There are good times to attempt mergers and there are bad times to attempt mergers. There are also good mergers and there are some bad ones. In the case of the Xerox Holdings Corp.’s (NYSE: XRX) attempt to leverage up and acquire HP Inc. (NYSE: HPQ
), this was a bad merger to start with and it was also at a very bad time. Xerox formally put the deal on hold earlier, but now Xerox has formally withdrawn all efforts to acquire HP.
According to Xerox, the deal was killed because of the current global health crisis and the current macroeconomic conditions and market turmoil in the wake of the COVID-19 pandemic. Xerox noted that the current environment is not conducive to continuing its pursuit to make the acquisition.
On top of a bad economy, this merger was one that would require substantial debt because HP was the target and it was much larger in market value than Xerox. As a result of the above items, that $30 billion tender offer and the proxy fight are over.
While investors should probably be glad this deal was squashed, the problem that this leaves is that the market turmoil will make it hard for other companies to use leverage to go out and make an opportunistic acquisition while share prices and the economy are both very far down from highs.
The justification note in the Xerox press release said:
There remain compelling long-term financial and strategic benefits from combining Xerox and HP. The refusal of HP’s Board to meaningfully engage over many months and its continued delay tactics have proven to be a great disservice to HP stockholders, who have shown tremendous support for the transaction.
To prove the leverage and size: Xerox’s $4 billion market cap is far less than the nearly $25 billion market cap for HP. If this was such a great merger, HP would have likely turned the tables and tried to acquire Xerox. And for a hint: that may have been the ploy the whole time. It is more than obvious now that neither company really has strong clarity on their guidance for the coming months.
HP stock closed down 2.7% at $17.36 on Tuesday, and the after-hours reaction had the shares down another 1.5% at $17.09.
Xerox stock closed up 5.5% at $18.94, and its shares were not showing much direction in Tuesday’s after-hours trading.