HP Inc: The price is wrong

In response to Xerox’s latest $24bn bid for HP Inc, the printer and PC company has once again declined the offer, saying it “significantly undervalues HP”.

HP’s letter to Xerox said: “We reiterate that the HP board of directors’ focus is on driving sustainable long-term value for HP shareholders. Your letter dated 6 January, 2020 regarding financing does not address the key issue – that Xerox’s proposal significantly undervalues HP – and is not a basis for discussion. The HP board of directors remains committed to advancing the best interests of all HP shareholders and to pursuing the most value-creating opportunities.”

Earlier this week, Xerox announced that it had secured binding financing commitments from Citi, Mizuho and Bank of America to fund what it described as a “value-creating combination with HP”.

At the time, Xerox CEO John Visentin wrote: “It remains clear to all of us that bringing our companies together would deliver substantial synergies and meaningfully enhanced cashflow that could, in turn, enable increased investments in innovation and greater returns to shareholders.”

In mid-December, Reuters reported that in a presentation aimed at HP Inc shareholders, Xerox claimed the proposed acquisition would result in sales growth of as much as $1.5bn for the combined company. The company sketched out a three-year roadmap that would involve cross-selling and creating operational synergies across the two businesses.

Xerox has traditionally been strong in the photocopier market. Its business focus appears to be on supporting paper-based business processes, such as invoicing, raising purchase orders, scanning documents and converting documents into machine-readable formats, as well as managed print and photocopier services.

While HP has developed its enterprise printers business, it is also a major PC manufacturer. According to Gartner’s third-quarter 2019 data, HP Inc’s PC shipments accounted for 21.7% of the overall PC market. It is unclear from what Visentin has said publicly how HP Inc’s PC business would fit into Xerox’s overall strategy.

While some see the PC market as struggling, HP Inc is confident that there is a resurgence. Presenting at the Barclays Global technology, media and telecommunication event in December, Alex Cho, president, personal systems at HP Inc, told analysts that there was a lot of movement and energy in the PC market.

Asked about market pressure in the PC sector, Cho said the market was worth $330bn. “We see it as a large, growing market,” he added. “What is encouraging is actual usage among Generation Z. They are spending more time on PCs on very high engagement activities, which is driving refresh and growth.”

Cho said the consumer sector was impacted by the availability of Intel CPUs, while HP Inc’s commercial PC business was benefiting from the Windows 10 PC upgrade as enterprises rush to complete migration from Windows 7 before support ends on 14 January, 2020. 

“On the commercial side, we did see a tailwind for Windows 10, but that will taper off in the second half [of 2020],” he said. “Equally, we see drivers for increasing computing needs in the commercial space. Collaboration using PCs is growing dramatically. A lot more people are working with remote colleagues around the world. Flexible work styles mean companies are implementing new technologies.”

Cho said HP Inc was also seeing demand for device-as-a-service among its corporate customers, as well as what he described as “discrete services” for organisations not yet ready for fully managed desktop and mobile device services. Both of these HP Inc services are powered by artificial intelligence (AI), which learns why customer devices go wrong by analysing data collected across the customer base.

“We have 45 million devices and  2.5TB of data that makes our AI engine more intelligent for our customers,” said Cho.