Before the pandemic Xerox made a bid to acquire Hewlett-Packard (HP). According to the paperwork the tender offer expired April 21, but Xerox said earlier that all efforts to pursue the acquisition were on hold. Anyway, I don’t really care what happens and do not want to discuss the offer. What I want to do is discuss the way both companies see Hewlett-Packard’s value.
Xerox, being the pursuer, has a duty to explain the benefit to HP stockholders of accepting the offer. They present what they feel are compelling reasons such as “attractive valuation,” “immediate value realization,” “substantial long-term value,” “first-mover advantage,” “market leadership,” “significant synergies,” “decisive and proven leadership” and “increased focus on research and development.” In my opinion, some of the explanations are pretty vague or boilerplate and some are self-contradictory. I believe the only compelling reason for HP stockholders would be the amount they would be receiving and how much is in cash and the anticipated dividends on the stock they ended up with, and whether the growth potential of the new company would be stronger than that of the two separate premerger companies.
I consult and perform business valuations and always look at these types of offers to see if there are any new valuation theories or ideas that I could consider using in the future. I was disappointed in not finding any here. Further whatever reasons Xerox offered did not seem to justify the combination as I felt that most of what they said could be done by the separate companies, and if they were such good ideas then why weren’t they already being done? Afterall, these are not small companies.
There are some caveats presented by Xerox and these took more space in the offer document than the reason for the combination. The caveats are an interesting “catalogue” of risk factors which can provide insight into what can go wrong. This I will hold on to and perhaps can glean future ideas from.
The HP president/CEO has indicated that he did not like the offer because it undervalues HP. He also said that it disproportionately benefits Xerox stockholders. Well, yeah, otherwise why would Xerox do it? I believe the offer should be looked at as to what’s in it for HP stockholders and not what’s in it for the other guy.
The CEO then goes on to explain that the HP board of directors also doesn’t like it and then specific reasons are presented. Some of these reasons are pretty good and, of course, contradict the Xerox reasons for the acquisition. Each reason is carefully explained but the capstone presented is the “inadequacy opinions” from two prestigious investment bankers. As a matter of interest, I think they should be read, if for no other reason than to pick up some buzz words of why no responsibility should be attributed to those types of reports.
The point I want to make is that both companies present compelling reasons for its opinions and they both cannot be right. The same could be said for every stock transaction. A buyer always thinks the stock is undervalued and the seller thinks it is overvalued, or that there are better opportunities elsewhere. I guess that’s what makes investing interesting but also fraught with risk.
In the interests of full disclosure, I own insignificant positions (in relation to my total portfolio) in both companies. That is how I know about the tender offer and the accompanying paraphernalia. However, I am not doing anything in regard to the tender offer.
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