Not so fast, Xerox: HP again dismisses merger offer

Yesterday, HP Inc. again rejected Xerox‘s $33.5 billion bid for the printing and PC company, ahead of a Monday deadline demanded by Xerox management to take the offer or face a hostile bid. Xerox has offered to buy HP for $22 a share, and offer that HP rejected and Xerox then followed up with a letter saying they would take the case to the shareholders.

As part of its rejection of the Xerox plan, HP cited Xerox’s recent history of missed earnings projections and declining revenues as proof a combined entity would not necessarily be successful. The HP response letter authors – HP CEO Enrique Lores and board member Chip Bergh, of Levi Strauss – noted the board does not believe the future of HP is contingent on a merger. Also, they questioned Xerox’s need for urgent action, especially after, in their opinion, Xerox failed to make its case for combination during private merger discussions in August and September.

The letter in its entirety is reproduced below:

November 24, 2019

John Visentin
Vice Chairman and CEO
Xerox Holdings Corporation
201 Merritt 7
Norwalk, CT 06851-1056

CC:  Keith Cozza, Chairman of Xerox Holdings Corporation; President and Chief Executive Officer, Icahn Enterprises L.P.

Dear John,

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 long-term 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.

On behalf of the Board of Directors,

Enrique Lores	Chip Bergh

Advisors

Goldman Sachs & Co. LLC is serving as financial advisor to HP, and Wachtell, Lipton, Rosen & Katz is legal advisor.