Xerox goes hostile with HP takeover bid

Jo Francis
Thursday, November 28, 2019

The gloves are off: Xerox has gone on the offensive and will now take its takeover proposal directly to HP’s shareholders, saying that HP’s refusal to engage in mutual due diligence “defies logic”.

Visentin: Xerox proposal is "compelling"
Visentin: Xerox proposal is "compelling"

The war of words between the two companies has resulted in yet another letter between the two boards.

Xerox CEO John Visentin's latest letter to HP CEO Enrique Lores and chairman Chip Bergh comes in response to HP’s rejection of Xerox’s $33.5bn (£26bn), $22-a-share takeover proposal, via a letter sent on Sunday.

$17 of the per-share offer would be in cash.

Visentin accused HP of continuing to “obfuscate and make misleading statements” and said Xerox would now take its offer directly to its shareholders.

He rejected HP’s criticism of Xerox’s business performance and its recent separation deal with Fujifilm, and described HP’s own cost saving plans as “modest, expensive and time-consuming”.

“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," Visentin stated.

“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."

The full text of the letter is below.

HP is six times the size of Xerox, and has just announced its Q4 and full year results. Sales were $58.8bn, effectively static, for the 2019 financial year.

“We generated $4 billion in free cash flow above our full-year outlook and we returned 85% of that to shareholders through share repurchases and dividends,” Lores stated.

In Q4 the business grew revenue 2% in constant currency.

“The fourth quarter capped off a very solid year in which we exceeded our targets for non-GAAP EPS growth and free cash flow. Our strategy is working and we are confident about our business outlook heading into fiscal year 2020,” Lores said.

In a briefing with analysts he said HP would not be expanding on its previous communications regarding the Xerox takeover proposal.

Xerox’s share price slipped by 1.19% yesterday to $38.30, giving the business a market cap of $8.28bn. HP’s share rose from $20.06 to $20.41 in after-market trading following its results announcement. HP’s market cap is $29.73bn.

A recent Printweek poll about the possible mega-merger of two key industry suppliers received more than 500 votes, with 56.2% of respondents saying they did not think a merger would be a good thing for the printing industry.

 

26 November letter from Xerox to HP

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.

Sincerely,

John
Vice Chairman and CEO
Xerox Holdings Corporation

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