HP Claims Visentin First Asked It To Acquire Xerox

In a regulatory filing, HP disclosed its account of private conversations between top HP and Xerox executives over a potential merger of the two companies.

In discussions with HP's CEO in September, Xerox CEO John Visentin said he preferred to see his company acquired by HP — in part because it would take too much debt for Xerox to acquire HP, according to a regulatory filing from HP Inc.

The comments came during a private meeting between Visentin and then-HP CEO Dion Weisler on Sept. 4, according to the proxy filing from HP. That was two months before Xerox would launch an unsolicited takeover bid for HP that ultimately turned hostile.

[Related: 10 Big Things HP Just Said About Xerox]

Visentin told Weisler at the time that "strategically, Xerox’s Board believed that Xerox was out of organic growth opportunities and must either grow through a strategic acquisition or be acquired," HP said Thursday in the filing with the U.S. Securities and Exchange Commission.

Visentin also informed Weisler that Xerox "had offered to buy Fujifilm Holdings Corporation’s (“Fuji”) interest in their joint venture, but Fuji had declined to enter into negotiations," the filing says.

"Mr. Visentin further stated that Xerox could try to acquire HP, but that the extreme leverage that Xerox would need to take on to make such an acquisition and the resulting potential for a credit downgrade made it preferable for HP to acquire Xerox," according to the filing.

The significant amount of debt that Xerox would have to raise to complete its hostile takeover bid for HP has been a repeated criticism leveled by HP executives against the proposal. HP's board of directors has rejected the deal multiple times since it was first disclosed in November.

In the proxy filing, HP offers its account of privately held discussions between top HP and Xerox executives related to a potential merger, including details that HP has not previously disclosed.

A representative for Xerox did not immediately respond to a request for comment Thursday evening.

Here are several key events detailed in the filing:

- On Aug. 12, activist investor Carl Icahn — a major Xerox shareholder, who had backed the appointment of Visentin as CEO of the company — contacted Weisler to disclose he'd bought 4.125 percent of HP shares, according to the filing. "Mr. Icahn further expressed his belief that there was considerable value in combining Xerox and HP, that HP should consider buying Xerox (or, if not, that Mr. Icahn would consider making an offer to acquire HP) and that he wanted a transaction to occur quickly," HP said in the filing. Weisler later sent Visentin "a list of threshold questions that would need to be addressed by Xerox before HP would engage in full discussions concerning an acquisition of Xerox." CRN has reached out to an Icahn representative for comment.

- Icahn called Weisler again on Aug. 26 and "expressed that he was focused on quickly pursuing a combination of HP with Xerox." The next day, "Visentin phoned Mr. Weisler and stated that Xerox was eager to combine with HP."

- Weisler's response to Visentin during the Sept. 4 meeting was that "HP was attempting to evaluate a potential transaction, but was still awaiting the requested information from Xerox that was necessary to conduct even a preliminary evaluation of a potential transaction, and without that information, HP could not determine next steps."

- Visentin and Weisler spoke again on Sept. 27, and Visentin "pressed Mr. Weisler regarding next steps." Weisler "emphasized that HP required the threshold information that it had requested in order to make any determinations. Mr. Visentin said that he would attempt to facilitate the provision of that information."

- The discussions broke down in early October. On Oct. 4, "Weisler confirmed that HP was prepared to enter into a non-disclosure agreement with Xerox and to commit time and resources to further explore a business combination, if Xerox would be willing to begin sharing substantive information with HP." Visentin "stated that Xerox required HP to make an indicative offer, including the price (or price range) to acquire Xerox, before Xerox would continue the discussions." Weisler "stated that HP could not specify a price without the previously requested threshold information, given HP’s concerns regarding Xerox’s business and the limited information that had been provided to date."

- On Oct. 10, "Visentin confirmed that Xerox was unwilling to provide any substantive information without an indicative offer price from HP." Weisler "again confirmed that HP was prepared to commit the requisite time and resources to a focused, expeditious process to inform its valuation of a potential combination, if Xerox was willing to provide the threshold diligence information previously discussed." Visentin "informed Mr. Weisler that Xerox was not willing and, therefore, discussions were at an end."

According to the filing, on Nov. 5, Visentin contacted Weisler (who was at this point no longer HP's CEO, but remained on the board). Visentin disclosed that the Xerox board had approved an offer to acquire HP, and had lined up financing from Citibank. A report in the Wall Street Journal on the Xerox offer was published that evening.

On Nov. 8, Icahn spoke with Weisler and HP CEO Enrique Lores, according to HP’s filing. Icahn "informed Mr. Weisler and Mr. Lores that he believed that HP and Xerox should move to combine swiftly in a transaction in which Mr. Icahn would receive stock of the combined company, and that if HP was unwilling to do that, Xerox and Mr. Icahn were prepared to escalate the situation," HP said in the filing.

The filing details the back-and-forth public statements between the two companies in the following months. It also adds details on HP's recent outreach to Xerox to resume merger negotiations, which HP disclosed on Monday. That same day, "Lores sent an email to Mr. Visentin proposing to arrange a meeting to explore the basis for a transaction and alternative transaction frameworks that could deliver attractive value to both HP and Xerox shareholders, and offering that Mr. Lores’ office would reach out to Mr. Visentin’s office to arrange a time to discuss."

Xerox has promised to launch a tender offer starting "on or around" March 2 that will ask all HP shareholders to sell their shares to Xerox. The company also recently upped its offer for HP to $24 a share — or $34.9 billion in total — from $22 a share initially.

Despite being the far smaller of the two companies, Xerox has been seeking to absorb HP in order to bring together the largest players in the copier and printer markets, at a time when the industry is waning.

HP on Monday signaled that it's prepared to fight Xerox's hostile takeover bid on all fronts.

Along with committing to return $16 billion to shareholders in the next three years, HP executives laid out their fullest case yet for why they believe the Xerox proposal is a bad deal for everyone other than Xerox.

The moves follow HP's adoption last week of a shareholder rights plan that aims to stymie the takeover.

The Xerox bid “compromises the future of HP and the value of HP's shares,” Lores said during the company's quarterly call with financial analysts Monday. “Their proposal has a number of fundamental problems.”

In recent months, HP has been highly critical of the way that Xerox's proposal would depend on taking a large amount of debt that is secured against HP's own cash flows. On Monday, HP executives again emphasized the issue, while framing it as an unprecedented level of debt in the industry.

"The proposal creates a highly leveraged and irresponsible capital structure," Lores said. "Considering the nature of our business, which operates with a negative cash conversion cycle as well as a macro economic cycle, this level of debt creates significant unnecessary risk."

Specifically, the combined company's "resulting debt to EBITDA ratio would be the highest in the S&P hardware index," Lores said.