HP Rejects Xerox Offer - Open to Merger/Buy

Although not your typical "Dear John letter" announcing someone has found another, more well-suited, suitor, HP Inc. did issue a letter to Xerox Vice Chairman and CEO John Visentin on Sunday unanimously rejecting the unsolicited proposal from Xerox Holdings to acquire HP for approximately $33.5 billion in a combined cash-and-stock transaction. Here is HP's written response:

Dear John,

Our Board of Directors has reviewed and considered your unsolicited proposal dated November 5, 2019 at a meeting with our financial and legal advisors and has unanimously concluded that it 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.

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.

We remain ready to engage with you to better understand your business and any value to be created from a combination.

On behalf of the Board of Directors,

Enrique Lores   Chip Berg

The following day, HP Inc. shares dropped 5% on the news of the rejection of the bid from its much smaller rival. HP's board claimed the offer undervalued HP; would make the combined company too highly leveraged; and even questioned Xerox's future growth prognosis based on its trailing 12-month, $1 billion revenue decline.

At the same time, though, the response indicated that HP recognizes the cost benefits of consolidation (Xerox claims their merger could generate $2 billion in savings within 24 months) and is willing to remain engaged in further due diligence discussions. As some pundits had also predicted, the response also seemed to hint that HP might consider acquiring Xerox instead.

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