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Why Did HP Reject Xerox Takeover Bid Again?


Nov. 25 2019, Published 8:04 a.m. ET

HP (HPQ) turned down the second takeover bid from Xerox Holdings (XRX). As a result, Xerox threatened to go hostile. In a letter on November 24, HP rejected Xerox’s warning to agree to a “friendly” discussion and accept the takeover offer. HP’s management, on behalf of the board, wrote the letter to Xerox CEO John Visentin. The letter mentioned that Xerox’s takeover bid of $33.5 billion for the company “significantly undervalues HP.”

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HP rejected Xerox takeover offer again

HP rejected Xerox’s takeover offer for the second time. On November 17, HP rejected Xerox’s proposal price of $22 per share. HP said that Xerox’s offer was “too low” and undervalued the company.

Xerox wrote a letter to HP’s board following the first rejection and pressured the company to merge. Xerox even threatened that it would make the takeover bid hostile if HP didn’t open its books before today. In the letter last week, Xerox told HP to “agree on mutual confirmatory due diligence” by today. Overall, Xerox was surprised and “confused” by HP’s reasoning that the $22 per share offer is low. Despite the threats, HP reiterated its stance on Xerox’s bid and rebuffed its offer on Sunday.

Xerox stock ended 0.96% higher and closed at $39.06 on November 22. However, HP shares rose 1.48% on November 22 and stood at $19.94. On a year-to-date basis, Xerox has gained over 100%, while HP has remained almost flat.

Xerox’s takeover offer

Xerox formally offered a deal price of $22 per share on November 5 following rumors that the company might buy HP. The deal bid valued the company at $33.5 billion—more than three times Xerox’s market value. The deal value was also higher than HP’s market value, which stood at $29.6 billion as of November 22.

Xerox planned to pay HP shareholders in cash and stock. The company would pay 77% cash and 23% of the stock to HP stockholders.

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According to Xerox, the deal could bring a significant change in the printing industry. Xerox said, “Our industry is long overdue for consolidation, and those who move first will have a distinct advantage,” according to CRN. Since HP and Xerox are struggling in the printing industry, the deal would bring in significant cost savings of $2 billion. Also, Xerox would be able to compete with Canon and Ricoh. The deal could help the company expand in Asia, where HP has a strong presence.

HP’s views on the takeover offer

While Xerox disclosed its financing plans, HP doubts the company’s ability to fund the deal. HP said that Xerox’s “proposal does not constitute a basis for due diligence or negotiation,” as noted in the letter on November 24. According to HP, Xerox didn’t provide “adequate information” on its cash-raising or future viability. In the letter, HP said, “There continues to be uncertainty regarding Xerox’s ability to raise the cash portion of the proposed consideration.”

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Xerox planned to take a loan from Citibank to fund the HP deal. Also, Xerox ended its dispute with Japan’s Fujifilm. The company sold its 25% stake in Fuji Xerox, a Fujifilm joint venture, to finance the merger. However, HP fears that the sale of Xerox’s stake in Fujifilm’s joint venture could mark a “sizeable strategic hole in Xerox’s portfolio.”

HP cited Xerox’s sluggish revenues. As a result, the company doesn’t see any merit in the merger. Xerox’s revenues have been falling since 2012. The revenues could fall 6% YoY in 2019. HP’s board also has “significant concerns about both the near-term health and long-term viability” related to Xerox’s business. The company mentioned that instead of addressing the queries and concerns related to the deal, Xerox opted for a hostile approach. In addition to falling revenues, HP is concerned that combining the companies would result in an “outsized debt burden.”

HP’s board is confident about its business model. The company will look for its own value-creating opportunities for shareholders.

Jim Cramer and Carl Icahn’s views

We noted that Jim Cramer, CNBC’s “Mad Money” host, wasn’t sure about the HP and Xerox deal. Cramer doubted Xerox’s ability to pull off the merger. He also said that the alliance between the two companies was a “far-fetched idea.” Many analysts also thought that the merger might have integration issues, according to a Reuters report.

However, activist investor Carl Icahn thought that the potential merger could bring in substantial synergies. Icahn already owned a 10.6% stake in Xerox. He bought a 4.24% stake in HP on November 13. Icahn said that that the HP and Xerox merger is “no-brainer.” He expected the merger to yield significant profits for investors.

Could HP acquire Xerox?

HP isn’t considering Xerox’s bid. The latter didn’t offer an attractive and viable deal. However, the company understands the potential benefits if the merger went through. HP has options to acquire Xerox, according to a Reuters report.

HP has also been struggling in the printing supplies segment. The company wants to cut down its costs to increase profitability. HP planned to eliminate around 7,000–9,000 employees by fiscal 2022. Amid the challenges, acquiring Xerox could be an excellent opportunity and might boost HP’s cost savings.


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