HP’s board of directors have given global technology giant Xerox Corporation the thumbs down on its offer to buy the business for US$33.5 billion citing concerns about Xerox’s declining revenue and future business trajectory.
Xerox Corporation made the unsolicited offer for HP on November 5 with Xerox chairman and CEO John Visentin writing to HP chairman Chip Bergh, pictured, outlining the proposal to combine the two companies and in doing so generate substantial synergies and strength in the balance sheet.
Xerox’s offer included paying HP shareholders $22 per share comprised of $17 in cash and 0.137 Xerox shares for each HP share.
It also came after a sustained push by activist investor Carl Icahn, who has a stake in both companies, described the proposed merger to the Wall Street Journal as a “no-brainer”, arguing a union could yield major profits for investors.
As part of its case Xerox said combining the two businesses presented a strong industrial logic given the strengths of both businesses in the A3 and A4 markets, complementary footprint, deep cultural fit and shared DNA of innovation.
“Our combined scale, product portfolio and global reach would allow us to compete effectively in the Production, Large Enterprise and SMB segments, while offering a truly differentiated Managed Services capability. It is difficult to conceive of a strategic alternative for either company that delivers superior value,” the letter from Xerox read.
“Our Board of Directors strongly believes the industry is overdue for consolidation and that those who move first will have a distinct advantage in a secularly declining macro environment. By combining R&D capabilities and financial resources, together we can accelerate the transformation of our businesses and take a leadership role in key growth markets such as: 3D Printing, Digital Packaging and Labels, Graphics, Textile Printing, Workflow Software and IoT Enabled Services.”
The offer for HP coincided with Xerox’s decision to sell its 25 per cent stake in Fuji Xerox, which was a joint venture it entered into with Fujifilm Holdings in 1957.
The divestment also resolved pending legal action without any monetary payment and achieved a more flexible strategic sourcing relationship.
The proposal however has been knocked back by HP with chairman Chip Bergh saying the offer “significantly undervalues HP and is not in the best interests of HP shareholders”.
“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 letter signed by Bergh and HP chief executive officer Enrique Lores said.
“We have great confidence in our strategy and our ability to execute to continue driving sustainable long-term value at HP. In addition, 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.
“We recognize the potential benefits of consolidation, and we are open to exploring whether there is value to be created for HP shareholders through a potential combination with Xerox.
“However, as we have previously shared in connection with our prior requests for diligence, we have fundamental questions that need to be addressed in our diligence of Xerox.
“We note the decline of Xerox’s revenue from $10.2 billion to $9.2 billion (on a trailing 12-month basis) 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. 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,” the letter said.
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