One thing’s for certain during the course of Xerox’s pursuit of HP. Both parties are not shy about sending replies on the weekend.
Last Saturday, HP penned a response to Xerox CEO John Visentin, reiterating its rejection of the $33.5 billion cash-and-stock acquisition offer. HP stood by its position that the offer is “highly conditional and uncertain,” and once again questioned Xerox’s ability to raise the cash portion of the proposed consideration while expressing concerns regarding the prudence of the outsized debt burden on the combined company’s stock.
Consequently, HP said the proposal “does not constitute a basis for due diligence or negotiation.” In other words, there is nothing more to discuss based on Xerox’s current offer.
The letter, signed by HP’s Enrique Lores and Chip Bergh, continued that HP is not dependent on a combination with Xerox, and that the manufacturer has a strategy and numerous opportunities to drive “sustainable long-term value.” The letter also called attention to private discussions held between the companies in August and September, and reminded Visentin that HP had voiced concerns at that juncture, which went unanswered.
“It is clear in your aggressive words and actions that Xerox is intent on forcing a potential combination on opportunistic terms and without providing adequate information,” the letter said. “When we were in private discussions with you in August and September, we repeatedly raised our questions; you failed to address them and instead walked away, choosing to pursue a hostile approach rather than continue down a more productive path. But these fundamental issues have not gone away, and your now-public urgency to accelerate toward a deal, still without addressing these questions, only heightens our concern about your business and prospects. Accordingly, we must have due diligence to determine whether a Xerox combination has any merit.”
The letter went on to recount some of HP’s objections mentioned previously. HP also painted Xerox’s exiting of the Fuji Xerox in less than favorable terms.
“It appears to us that when Xerox exited the Fujifilm joint venture, Xerox essentially mortgaged its future for a short-term cash infusion. We fear that the exit has left a sizeable strategic hole in Xerox’s portfolio.”
On Tuesday, Visentin fired back, with an opening line that stated HP’s refusal to engage in mutual due diligence “defies logic.” He again disputed the notion that Xerox’s offer is “highly conditional” or “uncertain,” and stressed the combined companies would create an “investment grade credit rating.”
“The potential benefits of a combination between HP and Xerox are self-evident,” he wrote. “Together, we could create an industry leader – with enhanced scale and best-in-class offerings across a complete product portfolio – that will be positioned to invest more in innovation and generate greater returns for shareholders.”
Pointing out their shares have increased 9.5% (HP) and 6.6% (Xerox), Visentin pointed out that he has received inquiries from “several HP shareholders and are encouraged by their interest in our offer.” Visentin felt it prudent to clarify what he viewed as “mischaracterizations” from HP’s most recent letter. Those points emphasized:
- On February 5, 2019, Xerox announced a three-year strategic plan that was built on four initiatives: (i) optimizing operations, (ii) driving revenue, (iii) reenergizing innovation and (iv) focusing on cash flow and capital returns. We are already outperforming this plan. Through the first nine months of 2019, we have increased our guidance for adjusted earnings per share and free cash flow while also increasing investments in innovation and our core business, which is why our stock is up 96% year-to-date.
- Your comment regarding total contract value is little more than a diversion. Your own public disclosure states that backlog information is “not a meaningful indicator of future business prospects” or “material to an understanding of our overall business.”
- It is possible that the modest, expensive and time-consuming cost savings included in the restructuring plan you announced on October 3, 2019 (only $1 billion over three years at a cost of $1 billion in restructuring charges), has resulted in a lack of confidence in HP’s ability to realize the $2+ billion of synergies your team previously agreed could be achieved in a combination.
- We monetized our illiquid interest in Fuji Xerox at over 20 times 2019 expected aggregate cash flow while favorably restructuring the terms of our sourcing relationship with Fuji Xerox to ensure continuity of supply, protect our high-value intellectual property and provide strategic flexibility. There is no “hole in Xerox’s portfolio” as a result of those transactions – just significantly more cash to support growth and greater flexibility in our sourcing terms.
Visentin refused to apologize for Xerox’s “aggressive tactics” and concluded that Xerox plans to engage directly with HP shareholders to solicit their support in pursuing a potential deal.
