HP-Xerox Deal Could Add Synergies

The Wall Street Journal reported on Nov. 5 that Xerox XRX is considering buying HP HPQ for an undisclosed amount, but potentially bidding a cash-and-stock offer that is less than $23 per HP share. On Nov. 6, HP said that it has had conversations with Xerox regarding business combinations and confirmed that it received a proposal on Nov. 5. No details of the offer were provided, but HP said it intends to act in its shareholders' best interests. A deal could add synergies to the two printer and copier companies, both of which are suffering from industry headwinds, and would come soon after Xerox and HP announced a tighter relationship a few months ago. Both companies are working through cost-saving plans as they struggle to find growth in an increasingly digital environment, and we could see redundant costs being removed from staffing and marketing expenses.

The limited overall overlap between HP and Xerox could establish a robust portfolio for a wider gamut of printing needs, and this potential deal could make Xerox the largest vendor in the enterprise copier and printer space. In turn, we would expect regulatory scrutiny, but we can envision this deal closing because the combined company would have only a limited influence over the entire industry.

However, we believe HP could be reluctant to accept an offer that is around 13% higher than its current trading valuation. We are maintaining our fair value estimates of $30 and $19 per share for no-moat Xerox and HP, respectively.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.