Xerox Urges HP Buyout, Threatens Hostile Takeover

The Xerox-HP Inc. saga continues, with Xerox today publishing a letter to members of the HP Inc. Board of Directors urging the board to agree to its  purchase offer and issuing an ultimatum that it will directly take the issue to HP shareholders if HP does not comply with its demands.

On Sunday, November 17th, HP Inc. CEO Enrique Lores published a letter to Xerox CEO and Vice Chairman John Visentin stating that the HP board had unanimously rejected Xerox’s buyout offer, stating that the $22 per share offer undervalued HP. The letter also expressed concern that Xerox would have to take on debt to purchase HP, with the new merged company taking on that debt. However, Lores’ letter did leave open future talks and a possible merger.

In the letter, addressed to Lores and Chip Bergh, the latter of whom is the chairman of the HP board, Xerox’s Visentin states that he was surprised that HP “summarily rejected” Xerox’s “compelling proposal” to acquire HP. Visentin explains that HP’s own financial adviser, Goldman Sachs, set a $14 per share price for HP in October, with Xerox’s $22 per share offer thus a 57-percent premium.

The Xerox CEO also stated that there would be no financing condition for the purchase.

Visentin’s letter goes on to note that while HP has requested “customary due diligence, which we have accepted,” HP has  refused to agree to “corresponding due diligence for Xerox.” The letter states that this alleged refusal on HP’s part is “an unnecessary delay tactic.”

The letter goes on to note that a merger could provide “substantial cost and revenue synergies that we both believe could be achieved through a combination.”

Will Take Case to HP Shareholders

Finally, the letter concludes by stating that unless Xerox and HP agree to on “mutual confirmatory due diligence to support a friendly combination by 5:00 p.m. EST on Monday, November 25, 2019, Xerox will take its compelling case to create superior value for our respective shareholders directly to your shareholders.”

Our Take

Xerox appear to be threatening a hostile takeover if HP doesn’t accede to its demands. Such hostile takeovers involve going directly to the target company’s shareholders or replacing its management – the latter of which activist investor Carl Icahn succeeded doing with Xerox as part of his process of derailing a proposed Xerox-Fuji Xerox merger.

Icahn, who was a 10.6-percent stake in Xerox, and a 4.24-percent stake in HP, is undoubtedly behind this push, as he has recently urged a merger, calling such a union “a no-brainer.” Meanwhile, it’s hard not to see how the HP board could be pleased with the overall tone of the letter and the strong-armed deadline tactic.

The full text of the letter sent to HP is as follows:

Dear Chip and Enrique,

We were very surprised that HP’s Board of Directors summarily rejected our compelling proposal to acquire HP for $22.00 per share, comprising $17.00 in cash and 0.137 Xerox shares for each HP share, claiming our offer “significantly undervalues” HP.  Frankly, we are confused by this reasoning in that your own financial advisor, Goldman Sachs & Co., set a $14 price target with a “sell” rating for HP’s stock after you announced your restructuring plan on October 3, 2019. Our offer represents a 57% premium to Goldman’s price target and a 29% premium to HP’s 30-day volume weighted average trading price of $17.

Moreover, our offer is neither “highly conditional” nor “uncertain” as you state. There will be NO financing condition to the completion of our acquisition of HP.

While we are glad to see that HP’s Board of Directors acknowledges the substantial merits of a business combination between Xerox and HP and are open to exploring the value opportunity for our respective shareholders, your response lacks a clear path forward. You have requested customary due diligence, which we have accepted, but you have refused to agree to corresponding due diligence for Xerox. Any friendly process for a combination of this type requires mutual diligence—your proposal for one-way diligence is an unnecessary delay tactic. In light of favorable markets and terms, Xerox is determined to capture the compelling opportunity for our respective shareholders and strongly encourages HP’s Board of Directors not to sanction further delay in light of our extensive discussions to date.

Xerox remains willing to devote the resources necessary to complete mutual due diligence over the next three weeks and confirm the substantial cost and revenue synergies that we both believe could be achieved through a combination.

The Xerox Board of Directors is determined to expeditiously pursue our proposed acquisition of HP to completion—we see no cause for further delay. Accordingly, unless you and we agree on mutual confirmatory due diligence to support a friendly combination by 5:00 p.m. EST on Monday, November 25, 2019, Xerox will take its compelling case to create superior value for our respective shareholders directly to your shareholders. The overwhelming support our offer will receive from HP shareholders should resolve any further doubts you have regarding the wisdom of swiftly moving forward to complete the transaction.

We look forward to your prompt response.

Sincerely,

John Visentin
Vice Chairman and CEO
Xerox Holdings Corporation

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