HP Rejects Xerox Buy-Out Offer

We had to say we told you so (see This Week in Imaging: Why Xerox Probably Won’t Be Acquiring HP), but on November 17th, HP Inc. did indeed decline Xerox’s buy-out offer.

HP announced that its board of directors “has unanimously rejected the unsolicited proposal from Xerox Holdings Corporation to acquire the Company.”

In a letter to Xerox CEO and Vice Chairman John Visentin, HP CEO Enrique Lores, although leaving open the possibility of future talks, said the HP board believed Xerox’s offer (approximately $33 billion) undervalued HP. He also cited the board’s concerns with Xerox’s lower revenues, and the fact that Xerox would have to borrow to buy HP (probably at least $20 billion in our opinion), leaving the new merged company with a substantial deb load.

Lores’ letter to Visentin is as follows:

Dear John,

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.

On behalf of the Board of Directors,

Enrique Lores

Our Take

There was a lot HP had to be wary about concerning this deal, including the outsize influence of Carl Icahn, declining lower revenue at Xerox since June 2018, and the debt a new merged company would take on. While Xerox has been reporting higher earnings that have resulted in a higher share price, a great deal of this has to be due to aggressive cost-cutting. And, as we’ve reported previously, earlier this year, Xerox and HP had held talks concerning a potential merger, but Xerox curtailed those talks.

While HP CEO Lores’ leaves open the possibility of future talks, and anything of course is possible, we bet that at least for now, a lot of folks at HP are breathing a sigh of relief.

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