HP formally turns down offer but leaves door open for further negotiations
HP turned down cold the Xerox takeover bid. The company’s board unanimously rejected the $33 billion offer, citing concerns over the viability of the Xerox business and the ability of the combined company to service the debt required to pull off the deal.
The Lowdown: HP wasted little time acting on the acquisition that was formally proposed Nov. 5. In the rejection letter to Xerox, HP’s board expressed confidence in its ability to execute its new strategy and drive higher value for its customers, partners, and shareholders. HP is undertaking a global reorganization to streamline processes and cut costs; the strategy will eliminate up to 9,000 jobs over the next two years.
The Details: While HP rejected Xerox’s offer, it did not close the door on a potential merger. HP’s board said that it’s open to exploring different ways of combining the two companies as it sees the potential gains and savings that would result from a merger. However, HP said that much more due diligence is required and doubted Xerox’s ability to pull off the acquisition. HP noted that Xerox’s revenue shrank from $10.2 billion to $9.2 billion on a trailing 12-month basis. “[This] raises significant questions for us regarding the trajectory of your business and future prospects,” HP wrote.
The Impact: The formal rejection is not unexpected. Xerox buying HP was always considered a long shot. HP is three times Xerox in terms of market value and more than six times in terms of gross revenue. The rejection, though, could be the beginning of a new phase of negotiations that will result in a merger on more favorable terms for both companies. Activist investor Carl Icahn disclosed that he bought more than a 4% stake in HP to complement his 10% stake in Xerox; Icahn also said that merging the companies is a “no brainer.”
Background: Earlier this month, Xerox offered to buy HP for roughly $33 billion, of which it would pay three-quarters cash and the balance in stock. Xerox believed combining the two companies’ print businesses would improve their market value and ability to compete. Additionally, eliminating redundancies could save the combined companies more than $2 billion a year.
HP acknowledged it considered buying Xerox earlier this year, but broke off negotiations after a due diligence review.
The Buzz: The following is the full text of the rejection letter from HP’s board to Xerox.
“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.”