There are serious areas of disagreement between the leadership teams at HP Inc. and Xerox over the details of how the two companies would be combined, according to a report.
Xerox—which has made a takeover offer for HP that is reportedly 23 percent higher than where HP shares started the month—may offer HP four weeks to perform due diligence on the deal, Bloomberg reported.
The deal is somewhat unusual as Xerox is proposing to acquire its significantly larger rival, HP. Xerox's market capitalisation was US$8.62 billion as of Friday, compared with HP's market capitalisation of US$28.93 billion.
Sources told Bloomberg that both companies see a rationale for a merger, which would bring together the leaders in A4 and A3 devices at a time when the print industry is waning.
However, there are some major disagreements over the specifics—such as which company would be the acquirer in the deal and which of the two management teams would run the combined company, according to the report. Bloomberg characterised the issues as "potentially intractable disagreements."
CRN has reached out to HP and Xerox for comment but had not heard back by press time.
According to reports, Xerox is proposing to buy HP at US$22 a share in a cash and stock offer that would give HP shareholders a 48 percent stake in the new combined enterprise. Xerox reportedly has lined up financing for the deal through Citigroup.
“Our industry is long overdue for consolidation, and those who move first will have a distinct advantage,” Xerox said in a statement last week. “We look forward to expeditiously moving this process forward and creating additional value for shareholders.”
Meanwhile, HP said last week that it will "continue to act with deliberation, discipline and an eye towards what is in the best interest of all our shareholders” after receiving the takeover offer. The company has "great confidence in our multi-year strategy and our ability to position the company for continued success in an evolving industry, particularly given the multiple levers available to drive value creation," HP said in its statement.
The takeover offer came just days after Enrique Lores took the helm as CEO of HP and the company began rolling out a reorganisation and restructuring plan meant to improve efficiency and support investment in key areas.
A new commercial organisation will see HP shifting from a three-region organisational structure to a set of 10 geographic markets, while the restructuring will involve a staff reduction of as much as 16 percent by 2022—with between 7000 and 9000 employees affected.
Along with the fact that the Xerox takeover would represent the smaller company assuming control of the larger one in the deal, there are other grounds for HP leadership to make a case for heading up the combined company. Among them: HP is currently seeing growth in its PC business and has strong prospects in its 3-D printing business.
HP's personal systems business generated US$28.27 billion during the company's latest three quarters, up 2.4 percent year over year. The company is the No. 2 PC maker worldwide and No. 1 in the U.S.
HP has also brought forward a wide array of Jet Fusion 3-D printers in recent years that aim to disrupt the traditional manufacturing business with high-speed 3-D printing of parts at a comparatively lower cost. The company has said it sees an opportunity to transform the $12 trillion manufacturing market with its 3-D printing systems, which now cover everything from prototyping to short runs to volume production of plastic parts.
And in traditional print, HP has put a substantial amount of effort into retooling its strategy, with executives last month disclosing plans to overhaul the company’s longtime print business model. The move is partly a response to HP’s declining print supplies business.
"In our current print model, we lose money any time we sell a printer, and we make money on supplies. We are going to be pivoting this model," Lores said in a recent interview with CRN, prior to the Xerox takeover bid.
Starting toward the end of HP's fiscal year 2020, which ends in October 2020, the company will begin shifting to a model where subsidised printers will only be available if they are locked to HP-branded supplies.
The company will still offer printers that can use third-party supplies—but those printers will come with a higher price tag than in the past.
"Today we make most of our money on supplies because we are very aggressive in the pricing that we have with printers. And this is going to re-balance that," Lores told CRN. "This is really our goal—to remove our dependency on supplies from a profit perspective and rely on the other components of the system, especially in those areas like hardware, where we have a strong competitive advantage."
Overall at HP, "we are starting a new chapter," Lores said. "And the key elements of the chapter are our ambition to advance our leadership in personal systems and print, and the opportunity that we have to disrupt some key industries."