HP Inc (HPQ) announced over the weekend that its board had unanimously rejected Xerox's (XRX) bid to acquire the company, saying the offer undervalues HP and is not in the best interest of shareholders.
HP'S BOARD REJECTS XEROX OFFER: HP's board of directors said Sunday that they unanimously rejected Xerox's proposal, saying the offer is not in the best interest of shareholders and would undervalue HP. Xerox had offered HP $22 per share, consisting of $17 per share in cash and 0.137 Xerox shares. "In reaching this determination, the Board also considered the highly conditional and uncertain nature of the proposal, including the potential impact of outsized debt levels on the combined company’s stock," the board wrote in a letter to John Visentin, Xerox’s CEO.
In the letter, the board added that "We have great confidence in our strategy and our ability to execute to continue driving sustainable long-term value at HP." Additionally, it noted that the board and management team continue to take actions to enhance shareholder value, "including the deployment of our strong balance sheet for increased repurchases of our significantly undervalued stock and for value-creating M&A."
HP 'OPEN TO EXLPORING' POTENTIAL COMBINATION: Commenting further on consolidation, the board said it is "open to exploring whether there is value to be created for HP shareholders through a potential combination with Xerox." However, the board stated that "fundamental questions that need to be addressed in our diligence of Xerox." In particularly, the board said "We note the decline of Xerox's revenue from $10.2B to $9.2B since June 2018, which raises significant questions for us regarding the trajectory of your business and future prospects. In addition, we believe it is critical to engage in a rigorous analysis of the achievable synergies from a potential combination." HP's board concluded that "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. We remain ready to engage with you to better understand your business and any value to be created from a combination."
WHAT'S NOTABLE: HP Inc. held "detailed" talks to buy Xerox within the last two months, CNBC's David Faber reported on November 8.
According to sources, Faber said HP asked for more time for due diligence and the talks ended. Carl Icahn, who owns a 10.6% stake in Xerox, made a case for a proposed merger between the company and HP Inc, saying he thinks a deal could yield big profits for shareholders, The Wall Street Journal's Cara Lombardo reported on November 14. Icahn, who later disclosed a 4.24% stake in HP, valued at roughly $1.2B, said he believes a deal between the companies is in the best interests of both sets of shareholders given the potential for cost savings and for the combined company to market a more balanced portfolio of printer offerings. "I think a combination is a no-brainer," Icahn said. "I believe very strongly in the synergies," he said, adding that "there will probably be a choice between cash and stock and I would much rather have the stock, assuming there’s a good management team." At the time, HP responded to Icahn's investment, saying the company was "aware" and was "committed to doing what is in the best interests of all HP shareholders."
In August, HP Inc said Dion Weisler would step down to deal with a family healthy matter and that he would be succeeded by Enrique Lores. Prior to being appointed as CEO, Lores served as the president of HP's Imaging, Printing and Solutions business. In early October, Lores announced plans to reduce its global headcount by approximately 7,000-9,000 employees through a combination of employee exits and voluntary early retirement, yielding annual cost savings of approximately $1B by the end of fiscal 2022. The company added that it expects EPS ex-items for fiscal 2020 to be $2.22-$2.32. Additionally, HP announced a new strategy to revive its printer business, which analysts have said represent a conceptual shift away from the former "Core, Growth and Future" model towards one focused on "Advance, Disrupt and Transform."
LETTER SUGGESTS 'OPENNESS': Deutsche Bank analyst Jeriel Ong told investors in a research note that while HP's offer rejection reduces the odds of Xerox being the acquirer, he believes the board's letter also communicates the openness HP has in evaluating a combination. It is unclear whether Xerox increasing the offer price would improve the odds of a combination as HPQ is already concerned about debt load at the $22 per share offer, Ong said. The analyst said he continues to believe that a combination makes sense with HP as the acquirer rather than the target.
PRICE ACTION: In morning trading, shares of HP are down about 1% to $19.98, while Xerox shares are also down about 1% to $38.61.
Xerox
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HP Inc.
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