Xerox continued its push to annex HP after launching a tender offer Monday to obtain all outstanding shares of HP for $24 a share. The offer, for $18.40 in cash and 0.149 Xerox shares for each HP share, was swiftly and decidedly rejected by HP after the Palo Alto, CA-based manufacturer conferred with its independent financial and legal advisors.
HP’s verdict: In addition to previously stated objections, the deal would disproportionately benefit Xerox shareholders. HP also feels Xerox lacks operational experience in its critical sectors including personal systems, home printing, and 3D and digital manufacturing.
HP isn’t the only party that objects to the prospect of an HP-Xerox union. Canon CEO and Chairman Fujio Mitarai has gone on the record to say his company will end its 35-year relationship with HP in the event of a combination between HP and Xerox.
Norwalk, Connecticut-based Xerox entered into an amended and restated commitment letter to add MUFG, PNC, Credit Agricole, Truist and Sun Trust Robinson Humphrey as commitment parties to provide a portion of the financing. They were added to a list of financing partners that already included Citi, Mizuho and Bank of America under its previously confirmed $24 billion in binding financing commitments not subject to due diligence conditions.
The offer and withdrawal rights are scheduled to expire at 5 p.m. Eastern time April 21, unless the offer is extended. Full terms, conditions and other details of the tender offer are set forth in the offering documents that Xerox filed with the Securities and Exchange Commission.
“Our proposal offers progress over entrenchment,” noted John Visentin, vice chairman and CEO of Xerox. “HP shareholders will receive $27 billion in immediate, upfront cash while retaining significant, long-term upside through equity ownership in a combined company with greater fee cash flow to invest in growth and return to shareholders.”
HP’s Rationale
While HP intended to advise shareholders of the board’s position on the Xerox offer within 10 business days, the answer came roughly 72 hours later. HP’s board unanimously recommended that HP shareholders reject the offer and not tender their HP shares under the current offer.
“Our message to HP shareholders is clear: the Xerox offer undervalues HP and disproportionately benefits Xerox shareholders at the expense of HP shareholders,” said Chip Bergh, chair of HP’s board of directors. “The Xerox offer would leave our shareholders with an investment in a combined company that is burdened with an irresponsible level of debt and which would subsequently require unrealistic, unachievable synergies that would jeopardize the entire company.”
HP’s main thrust is creating value and not risk, HP President and CEO Enrique Lores maintained in the press release. “HP is a trusted brand with a strong track record of value creation and we’re executing a clear plan that will drive significant earnings growth,” he wrote. “We’re well-positioned in our categories, aggressively attacking costs and pursuing the most value-creating path for our shareholders.”
Among the reasons cited by HP in reaching its determination:
- The Xerox offer, in effect, principally offers HP shareholders something they already own, and would disproportionately benefit Xerox shareholders relative to HP shareholders.
- The Xerox offer would use HP’s balance sheet as transaction consideration for the benefit of Xerox shareholders.
- The Xerox offer meaningfully undervalues HP by failing to reflect the full value of HP’s assets and its standalone strategic and financial value creation plan.
- HP has a track record of execution that has resulted in strong, consistent operational and financial performance.
- The HP Board believes that HP’s standalone plan has positioned HP for significant value creation.
- HP’s strong balance sheet and financial flexibility provide multiple levers for value creation.
- The HP board believes that the Xerox offer would compromise the future of HP and the value of shares of HP common stock by transferring value to Xerox shareholders and leaving HP shareholders with an investment in a combined company with an irresponsible capital structure, premised on unrealistic synergies estimates.
- HP believes that Xerox’s “synergy” estimates, including cost cuts, exceed reasonably achievable levels.
- The Xerox offer includes a significant equity component, the value of which the HP board believes would be subject to significant risks and uncertainties.
- Xerox does not have experience operating businesses in the sectors in which HP operates, including personal systems, home printing, and 3D and digital manufacturing.
- Xerox has been experiencing declining sales and the recent sale of its interest in the Fuji-Xerox joint venture raises significant concerns about its future position.
- HP believes that Xerox’s cost-cutting has come at the expense of long-term value creation, and Xerox has demonstrated a lack of focus on research and development.
- The quantity and nature of the conditions of the Xerox offer create significant uncertainty and risk.
- The HP board believes that Xerox’s urgency in launching the offer, while simultaneously running a full slate of director nominees for election at HP’s 2020 annual meeting of shareholders, evidences Xerox’s desperation to acquire HP to address its continued business decline.
At least one critical HP partner clearly supports HP’s conclusions. Canon’s Mitarai told Nikkei Asian Review he is not in favor of an alliance, which would make the newly-created company a challenger to Canon in the office equipment space. Such a move by Canon would leave HP in search of a new parts supplier.
“The foundation of this partnership is, above all else, built upon a relationship of trust between the top management of both companies,” Mitarai told the Review. “At the same time, it also involves a great deal of technological exchange gradually established over the decades-long relationship.”
HP is one of Canon’s biggest customers, accounting for about 14% of its sales, the Review reported.
