HP Maintains Opposition To Xerox Takeover In New Letter, Setting Up Possible Proxy Battle

HP's board says that Xerox's leadership has been using "aggressive words and actions" in its takeover bid, but "without providing adequate information” to support the proposal.

HP Inc.'s board of directors Sunday reiterated its opposition to the proposed takeover bid by Xerox, setting the stage for a potential proxy battle between the two companies.

In a letter to Xerox CEO John Visentin, HP's board said it has reviewed his latest communication, sent last Thursday, and said it "provided no new information beyond your November 5 letter." HP's Sunday letter goes on to say that Xerox's leadership has been using "aggressive words and actions" in its takeover bid, but "without providing adequate information” to support the proposal.

[Related: HP Vs. Xerox: 4 Key Financial Metrics In The Takeover Fight]

"We reiterate that we reject Xerox’s proposal as it significantly undervalues HP. Additionally, it is highly conditional and uncertain," HP's board said in its letter, which was made public via its website. "In particular, there continues to be uncertainty regarding Xerox’s ability to raise the cash portion of the proposed consideration and concerns regarding the prudence of the resulting outsized debt burden on the value of the combined company’s stock even if the financing were obtained. Consequently, your proposal does not constitute a basis for due diligence or negotiation."

CRN has reached out to Xerox for comment.

In his letter to HP's board of directors Thursday, Visentin said he was willing to take his company's proposal "directly to your shareholders." He predicted the offer would receive "overwhelming support" from HP shareholders.

Activist investor Carl Icahn has sizable ownership stakes in both Xerox (10.6 percent of shares) and HP (4.24 percent). Previously, Icahn was a central figure in dissolving Xerox's planned merger with Fujifilm in 2018 and installing Visentin—a longtime loyalist of the investor—as CEO of Xerox.

In his letter to HP's board, Visentin had given a deadline of Monday at 5 p.m., Eastern Time, to agree to mutual “confirmatory due diligence to support a friendly combination." After that, Visentin said Xerox would take the case directly to HP shareholders. HP is scheduled to report its quarterly earnings Tuesday.

"It is clear in your aggressive words and actions that Xerox is intent on forcing a potential combination on opportunistic terms and without providing adequate information," HP's board said in its letter Sunday. "When we were in private discussions with you in August and September, we repeatedly raised our questions; you failed to address them and instead walked away, choosing to pursue a hostile approach rather than continue down a more productive path. But these fundamental issues have not gone away, and your now-public urgency to accelerate toward a deal, still without addressing these questions, only heightens our concern about your business and prospects."

Combining Xerox and HP would bring together the leaders in printer and copier devices at a time when the industry is waning.

However, HP is by far the larger company of the two. HP had a market capitalization of $29.51 billion as of Friday, compared to Xerox's market cap of $8.44 billion. HP also installed a new CEO, Enrique Lores, formerly the company's printing business president, just days before Xerox made its takeover offer.

Xerox's proposal offers $22 a share for HP, with $17 per share in cash and the rest in Xerox stock. That would represent a roughly 20 percent premium above HP's closing stock price on Nov. 5, and would value HP at about $33 billion. HP shareholders would end up with a 48-percent stake in the combined company.

The debt that would be used to finance the acquisition would likely be secured against HP's free cash flow, an analysis of Xerox's offer published by Bloomberg has found.

HP partners who have spoken with CRN have sharply criticized Xerox's proposed deal, raising issues ranging from Xerox's inexperience in the PC market to differences in the two companies' channel approaches.

"Xerox has a luckluster channel alignment compared with HP’s true go-to-market with partners," said Bob Venero, CEO of Holbrook, N.Y.-based solution provider Future Tech, a partner of both HP and Xerox, in a previous interview with CRN. "Xerox has a less channel-friendly and channel-focused model than HP, particularly in the enterprise market.”

In its letter Sunday, HP's board said it believes "it is important to emphasize that we are not dependent on a Xerox combination."

"We have great confidence in our strategy and the numerous opportunities available to HP to drive sustainable long-term value, including the deployment of our strong balance sheet for increased share repurchases of our significantly undervalued stock and for value-creating [mergers and acquisitions]," HP's board said in the letter.

HP's board added that it remains "prepared to study the potential value of a combination and to work quickly to learn more about your business trajectory."

However, "there are significant concerns about both the near-term health and long-term viability of your business that have a significant impact on Xerox’s value," HP's board said. "The question of whether there is a path to turn around your business is a threshold issue."

Specific concerns cited by HP's board include Xerox's recent track record of missing consensus revenue estimates in four of the company's latest five quarters, along with a drop in revenue to $9.2 billion from $10.2 billion on a trailing 12-month basis since June 2018.

Additionally, "given how much of your business is based on contractual revenue, we are concerned about the decline in customer Total Contract Value (TCV) in excess of revenue declines, which suggests your revenues may decline even faster in future years," HP's board said in the letter.