Xerox (XRX - Get Report) is reportedly considering buying HP Inc. (HPQ - Get Report) and shares of the computer and printer market are rising considerably. If the deal goes through the question then becomes: Should investors buy Xerox?.
Xerox is looking to pay just under $23 a share for HP Inc., which rose 10% to $20.25 on Wednesday. At that price, HP Inc. would be valued at roughly $35 billion. Xerox's market capitalization is $8 billion vs. HPQ's current $30 billion. Financing the transaction won't be easy.
That's why Xerox will use some cash, some stock and some debt. But debt is already 40% of its total enterprise value. HPQ isn't light on debt either, so the combined company must create an earnings and cash flow machine for the deal to be net positive.
TheStreet's experts broke it all down.
"Citigroup looks like the bank that will be financing that debt, according to Bloomberg, but you also have another $2 billion in [cost] synergies between the two companies, so that's another $2 billion saved and $2.3 billion from Fujifilm's purchase of the Xerox stake," said TheStreet's Tony Owusu. Xerox may also issue new shares of equity.
TheStreet's London Bureau Chief Martin Baccardax said that both of the companies "are sub-investment grade and that means that they're going to borrow in the bond market at a more expensive rate than a company with a stronger balance sheet. That puts a lot of pressure on the combined entity to generate a lot of cash and to grow the business in order to pay that debt back and once they do that they can then start returning cash to shareholders. Shareholders need to understand exactly how they are going to be punished not only by the debt-raising, but by issuing the new shares, which would dilute Xerox's holding out on the market already."
But can the combined company indeed be net positive?
"From a business point of view, it probably does make sense," said Baccardax. "Companies are migrating to the cloud, they have less interest in the printer business and the printer business is shrinking, so combined they could do maybe better than they could do individually."