Within days of receiving an offer of $33.5 billion in cash and stock to be acquired by Xerox, HP on Sunday publicly released the letter it sent to John Visentin, Xerox vice chairman and CEO, that said its board of directors had unanimously rejected the offer.
Four days later, HP returned volley with a response that expressed surprise and underscored the value of its offer and vowed to take its case to HP’s shareholders absent an agreed-upon due diligence process.
First came HP’s response. That letter, signed by Board Chair Chip Bergh and CEO Enrique Lores, said the proposal “significantly undervalues” HP and is not in the best interests of HP shareholders. HP’s board weighed several conditions of the “highly conditional and uncertain nature of the proposal,” one of which is the potential impact of outsized debt levels on the combined company’s stock.
Not that HP doesn’t think a proposed combination is without merit. The letter held out the possibility of bringing the industry heavyweights together, which would likely portend a long and difficult road toward an agreement.
“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,” the letter added.
Of the primary questions that HP feels could be answered in thorough due diligence is the trend of declining revenue from $10.2 billion to $9.2 billion on a trailing 12-month basis since June of 2018. That, HP believes, calls into question Xerox’s business trajectory and future prospects.
“In addition, we believe it is critical to engage in a rigorous analysis of the achievable synergies from a potential combination,” the letter continued.
HP’s call for due diligence ended the rejection letter on a hopeful note in wanting to learn the value that could be created from a combination of the firms.
Vetting Claims
Xerox wasted little time in questioning some of HP’s objections. In a letter sent to HP dated Nov. 21, Visentin wondered why the offer “significantly undervalues” HP, given that HP’s own financial advisor, Goldman Sachs & Co., established a $14 price target with a “sell” rating for HP’s stock following its restructuring plan announced Oct. 3. Xerox’s offer, Visentin argued, represented a 57% premium to the Goldman Sachs price target, as well as a 29% premium to HP’s 30-day volume-weighted average trading price of $17.
Xerox’s offer of $22 per share in cash and stock represented a 20% premium based on HP’s Nov. 5 closing price. It also represented an incremental value of at least $14 billion to their respective shareholders based on a 7X multiple of EBITDA.
Visentin also disputed the offer being “highly conditional” or “uncertain,” as he reiterated there were no financing conditions tied to the proposed deal.
“While we are glad to see that HP’s Board of Directors acknowledges the substantial merits of a business combination between Xerox and HP and are open to exploring the value opportunity for our respective shareholders, your response lacks a clear path forward,” Visentin wrote. “You have requested customary due diligence, which we have accepted, but you have refused to agree to corresponding due diligence for Xerox. Any friendly process for a combination of this type requires mutual diligence—your proposal for one-way diligence is an unnecessary delay tactic. In light of favorable markets and terms, Xerox is determined to capture the compelling opportunity for our respective shareholders and strongly encourages HP’s Board of Directors not to sanction further delay in light of our extensive discussions to date.”
Higher Court
Visentin concluded that unless the parties agree on mutual confirmatory due diligence to support a friendly combination by Nov. 25 at 5 p.m. Eastern Time, Xerox will take its case directly to HP’s shareholders.
“The overwhelming support our offer will receive from HP shareholders should resolve any further doubts you have regarding the wisdom of swiftly moving forward to complete the transaction,” he added.
In terms of potential synergies, Xerox believes their respective strengths in the A3 and A4 markets, complementary footprint, deep cultural fit and “shared DNA of innovation” makes strategic sense and would allow them to compete effectively in the production, large enterprise and SMB segments.
Xerox also outlined cost synergies of at least $2 billion within 24 months, including $1.5 billion in savings through combining research and developent groups as well as streamlining corporate functions.
Xerox told HP it would be able to finance the deal through cash on hand and through the backing of Citi, which it said provided certainty in arranging financing. Plus, in mending fences with Fujifilm through divestitures of its Fuji Xerox and other interest—along with the removal of Fujifilm’s breach of contract litigation—would pave the way toward a swift and unencumbered transaction with HP.
