There are several strange things about this news, but the strangest is the relative sizes of the two companies. HP is worth more than $27 billion, while Xerox is worth only around $8 billion. It’s true that Xerox is suddenly sitting on an additional $2.3 billion in cash after selling its stake in Fujifilm recently. And, according to the Wall Street Journal, Xerox has in hand an informal promise of funding from an unnamed bank, something called a “highly confident letter.” Xerox would need at least $25 billion in funding to pull this off. That must be some letter.
CNBC’s Jim Cramer insists that because of their relative sizes, there’s simply no way that Xerox could buy HP. [Disclosure: I’m also a CNBC.com contributor.] But he raises an intriguing alternate possibility–that HP might buy Xerox instead. “That’s a horse of a different color, one that investors are obviously thinking about because both stocks rallied today,” he said in a recent episode of Mad Money.
Indeed, HP representatives seemed to float that very possibility in the statement they sent to TechCrunch confirming that the company had received Xerox’s offer. “We have had conversations with Xerox Holdings Corporation from time to time about a potential business combination. We have considered, among other things, what would be required to merit a transaction.”
Admittedly, companies that are being acquired sometimes attempt to conceal that fact by using vague terms such as “potential business combination” and “transaction.” But since, in this case, it might seem more reasonable for the larger company to buy the smaller one, that careful wording may really mean that a different sort of transaction is being contemplated.
Xerox and HP: Better together?
Leaving aside the question of who might buy whom, does a merger of Xerox and HP make sense? In many ways, the answer is yes. Both companies have been weakened by the slow transition toward paperless workplaces and the resulting reduction in printing and purchases of printers and ink. That’s especially true for HP, which has traditionally sold printers at a discount and made its money off ink cartridges–which are now being sold at lower prices by other companies.
As a result of this changing marketplace, both companies are engaged in cost-cutting measures at the moment. Anonymous inside sources told the Wall Street Journal that by combining, the merged companies could cut expenses by $2 billion.
On the other hand, HP’s new CEO Enrique Lores says his long-term plan is to lead HP into the lucrative and relatively new field of 3-D printing. Xerox can’t help HP achieve that ambition. (HP Inc. is what remains after HP split off Hewlett Packard Enterprise, which sells servers and storage devices to large corporate customers.)
How will all this play out? We’ll have to wait and see. But for years, the two companies seemed like friendly competitors. They were household names and it will be very strange to have one or both of those names disappear.
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