acquisition or a takeover can be completed using different methods, depending on whether the management of the target company accepts the deal or not, what the status of the acquirer is after takeover, etc. Therefore, there exist different types of takeovers, which have been briefly described below:

1. Friendly takeover: A friendly takeover is one where the Board of Directors i.e. the management of the company agree with the terms of the deal. They suggest the shareholders to accept the offer, and therefore, the acquisition takes place smoothly.

Fun fact: the majority of takeovers of private companies are friendly. This is because, in such companies, the Board of Directors are also the shareholders or at least, have a close connection with them. Thus, the takeover only takes place when they approve of it.

2. Hostile takeover: In cases where the Board does not approve of the takeover, the bidder has another method to pursue the acquisition. This is when a hostile takeover comes into the picture.

A hostile takeover can play out in different ways- either the acquirer makes a public offer to shareholders of the target company at a premium over the current market price of the shares, or it persuades the shareholders to elect a new management who would approve the takeover, or it quietly purchases enough stock of the target company in the open market to bring a change in the management.

3. Reverse takeover: A reverse takeover is when a private company acquires a public company. In this way, it is able to become public too, without having to undertake the expenditure and putting time into conducting an Initial Public Offer (introducing shares for sale to the public on a stock exchange).

4. Backflip takeover: A backflip takeover refers to a situation where the acquiring company becomes a subsidiary of the acquired company after the takeover. This happens when the acquiring company is larger but not well-known, and it has acquired a popular company which had been going through financial instability.

Xerox and HP: Two aging legends

Both Xerox and HP have been big players in the printer industry for many decades. They have brought innovations that have revolutionised the market, and their prominence in the industry has made them household names over the years. 

However, slowly, the technological landscape in the industry has changed. Due to the emergence of strong competitors like Canon, Ricoh and others, and an overall decline in the demand for printers and photocopiers in the face of an increasingly digital world, the two companies have been experiencing shrinking business.

Before delving into the details of the proposed acquisition deal, let’s take a closer look at the historical and current position of these two companies in the printer industry.

Xerox Holdings Corp.

Xerox laid the foundation for the original graphical user interface, and held a stronghold on the printing business for many years. At one point, it was a monopoly in the industry. The Connecticut-based company is still known for its enterprise copiers and printers. 

However, for quite some time now, Xerox has been seeing lower market share and revenue due to the arrival and success of big rivals like Canon, and a change in the technological landscape of the printer industry. Xerox is best known for its corporate copying and printing business, but companies are less and less paper-bound, and more and more digital now.

The company has faced some changes in the last couple of years. Its half-decade long joint ventureship with Japanese company Fujifilms came to an end recently. A lawsuit was filed against it by Fujifilms to the tune of $1 billion due to a failed merger attempt. The lawsuit was dismissed while an agreement was made for the sale of Xerox’s 25% stake in Fuji Xerox. It also sold its 51% stake in Xerox International Partners.

HP Inc.

HP was founded in 1939 by two Stanford University graduates in Palo Alto, California. It has been a leader in home computers since it got into the business in the 1980s, and was a beneficiary of the 1990’s tech boom. The company’s inkjet printers are also a huge part of its business. HP Inc. is the result of a split in the company Hewlett Packard a few years ago, with the other half of the original company continuing with the business of servers and networking equipment.

Over the years, HP too has struggled to maintain high growth. It has been through some changes in the recent months, with CEO Don Weisler stepping down and being replaced by Enrique Lores. Shortly after, it announced a major restructuring programme involving the release of almost 16% of its workforce by the end of Fiscal Year 2022, with the aim to cut costs.

The relationship between Xerox and HP

Xerox and HP have been competitors in the printer business for a long time. As their roles in the industry have changed over the decades, it shouldn’t be a surprise that there have been discussions of business partnerships between them from time to time. In June 2019, HP announced a partnership with Xerox wherein Xerox would buy printers from HP.

For some time there had been news of a merger in the air, but when the news officially came, people were slightly taken aback that Xerox wanted to acquire HP rather than the other way round- mainly due to the relative size of the two companies.

The interesting thing to note here is that HP, the target company, is almost three times bigger than Xerox. HP values at more than $27 billion, while Xerox is worth around $8 billion.

You must be thinking, how then would the acquisition take place?

Well, for starters, Xerox’s recent deal with Fujifilms to sell its shares in Fuji Xerox to the Japanese company will make it richer by $2.3 billion. Apart from that, Xerox has announced that financing commitments from Citi, Mizuho and Bank of America are going to bring them a sweet amount of cash- around $24 billion. This announcement was made by the company in an effort to quash doubts regarding its ability to finance the deal it proposes.

