Xerox has currently made a $33bn offer for the much larger HP business in cash and shares.
But according to IT trade publication CRN, Katy Huberty from Morgan Stanley said in a research note that HP’s shareholders consider the proposed deal as “risky and not lucrative enough”.
One of the major concerns of many shareholders is Xerox’s declining revenue, she added.
The manufacturer generated revenue of $9.23bn during the last four quarters it has reported, a decline of 8% from the four previous quarters when its sales were just over the $10bn mark.
Xerox’s Q4 2019 earnings are due out today (28 January) but Huberty said the manufacturer appears to be “unlikely to return to revenue growth” by calendar year 2021.
“Our bottom up analysis of Xerox's end-markets suggests that a near-term return to growth is unlikely, as growth investments in new and adjacent markets are unlikely to offset market declines and share losses in Xerox's core end markets,” she said.
HP’s shareholders also want to see a larger payout than Xerox’s current proposal, Huberty added.
“Does the math for a Xerox deal for HP work at $22-per-share? The short answer is, probably not.
“At $22/share, we do not believe Xerox’s offer seems rich enough to persuade HP’s board or shareholder base into accepting the deal.”
She noted that the current offer is below where HP’s shares were trading a year ago, at $23.84, and significantly below its late 2018 share price of $26.41.
She added there was also risk for HP in combining with a company whose management team is still relatively new and “whose balance sheet is not investment grade quality” and she felt a higher offer of $26-per-share would stand a “greater likelihood of success”.
At the end of last week HP responded after Xerox confirmed it planned to try and take over its board.
In an initial short statement, HP said: “We believe these nominations are a self-serving tactic by Xerox to advance its proposal, that significantly undervalues HP and creates meaningful risk to the detriment of HP shareholders.”
It later issued a longer rebuttal calling into question the motives of Xerox’s majority shareholder, Carl Icahn, who it said “would disproportionately benefit from an acquisition of HP by Xerox at a price that undervalues HP” due to his ownership position.
HP’s share price stood at $21.58 yesterday, while Xerox shares were $35.05.
The date for HP’s AGM, at which shareholders will have the opportunity to vote on Xerox's board nominations, has not yet been set.