HP rejects Xerox offer for shares

HP recognizes benefits of consolidation but no thank you

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HP

On 16 November 2019, HP’s board rejected Xerox Corporation’s offer to buy the business for US$ 33.5 billion (approximately Rs 234,000 crore), noting concerns about Xerox’s falling revenue and future direction. On 5 November, Xerox made its unsolicited offer for HP with Xerox chairman and CEO John Visentin writing to HP chairman Chip Bergh, outlining a proposal to combine the two companies to leverage substantial savings and the combined strengths of the two companies.

Xerox offered HP shareholders US$ 22 a share with a combination of US$ 17 in cash and 0.137 Xerox shares. Activist investor Carl Icahn, who last year blocked the acquisition of Xerox by Fujifilm Xerox, said the proposed merger of Xerox and HP was a “no-brainer” from the investor’s point of view. The offer for HP’s shares immediately follows the withdrawal of the legal suits and the settlement between Xerox and Fujifilm Xerox.

“Our combined scale, product portfolio and global reach would allow us to compete effectively in the Production, Large Enterprise and SMB segments, while offering a truly differentiated Managed Services capability. It is difficult to conceive of a strategic alternative for either company that delivers superior value,” said the offer letter from Visentin.

“Our Board of Directors strongly believes the industry is overdue for consolidation and that those who move first will have a distinct advantage in a secularly declining macro environment. By combining R&D capabilities and financial resources, together we can accelerate the transformation of our businesses and take a leadership role in key growth markets such as: 3D Printing, Digital Packaging and Labels, Graphics, Textile Printing, Workflow Software and IoT Enabled Services.”

The Xerox offer has been rejected by HP’s board, with chairman Bergh saying the offer “significantly undervalues HP and is not in the best interests of HP shareholders.” The letter rejected the proposal signed by Bergh and HP chief executive officer Enrique Lores said, “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 US$ 10.2 billion to US$ 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,” the letter said.

Readers may recall that in October, HP announced a cost-cutting plan that includes making 8,000 to 9,000 employees redundant. The company said the move could save the company US$ 1 billion annually.

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