HP rejects the latest demand by Xerox to negotiate an acquisition, potentially sparking a proxy war
For a second time, HP’s leadership rejected a bid by Xerox to merge the two companies under the Xerox banner in a $33.5 billion deal, potentially putting the two companies on the path to a proxy war. The prospects of the two companies duking it out on Wall Street will leave HP and Xerox customers and partners in a state of anxiety until there’s resolution.
The Lowdown: In a letter from CEO Enrique Lores and Chairman Chip Bergh, HP questioned Xerox’s ability to carry out the acquisition given its smaller size and relative health. HP says the acquisition offer is opportunistic and lacks adequate information. HP referenced many of the points it did in the initial rejection.
The Details: Xerox is offering $22 per share — or $33.5 billion — in a cash and stock deal in which the smaller printer and copier vendor will acquire the larger printer and PC manufacturer. Xerox had given HP until today (Monday, Nov. 25) to enter “friendly” negotiations or risk going to a proxy war.
While HP questions Xerox’s ability to pull off the massive acquisition, Xerox does have the support of activist investor Carl Icahn, who owns significant stakes in both companies. Icahn scuttled the merger of Xerox and FujiFilm earlier this year, and has a reputation for pushing deals that management teams don’t appreciate.
Xerox has not commented on the second HP rejection.
The Impact: From a channel perspective, the HP and Xerox ownership battle will leave partners and customers in a state of limbo while this boardroom-to-Wall Street battle plays out. The impact on operations in both companies is likely nil, as the negotiations and appeals to shareholders are unlikely to cause any interim changes. However, the uncertainty could put pressure on partners if customers use the tension as a negotiating lever in deals.
Background: Earlier this month, Xerox proposed taking over the much-larger HP. The argument for the deal is that the combined companies will have greater market power and cost savings by eliminating redundant operations and systems.
The Buzz: The following is the complete text of the Nov. 24 HP rejection letter to Xerox.
The HP Board of Directors has reviewed and considered your November 21 letter, which has provided no new information beyond your November 5 letter. We reiterate that we reject Xerox’s proposal as it significantly undervalues HP. Additionally, it is highly conditional and uncertain. In particular, there continues to be uncertainty regarding Xerox’s ability to raise the cash portion of the proposed consideration and concerns regarding the prudence of the resulting outsized debt burden on the value of the combined company’s stock even if the financing were obtained. Consequently, your proposal does not constitute a basis for due diligence or negotiation.
We believe it is important to emphasize that we are not dependent on a Xerox combination. We have great confidence in our strategy and the numerous opportunities available to HP to drive sustainable long-term value, including the deployment of our strong balance sheet for increased share repurchases of our significantly undervalued stock and for value-creating M&A.
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. 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.
We remain prepared to study the potential value of a combination and to work quickly to learn more about your business trajectory. However, there are significant concerns about both the near-term health and longterm viability of your business that have a significant impact on Xerox’s value. The question of whether there is a path to turn around your business is a threshold issue. In addition to the visible and substantial declines at Xerox, our specific concerns include:
Xerox has missed consensus revenue estimates in four of the last five quarters;
Xerox’s revenue has fallen from $10.2 billion to $9.2 billion (on a trailing 12-month basis) since June 2018, and this is expected to continue – Xerox management projects revenue declines of 6% in fiscal 2019;
Given how much of your business is based on contractual revenue, we are concerned about the decline in customer Total Contract Value (TCV) in excess of revenue declines, which suggests your revenues may decline even faster in future years. We note that the TCV of enterprise signings (including renewals) in 2018 was down 13.9% in constant currency and your churn for 2018 was 18%, both data points which Xerox has stopped providing publicly since the end of 2018;
Our review of synergies based on public information and the limited information you have shared does not support achievable synergies of the scale you suggest, and it appears that your assumptions include significant savings that are already included in each company’s independently announced cost reduction plans; and
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. In addition, we have concerns as to the state of Xerox’s technology resources, research and development pipeline, future product programs, and supply continuity and capability. Finally, we note that Xerox will have to get access to the fastest growing Asia Pacific region. The HP Board of Directors is committed to serving the best interests of HP shareholders, not Xerox and its shareholders. HP has numerous opportunities to create value for HP shareholders on a standalone basis. We will not let aggressive tactics or hostile gestures distract us from our responsibility to pursue the most value-creating path.