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Financing Xerox's Bid for HP

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Published: June 22nd, 2020
Can Xerox, with a market capitalization of $8.6 billion, really finance an acquisition of HP, with a $31.5 billion market cap?

Along with the media storm that has accompanied Xerox Holdings Corp.’s (XRX) pursuit on HP Inc. (HPQ), a nagging question persists.

Can Xerox, with a market capitalization of $8.6 billion, really finance an acquisition of HP, with a $31.5 billion market cap?

If Xerox pays $17 per share in cash and $5 per share in stock as reports suggest, Fitch Ratings Inc. analyst Kevin McNeil noted, the Norwalk, Conn., printer and copier company would have to raise $20 billion in debt. Leverage at Xerox’s core business would rise to between 3.4 times Ebitda and 4.2 times Ebitda, from 1.8 times.

“This is a pretty big incremental ask,” McNeil said regarding the size of a potential potential offering. “It would be one of the larger technology deals to get done. In the tech landscape this is maybe a more challenged sub-segment, so it will be interesting to see whether or not the market has the appetite for this.”

There are other examples of a little fish, relatively speaking, eating the big. Michael Dell and Silver Lake Management took Dell Inc. private in a nearly $25 billion buyout in 2013, and swallowed much larger EMC Corp. for $67 billion in 2016.

HP is small by comparison, but could still test the debt markets.

“It might be challenging if the debt doesn’t get an investment grade rating because, obviously, the high-yield market absorbing 20 billion, that’s quite a bit,” said Tuan Duong of S&P Global Inc.

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