Proposed acquisition: The story till date

Xerox has made a cash-and-stock offer to HP to the tune of $33.5 billion to acquire the printer and photocopier segment of its business. This means that it would pay for the shareholders’ stock in cash, rather than in the form of its own shares.

After the news of Xerox’s proposal started making the rounds early in November last year, HP finally confirmed the same through a statement disclosing that they had discussed “potential business combinations” with Xerox, and saying that they would continue to do whatever was in the best interests of the shareholders.

On November 17, HP issued a letter to Xerox rejecting their acquisition offer. The reason it gave for the same was that it “significantly undervalues HP”. 

In response, Xerox said that if HP refused to engage in the activity of mutual due diligence with them, it would directly approach HP shareholders to present the acquisition offer, which creates “superior value” for them. In other words, it threatened a hostile takeover. 

On November 24, HP sent another letter to Xerox, again rejecting their takeover bid. They said that while they were prepared to study the potential value of a combination, they had concerns about Xerox’s business and at the same time had confidence in their own capability to create value for their shareholders.

Subsequently, Xerox has said that HP’s decision to refuse to engage in mutual due diligence “defies logic”. The criticism has mainly come from Carl Icahn, one of the main shareholders of Xerox (with a stake of over 10%), who also possesses around 4% of the stock in HP. He has been active in trying to make this deal happen since the very beginning and has been a key figure in this episode till now.

The position of the two companies has not changed since then; while Xerox is keen on making this acquisition happen, HP has shown to resist it.

Why HP is resisting the deal

HP has not publicly expressed interest in entering into further deliberations with Xerox regarding this deal. HP claims that that the deal undervalues their company, which could mean that it is open to a higher offer. At the same time, though, it says that it has great confidence in their strategy and ability to bring success to the company in the evolving industry and create value for the shareholders. Furthermore, it has expressed concerns regarding Xerox’s business, saying that their revenues may decline in the future due to the uncertain nature of their business- which the other company has refuted.

Why Xerox is determined on making the deal happen

Xerox’s rationale behind wanting this deal is the benefits it sees for the companies upon acquisition, considering that their positions in the industry have weakened in recent years due to advancement in technology and globalization. It claims that the deal would enable them to cut costs and maximise profits in the face of declining printing industry. It has also expressed confidence that the combined company could earn over $1 billion in a period of 3 years.

Is this acquisition a good idea?

With some people calling this a potential “blockbuster deal” and others criticising it, let’s take a look at some of the pros and cons of this proposed acquisition and see if it would be a good idea for companies to go through with it.

Benefits that come with the acquisition

1. Such a deal could eliminate duplication of activities in the two companies and enable them to save costs in the face of a slowdown in business. 
2. It would result in a “behemoth printing and PC maker” with more than $70 billion of revenue, as per a Bloomberg Intelligence analysis. This would mean increased value generation for the company.
3. It would help the companies to together acquire a large market share in the industry, increasing their presence in it. 
4. They might be able to face up to, or even threaten, their rivals like Canon and Ricoh.
5. Synergy between the two companies could facilitate growth and innovation in technology.

Drawbacks that can come with the acquisition 

1. This expensive transaction could leave the combined company in huge debt. 
2. Analysts say that while it sounds like a rosy deal, an acquisition would not save the two companies from the inherent troubles in their operations as well as the deficiency in demand for their products.
3. It cannot act as a replacement for innovation, which is what both the companies require at this stage.

Conclusion

It is uncertain what’ll happen in the near future, but it would be interesting to see how the relationship between Xerox and HP proceeds and, if the deal is finalised, how the new gigantic entity approaches the market. One thing is certain- this deal has the capability to change the landscape of the industry, whether for good or bad, and both investors and competitors will be keeping a close eye on what the companies decide.

References

• https://www.bloomberg.com/news/articles/2019-11-10/sunday-strategist-here-s-why-xerox-wants-to-buy-hp-k2sy49yz
• https://in.reuters.com/article/us-hp-m-a-xerox-hlngs/hp-reiterates-its-rejection-of-xeroxs-offer-to-buy-the-company-idINKBN1XY0PQ
• https://www.wsj.com/articles/xerox-considers-takeover-offer-for-hp-11573012201
• https://www.inc.com/minda-zetlin/xerox-hp-acquisition-merger.html
• https://www.forbes.com/sites/sergeiklebnikov/2020/01/06/xerox-secures-24-billion-for-hostile-takeover-bid-of-hp/#52ae53f8b4d6 

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.