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John Visentin is speaking with the simmering impatience of someone who’s 100% sure his opponents are 100% wrong. “They want to block us with a poison pill, telling their investors they aren’t bright enough to make up their own minds,” he fumes. “That really annoys me!”

The “they” here is HP Inc. And Visentin, CEO of venerable printer-maker Xerox Holdings, is building a case for one of the most audacious takeover quests in recent memory. In November, Xerox made a guppy-devours-the-whale bid to buy HP, an offer now set at $35 billion. Today, with a cliffhanger proxy battle looming, HP’s countermoves are irking the takeover architect.

Visentin, a plainspoken 57-year-old from a blue-collar Canadian family, is the antithesis of a swashbuckler. He’s a career tech guy whose résumé includes a few stellar years in private equity and a stint as an executive vice president at the old Hewlett-Packard. But he’s capable of waxing passionate about his plans. “Printing is long overdue for consolidation,” he says, during an interview at Xerox’s anonymous glass-cube headquarters in Connecticut. “The potential for cutting costs, for investing for the future, is tremendous.” HP, he says, is thwarting Xerox by promising huge share buybacks: “How is that investing for the future?”

XER.04.20.John-Visentin-Xerox — Xerox’s Visentin argues that steep expense reductions and bets on big digital printers like the Iridesse (shown here) would make an HP-Xerox merger pay off.

Thirty years ago, a Xerox-HP takeover battle might have dominated the headlines. Today, these aging giants operate far from the spotlight. But they still run richly profitable printing businesses, generating cash that could finance the kinds of transformation that Visentin envisions. What makes his bid particularly bold is that it has been decades since a company Xerox’s size has succeeded in buying a rival that’s so much bigger. In 2019, Xerox posted sales of $9.1 billion—less than one-sixth of the $58.8 billion HP tallied in its most recent fiscal year.

One person’s “bold,” of course, is another person’s crazy. To finance the merger, Xerox would take on $24 billion in new debt. “It makes no sense because all that debt would make the combined company much riskier,” says Bill George, former CEO of Medtronic and a professor at Harvard Business School. HP brass, who oppose the merger, argue that the leverage would threaten the companies’ survival. “You can’t work through economic cycles with that level of debt,” says CFO Steve Fieler, who calls Visentin’s $2 billion in planned annual savings “unachievable.”

Real money

15%
Combined share of Xerox stock controlled by Carl Icahn, 84, and Darwin Deason, 80

$20.1 billion
Annual revenue of HP’s printer division (for fiscal year ending 10/31/19)

$24 billion
Debt that xerox would incur to acquire HP. Source: Company filings

Xerox’s offer—now $24 a share, a premium of about 20% over HP’s mid-March stock price—will face a vote at HP’s annual shareholder meeting, expected in May. Rooting for a deal is activist titan Carl Icahn. He’s Xerox’s largest investor, with an 11% stake, worth about $750 million; he also owns 4.4% of HP, worth some $1.3 billion. Icahn led a campaign in 2018 that blocked Japan’s Fujifilm Holdings from purchasing Xerox. He then backed a new management team headed by Visentin, who became Xerox CEO that May. Icahn claims that a combination promises huge gains for both sides. “I want to own the stock of the merged companies,” he tells Fortune, “and Visentin is a tough guy and the right guy to run it.”

If Xerox wins the proxy battle, a new HP board will likely approve the deal. But HP may persuade its shareholders to rebuff Xerox, or even turn around and buy Xerox—a deal proposed by, among others, Carl Icahn. Whatever the outcome, Visentin’s bid could shake up a backwater of the tech world by highlighting a strategy that has revived mature industries from autos to airlines: consolidation.

Printers may be unglamorous, but they’re also a $206-billion-a-year industry. Though revenues are shrinking as clients turn to digital documents, those boxy appliances produce enormous cash flow, as customers keep paying for years for paper, maintenance, and pricey toner cartridges.

