Hewlett-Packard (NYSE: HPQ) A Tale of Two Companies

Shares of Hewlett-Packard NYSE: HPQ were trading flat on Tuesday as investors and Wall Street digested the news of the mammoth takeover offer from Xerox NYSE: XRX that broke over the weekend and HPQ’s subsequent rejection.

The $33 billion offer was made last month but was only publicly disclosed on Sunday.

It looks to have been an easy decision for the Hewlett-Packard’s board of management. They unanimously rejected the proposal on the grounds that it significantly undervalued HPQ’s shares and was not in the best interest of shareholders.

In their rejection letter, the board also noted the $1 billion decline in Xerox’s revenue since last summer and suggested that this was a concern they’d highlighted before in previous overtures, but to no avail. They also didn’t like the “highly conditional and uncertain nature” of the letter but kept the door open for a future offer at a higher price. In particular, they appeared more than willing to collaborate on due diligence with regard to potential synergies they could achieve together.

So while it was a no, it was a very soft no. It sounded like if Xerox could dot a few more i’s and cross a few more t’s then Hewlett-Packard would consider the next offer a little more seriously.

By market cap, HP is over three times the size of Xerox but for a company that announced planned layoffs of upwards of 10,000 workers, 16% of its workforce, by 2022, rejecting this offer was a bold move.

The Offer

The offer boiled down to $22 a share, a 10% premium on where HPQ shares are currently trading but over 18% off last year's levels where the stock was trading at an almost two-decade high. With management making clear this undervalued their shares’ potential, up around the high $20s is probably a reasonable area for Xerox to target next.

HPQ shares are down from last summer’s highs but look to have put in a bottom for now at the $16 level are up 25% since bouncing there in October. Their earnings are out next week and one way or another will certainly add some more color to this picture. Investors will likely be hoping for a strong showing that will justify a higher offer from Xerox, while the latter would surely love nothing more than an ugly miss.

Shares of XRX have been performing well since their latest earnings report at the end of October and were unchanged at the news. The company has never looked like reaching the heights it saw during the dotcom boom but has put in a good shift for 2019 so far. While on the long term chart XRX shares are basically flat since 2000, they’ve almost doubled in value this year and the stock is trading at 10-year highs.

Potential Positioning

How should investors position in each for now? Both have positive momentum going for them. HPQ, in particular, is worth a look, if only from a dumb logic point of view. If the stock didn’t sell off at this week’s rejection, will they sell off if a higher-priced offer is rejected? And what if that higher-priced offer is accepted? Considering management made it clear that it was open to higher offers, it feels like there’s the potential for a win-win scenario for investors.

Both companies have bumbled and stumbled along in the two decades since their heyday of the dotcom boom while this latest generation of tech companies has since eclipsed them in terms of growth. An end of year merger would certainly be an interesting twist in the tale of two companies that came of age while the current crop of tech leaders were barely apples in investor’s eyes.