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Xerox Taking HP Bid to HP Shareholders, Prepares for Hostile Takeover

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Xerox today threatened a hostile takeover of HP – a term generally defined as one company that seeks to purchase another company, against the wishes of that company’s management – by appealing directly to that company’s shareholders.

The threat was contained in a letter published today by Xerox that is in response to HP Inc.’s second rejection of Xerox’s offer to purchase HP for $33.5 billion, or $22 per share. In its letter sent to HP’s board of directors today, Xerox threatens to take its bid directly to HP stockholders – which would likely spark a contentious proxy war between the two giant imaging companies. Xerox also stated that it had received favorable interest from HP stockholders concerning a merger, stating: “We have already received inquiries from several HP shareholders and are encouraged by their interest in our offer.”

But, the letter takes a contentious tone from the start, accusing HP of refusing to engage in mutual due diligence, which it says “defies logic.”

Accuses HP of Misstatements

The Xerox letter today also  states that in its last letter rejecting Xerox’s bid, HP made various misstatements regarding Xerox, with Xerox  stating that Xerox’s declining revenues have been expected, are part of a Xerox turn-around plan, and that it’s now out outperforming this plan.

The Xerox letter also states that HP’s statements regarding Xerox total contract value “is little more than a diversion,” and that HP’s own public disclosure states that backlog information is “’not a meaningful indicator of future business prospects’ or ‘material to an understanding of our overall business.’”

Rebuts HP Claims Concerning Xerox Sale of Stake in Fuji Xerox

The Xerox letter also takes issue with HP’s take on Xerox’s recent sale of its stake in Fuji Xerox, which the HP letter seemed to imply meant a loss of Fuji Xerox’s product portfolio for Xerox, as well as loss of access to the Asia-Pacific market. Instead, the Xerox letter states that the sale was a positive for Xerox, as it provided a favorable restructuring of terms for Xerox’s sourcing relationship with Fuji Xerox to ensure a continuity of product supply.

Xerox also stated that its  new Fuji Xerox agreement protects Xerox’s  intellectual property and provide strategic flexibility. Indeed, states the Xerox letter, “There is no ‘hole in Xerox’s portfolio’ (as HP had stated) as a result of those transactions – just significantly more cash to support growth and greater flexibility in our sourcing terms.”

The Xerox letter continues with a defiant non-apology: “While you may not appreciate our ‘aggressive’ tactics, we will not apologize for them.”

The letter continues to urge an HP-Xerox merger, stating that: “The potential benefits of a combination between HP and Xerox are self-evident. Together, we could create an industry leader.”

Last, the letter states that Xerox plans to “engage directly with HP shareholders to solicit their support in urging the HP Board to do the right thing and pursue this compelling opportunity.”

Our Take

As noted previously, this letter and tactics can likely be seen as the result of the influence of investor Carl Icahn, who owns a 10.6 percent stake in Xerox, and a smaller, approximate 4-percent stake in HP. Icahn has deployed similar strong-arm tactics before, most recently to derail last year’s proposed acquisition of Xerox by Fujifilm, along with the resignation of a majority of the Xerox board, and the appointment of his own members.

Will Icahn succeed this time with HP? While anything can happen, it’s worth noting the case with HP is quite different from the Fujifilm case. First, Icahn, along with Darwin Deason, represented majority Xerox stake holders at the time. In contrast, Icahn is currently the fifth largest shareholder in HP (mutual-fund Vanguard holds the largest HP share, 8.54 percent). Second, Xerox was at the time considering a controversial proposal, the sale of itself to Fujifilm, with revelations that then-Xerox board members were questioning the sale and the actions of previous Xerox CEO Jeff Jacobson.

Last, HP has hired the services of law firm Wachtell, Lipton, Rosen & Katz, which has helped various companies, including Dell, push back against Icahn. This law firm may be key in the coming months if Xerox pursues its threats.

The full text of the letter, which was sent to HP CEO Enrique Lores and HP Chairman of the Board Chip Bergh, is as follows:

“Dear Chip and Enrique,

Your refusal to engage in mutual due diligence with Xerox defies logic.

We have put forth a compelling proposal – one that would allow HP shareholders to both realize immediate cash value and enjoy equal participation in the substantial upside expected to result from a combination. Our offer is neither “highly conditional” nor “uncertain” as you claim. It does not contain a financing contingency, and the combined company is expected to have an investment grade credit rating.

The potential benefits of a combination between HP and Xerox are self-evident. Together, we could create an industry leader – with enhanced scale and best-in-class offerings across a complete product portfolio – that will be positioned to invest more in innovation and generate greater returns for shareholders.

The market clearly understands the industrial logic of this transaction. HP and Xerox shares are up 9.5% and 6.6%, respectively, since the date our proposal was first made public. We have already received inquiries from several HP shareholders and are encouraged by their interest in our offer.

Nevertheless, rather than engage with us in three weeks of customary mutual due diligence, HP continues to obfuscate and make misleading statements. It is important that we correct, for your benefit and that of HP’s shareholders, a few of the mischaracterizations from your last letter.

  • On February 5, 2019, Xerox announced a three-year strategic plan that was built on four initiatives: (i) optimizing operations, (ii) driving revenue, (iii) reenergizing innovation and (iv) focusing on cash flow and capital returns. We are already outperforming this plan. Through the first nine months of 2019, we have increased our guidance for adjusted earnings per share and free cash flow while also increasing investments in innovation and our core business, which is why our stock is up 96% year-to-date.
  • Your comment regarding total contract value is little more than a diversion. Your own public disclosure states that backlog information is “not a meaningful indicator of future business prospects” or “material to an understanding of our overall business.”
  • It is possible that the modest, expensive and time-consuming cost savings included in the restructuring plan you announced on October 3, 2019 (only $1 billion over three years at a cost of $1 billion in restructuring charges), has resulted in a lack of confidence in HP’s ability to realize the $2+ billion of synergies your team previously agreed could be achieved in a combination.
  • We monetized our illiquid interest in Fuji Xerox at over 20 times 2019 expected aggregate cash flow while favorably restructuring the terms of our sourcing relationship with Fuji Xerox to ensure continuity of supply, protect our high-value intellectual property and provide strategic flexibility. There is no “hole in Xerox’s portfolio” as a result of those transactions – just significantly more cash to support growth and greater flexibility in our sourcing terms.

While you may not appreciate our “aggressive” tactics, we will not apologize for them. The most efficient way to prove out the scope of this opportunity with certainty is through mutual due diligence, which you continue to refuse, and we are obligated to require.

We plan to engage directly with HP shareholders to solicit their support in urging the HP Board to do the right thing and pursue this compelling opportunity.”

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