HP knocks back Xerox offer
HP has rejected the US$33bn offer from Xerox to acquire the business, although it has not ruled out a future merger between the two printing giants.
The HP Board unanimously rejected the unsolicited proposal, which put a 21 per cent premium on the current HP share price, saying the offer “significantly undervalues HP and is not in best interests of HP shareholders.” The purchase price would still be below the $24 a share that HP was trading at back in February.
HP was also concerned about the supersize US$25bn debt the proposed deal would leave the new company saddled with. The Board said it was confident in its own ability to drive growth, and said it would be buying its own stock, which it believes is currently undervalued.
However, HP said it is willing to engage with Xerox in discussions on the merits of a potential transaction, saying, “We remain ready to engage with you to better understand your business and any value to be created from a combination.”
Under the proposed deal HP would have had 48 per cent of the new business. HP is currently more than triple the size of Xerox, with a market capitalisation of US$28bn compared to the US$8.2bn of its suitor. Xerox sales last year were US$9.8bn, compared to US$58.5bn of HP. Financial analysts, though, say the combined business will be able to shed US$2bn a year in back end costs.
Major Xerox shareholders Carl Icahn and Darwin Deason are behind the plan. Current Xerox CEO John Visentin comes from a private equity background, and is in place thanks to Icahn and Deason. They are the duo who fought against the Xerox board’s move to sell to Fujifilm, resulting in CEO Jeff Jacobson and other directors losing their jobs, with Fujifilm taking legal action over the failed $6bn deal.
The proposed deal came just a week after Xerox sold its 25 per cent stake in the Fuji Xerox business to joint venture partner Fujifilm – in exchange, Fujifilm dropped its US$1bn lawsuit over the failed merger deal.
Following is the full text of the letter that was sent on November 17 to John Visentin, Xerox vice chairman and CEO:
Our Board of Directors has reviewed and considered your unsolicited proposal dated November 5, 2019 at a meeting with our financial and legal advisors and has unanimously concluded that it significantly undervalues HP and is not in the best interests of HP shareholders. In reaching this determination, the Board also considered the highly conditional and uncertain nature of the proposal, including the potential impact of outsized debt levels on the combined company’s stock.
We have great confidence in our strategy and our ability to execute to continue driving sustainable long-term value at HP. In addition, the Board and management team continue to take actions to enhance shareholder value including the deployment of our strong balance sheet for increased repurchases of our significantly undervalued stock and for value-creating M&A.
We recognize the potential benefits of consolidation, and we are open to exploring whether there is value to be created for HP shareholders through a potential combination with Xerox. However, as we have previously shared in connection with our prior requests for diligence, we have fundamental questions that need to be addressed in our diligence of Xerox. We note the decline of Xerox’s revenue from $10.2 billion to $9.2 billion (on a trailing 12-month basis) since June 2018, which raises significant questions for us regarding the trajectory of your business and future prospects. In addition, we believe it is critical to engage in a rigorous analysis of the achievable synergies from a potential combination. With substantive engagement from Xerox management and access to diligence information on Xerox, we believe that we can quickly evaluate the merits of a potential transaction.
We remain ready to engage with you to better understand your business and any value to be created from a combination.