Xerox Thinks Big, but Maybe Not Too Big

Xerox Holdings Corp. (NYSE: XRX) had a market cap of about $8.1 billion at the market close Tuesday. HP Inc. (NYSE: HPQ) had a market cap of about $26.3 billion. But Xerox, feeling flush perhaps after scoring $2.3 billion for selling its share of Fuji Xerox to Fujifilm Holdings, is reportedly considering making an offer to acquire HP.

At last night’s closing price of $18.40 for HP shares, Xerox is looking to pay around $27 billion, without a premium. At a 30% premium, Xerox is looking at a figure north of $35 billion.

Can this possibly happen? Xerox’s largest shareholder is Carl Icahn, who owns just over 10% of the outstanding shares. In January of last year, Icahn led a battle against a proposed Xerox-Fujifilm deal that would have given the Japanese company majority ownership of Xerox.

Icahn and another activist investor, Darwin Deason, succeeded in scuttling that deal, arguing that it undervalued Xerox. The activists then struck a deal with Xerox that gave them control of the company’s board. A new chief executive officer, John Visentin, was installed, and he has been vigorously pursuing cost-cutting ever since. The payoff for Xerox shareholders has been a 12-month share price gain of around 25%.

It’s a cinch that if The Wall Street Journal’s report of talks between Xerox and HP is accurate, Xerox is acting with the blessing of Icahn and presumably Deason.

As part of the $2.3 billion sale of Xerox’s stake in Fuji Xerox, Fujifilm agreed to drop its $1 billion lawsuit against Xerox for walking away from the 2018 deal that would have given the Japanese firm control of Xerox.

Perhaps Fujifilm is still interested in acquiring control of Xerox and has struck a deal with Icahn and Deason to help acquire HP and then to acquire the combined company at a price that the activists are seeking. After all, there’s only so much cost that Visentin can wring out of Xerox, and Icahn probably doesn’t want to get stuck with a company that is selling printers and PCs in an age of smartphones and cloud computing.

Now that the possible buyout is public, we’re likely to see analysts weigh in on the merits. That probably will help Icahn and Deason make up their minds about how hard to chase HP.

Xerox shares traded down about 3.2% in Wednesday’s premarket, at $35.20 in a 52-week range of $18.58 to $36.99. The high was posted on Tuesday, and the 12-month price target is $38.00.

HP stock traded up about 7.7%, at $19.84 in a 52-week range of $15.93 to $25.72. The 12-month price target on the stock is $19.27.

Fujifilm stock, which trades over the counter in the United States, closed up 3.4% on Tuesday, at $45.61 in a 52-week range of $36.53 to $51.63 and with a 12-month price target of $50.00.

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