The field encompasses 12 major players, including HP, Xerox, and eight Japanese companies. Mergers could offer this gaggle some advantages: Combined, companies could slash costs by reducing headcount and winning lower prices on outsourced parts and services. They would then have more cash to invest in faster-growing arenas, including 3D printing and customized digital printing.

If such a strategy succeeded, it could pay off disproportionately for investors. HP and Xerox trade at a dirt-cheap 7.5 and 5.4 times free cash flow, respectively, reflecting investors’ belief that they’ll keep shrinking. The average multiple for the S&P 500, by contrast, is 19, and a growth surge could help their shares close that gap.

The best outcome may well involve HP buying Xerox because the combined company would carry much less debt.

Boosters of an HP-Xerox merger point out that each focuses on different parts of the market. HP’s $20.1 billion printing business specializes in desktop printers, a category called A4s. Xerox relies mostly on A3s, the huge multipurpose models used by businesses. In most cases, it leases them on contracts through which it provides supplies and maintenance.

Last year, Xerox produced free cash flow of $1.3 billion and HP of almost $4 billion. Visentin argues that he can produce $2 billion in new yearly savings—and the healthier margins and investment opportunities that come with them—by combining Xerox and HP. At Xerox, Visentin has delivered on the cost cutting: The company has sharply reduced what it spends on outsourcing such functions as IT management and payroll and medical claims management, lowering total expenses by almost 10% in 2019. The question now is whether HP’s investors will let him take his shears to their company.

To woo investors, HP is taking a cash-is-king approach. On Feb. 24 it unveiled a plan to buy back $15 billion in stock over three years and pledged to return 100% of free cash flow to shareholders. CEO Enrique Lores tells Fortune that Visentin’s bid both undervalues HP and would leave it overleveraged. HP is open to acquisitions, he says, but can expand sales and profits without them, by shifting the product mix to faster-growing business lines—including, yes, 3D and digital printing.

While Wall Street analysts are skeptical of that claim, HP’s countermoves have won some converts. “The cash return program probably moved HP from a disadvantage to a slight advantage,” one institutional shareholder says. This investor believes Xerox could regain its edge by raising its offer price by $2 to $3 a share. But that could mean taking on even more debt, a precarious proposition.

If Xerox looks like the winner as the vote approaches, it’s possible HP will bid for Xerox. Indeed, in a Feb. 27 proxy filing, HP gave a detailed narrative of negotiations on just that topic. According to the filing, Icahn and Visentin proposed selling Xerox to HP at around $45 a share—a huge premium over Xerox’s early March price of $32. But even at that price, it’s a move that HP, with its much larger revenue stream, could afford.

The best long-term outcome for shareholders may involve HP buying Xerox. The combined company would carry much less debt, probably less than $10 billion net of cash holdings, leaving more cash to invest in R&D and acquisitions, even as it reaches more customers. The problem, in some shareholders’ eyes: If HP is the buyer, Visentin and his “Let’s not copy, let’s reinvent” mindset might be sidelined. And the benefits of consolidation may mean that a Xerox acquisition is better than none.

If HP becomes the buyer, the boardroom maneuvering will undergo some fascinating twists. HP would need to convince institutional investors that it isn’t overpaying, lest they flip their support to Xerox. It would also likely need to propose a friendly merger to the same Xerox management that it has been trashing as irresponsible. The deadline for HP to unseat Xerox’s board in a hostile takeover at its annual meeting has passed for 2020, a scenario that Jim Woolery of King & Spalding, Xerox’s lawyer, says gives his client an advantage.

Darwin Deason knows who he’s cheering for. The 80-year-old Texan sold an outsourcing services company to Xerox in 2010 and still owns 4% of its stock; it was Deason who teamed with Icahn, 84, to block the Fuji takeover. Deason says he’s amused to be “at my last rodeo, fighting for the little guy to buy the big guy, when it almost always goes the other way around. But here I am riding the bull!” If that bull breaks some dishes in the sleepy china shop of the printer industry, the two octogenarians won’t be the only ones who profit.

A version of this article appears in the April 2020 issue of Fortune.

Inside Xerox’s audacious quest to buy much bigger rival HP

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