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Xerox to target HP shareholders as acquisition bid sours

28 Nov 2019

Xerox and HP have both been left with sour tastes in their mouths after HP outright rejected Xerox’s unsolicited attempt to acquire the company.

Earlier this month it came to light that Xerox proposed a US$33.5 billion deal to acquire HP, because the two companies could take on emerging areas such as 3D printing, graphics, textile printing and other areas. Or at least that’s what Xerox thought.

“It is difficult to conceive of a strategic alternative for either company that delivers superior value,” wrote Xerox vice chairman and CEO John Visentin.

HP rejected the deal, saying it’s willing to talk about things but Xerox’s finances aren’t exactly in top shape.

“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,” replied HP’s Chip Bergh and Enrique Lores.

This week, Visentin shot back with his response, saying that HP’s refusal to engage in mutual due diligence with Xerox “defies logic.”

He adds that Xerox will not apologise for its ‘aggressive’ tactics, even if HP doesn’t appreciate them.

“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,” says Visentin.

Visentin says that since HP itself is rejecting the proposal, Xerox will instead appeal to HP shareholders, who Visentin hopes will persuade HP’s board to consider the acquisition.

“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,” Visentin writes.

“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.”

Visentin also accuses HP of making misleading statements. In the letter to HP, he clears up some of the confusion. He writes:

"- On February 5, 2019, Xerox announced a three-year strategic plan that was built on four initiatives: (i) optimising operations, (ii) driving revenue, (iii) reenergising 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 realise the $2+ billion of synergies your team previously agreed could be achieved in a combination.

"- We monetised our illiquid interest in Fuji Xerox at over 20 times 2019 expected aggregate cash flow while favourably 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."

Citigroup Global Markets Inc. is acting as Xerox’s financial advisor and King & Spalding LLP is providing legal counsel to Xerox and the board of directors. Willkie Farr & Gallagher LLP is providing legal counsel to Xerox’s independent directors.

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