HP rejects Xerox takeover proposal, recognizes benefit of ‘potential combination’

Days after revealing that activist investor and Xerox Holdings Corp. majority shareholder Carl Icahn had purchased $1.2 billion in Hewlett Packard Inc. stock—a sign that the 83-year-old investor wholeheartedly backed a merger between the two companies—HP announced it had rejected Xerox’s unsolicited bid to acquire the Palo Alto, Calif.-based computer giant.

In a statement released Sunday, HP officials said the Nov. 5 proposal “significantly undervalues HP and is not in the best interests of HP shareholders,” but also left the door open for a potential combination that would put HP in the driver seat.

Xerox’s $33.5 billion proposal offered HP shareholders $22 per share, comprising $17 in cash and 0.137 Xerox shares for each HP share. HP shareholders would have owned roughly 48 percent of the combined company. The offer represented a 20 percent premium to HP’s closing share price of $18.40 on Nov. 5.

“A combination between us is supported by strong industrial logic given our respective strength in the A3 and A4 markets, complementary footprint, deep cultural fit and shared DNA of innovation,” Xerox officials wrote in the proposal. “It is difficult to conceive of a strategic alternative for either company that delivers superior value.”

Xerox pointed to cost synergies of “at least” $2 billion within 24 months, including $500 million by leveraging scale, supply chain and distribution footprint, and $1.5 billion from combining “world-class” R&D groups and streamlining corporate functions.

“Our board of directors strongly believes the industry is overdue for consolidation and that those who move first will have a distinct advantage in a secularly declining macro environment,” Xerox officials wrote in the proposal. “By combining R&D capabilities and financial resources, together we can accelerate the transformation of our businesses and take a leadership role in key growth markets such as 3D printing; digital packaging and labels; graphics; textile printing; workflow software; and IoT enabled services.”

But HP officials on Sunday said its board had considered the “highly conditional and uncertain nature” of the proposal, including the impact of outsized debt levels on the combined company’s stock.

“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,” said HP President and CEO Enrique Lores and Chairman Chip Bergh in their letter to Xerox Sunday. “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.”

Specifically, HP noted the decline of Xerox’s revenue from $10.2 billion to $9.2 billion since June 2018, “which raises significant questions for us regarding the trajectory of your business and future prospects.”

“We believe it is critical to engage in a rigorous analysis of the achievable synergies from a potential combination,” the letter states. “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.”

Xerox’s bid to acquire HP followed closely on the heels of an agreement to sell its one-quarter stake in Fuji Xerox to Fujifilm Holdings Corp. for $2.3 billion. Both companies’ boards agreed to the deal, which will give Fujifilm 100 percent ownership of the 57-year-old joint venture.

As part of the deal, Fuji agreed to withdraw its $1 billion breach of contract lawsuit against Xerox. Xerox Vice Chairman and CEO John Visentin on Nov. 5 said the company would use funds from the sale to pursue mergers and acquisitions in core and adjacent industries, return capital to shareholders and pay down its $550 million debt, which matures next month.

Shares of company stock (NYSE: XRX) closed Friday at $38.94 and were trading at around $38.79 midday Monday.

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