HP Inc. isn't missing an opportunity to push back against Xerox's hostile takeover bid, with HP saying that Xerox's fourth-quarter results are another reason to be wary of the proposed deal.
In a statement released Tuesday, HP warned against handing over its shares for shares in Xerox, which HP's statement called "a company of questionable value and exposed to meaningful risk."
Despite being the far smaller company, Xerox is seeking to win over HP shareholders to support its US$32 billion takeover. HP's board of directors has repeatedly rejected the deal since its was first proposed in November.
On Tuesday, Xerox revealed that its revenue for the fourth quarter of 2019, ended 31 December, came in at US$2.44 billion. That was down 2.2 percent from the same period a year earlier.
For the full year 2019, Xerox reported US$9.07 billion in revenue, a drop of 6.2 percent from the prior year. Earnings per share were sharply up, coming in at US$2.78, versus last year’s earnings of US$1.16 per share.
For 2020, Xerox expects to see a further revenue decline, estimated at 4 percent.
"Xerox's results do not alleviate the fundamental concerns about the continued revenue declines and health of the Xerox business," HP said in a statement released on Tuesday.
"The fact remains: Xerox is relying on HP’s balance sheet to advance its proposal, which significantly undervalues HP and would require our shareholders to exchange the value of our businesses and the opportunities afforded by our balance sheet for stock in a company of questionable value and exposed to meaningful risk, due to inordinate leverage and sustained, declining performance."
HP's statement refers to the debt that Xerox would need to raise to finance the deal, which analyses have suggested would be secured against HP's free cash flow. HP's comparatively low level of debt appears to be another key element of Xerox's financing plan.
Xerox declined to comment on HP's statement Tuesday.
Last week, Xerox disclosed plans to nominate a new slate of HP board members that would be amenable to combining the printer and copier giants. Xerox CEO John Visentin has also said his company has been engaging directly with HP shareholders around the deal.
"We receive positive feedback from HP shareholders we spoke to," Visentin said Tuesday during the company's quarterly call with analysts. "They immediately appreciate the industrial logic and believe in the value we can create."
However, according to Morgan Stanley analyst Katy Huberty, many HP shareholders actually see significant risks in merging with Xerox, including the company's declining revenue. Xerox appears to be "unlikely to return to revenue growth" by calendar year 2021, Huberty wrote in a research note this week.
"Our bottom up analysis of Xerox's end-markets suggests that a near-term return to growth is unlikely, as growth investments in new and adjacent markets are unlikely to offset market declines and share losses in Xerox's core end markets," she wrote.
And regardless of concerns about revenue, HP shareholders want to see a larger payout than what Xerox is proposing, Huberty wrote.
"Does the math for a Xerox deal for HP work at US$22 per share? The short answer is, probably not," she wrote. "At US$22/share, we do not believe Xerox's offer seems rich enough to persuade HP's board or shareholder base into accepting the deal."
During Xerox's call with analysts on Tuesday, Xerox CFO Bill Osbourn Jr. responded to an analyst question about whether Xerox could get more than the US$24 billion in financing that it has secured to buy HP. Osbourn said that Xerox's leadership believes it has “flexibility” around that number with its three banks — Citigroup Inc., Mizuho Financial Group and Bank Of America.
“We believe our arrangements with those financial institutions allow us flexibility if need be,” Osbourn said.
An offer of US$26 per share for HP would have a "greater likelihood of success,” Huberty wrote in her research note Monday.
"That being said we think Xerox faces risks on both sides of the coin in pursuing a deal for HP. In the event Xerox closes a deal for HP, the complexity of absorbing a company 4x as large raises the risk of integration issues, which the market is likely to penalize given Xerox's high debt levels (5.4x net leverage post-deal) post-close," she wrote. "Conversely, not pursuing a deal means Xerox would have to rely on organic means to stabilise revenue, a risk unto itself."
In a statement last week, HP sought to make a distinction between activist investor Carl Icahn—who owns a 4.24 percent stake in HP—and the company's other shareholders. Icahn also owns 10.6 percent of Xerox shares, and he was central to the installation of Visentin, a longtime loyalist, as CEO of Xerox in 2018.
"We believe that Xerox’s proposal and nominations are being driven by Carl Icahn, and his large ownership position in Xerox means that his interests are not aligned with those of other HP shareholders," HP said in the statement. "Due to Mr. Icahn’s ownership position, he would disproportionately benefit from an acquisition of HP by Xerox at a price that undervalues HP."
HP said it has not yet announced a date for its 2020 annual meeting, where the board of directors will be chosen.