Xerox CEO John Visentin has confirmed he will go around HP Inc.'s management in his company's takeover bid for the PC and printer giant.
"We plan to engage directly with HP shareholders to solicit their support in urging the HP Board to do the right thing and pursue this compelling opportunity," Visentin said in a letter to HP's board of directors, posted on Xerox's website Tuesday.
It's the latest salvo between the two companies, which have been clashing publicly over the past two weeks amid Xerox’s unsolicited US$33 billion offer for HP.
Xerox is “choosing to pursue a hostile approach rather than continue down a more productive path” that could lead to a merger, HP's board said in its latest letter, which was sent to Xerox and posted online on Sunday.
HP's board has raised a range of issues in attempting to fend off the Xerox acquisition bid. Xerox, on the other hand, has disputed many of the points made in HP's two letters responding to the takeover offer.
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 capitalisation of $29.82 billion as of the market close on Monday, compared to Xerox's market cap of $8.37 billion.
What follows are the five biggest disputes in Xerox's takeover bid for HP.
Who would run the combined company?
One might think the acquisition price belongs at the top of the list of the biggest disputes over this takeover bid, and it's true that HP has said Xerox's offer of $22 a share "significantly undervalues" HP. But there's good reason to believe that the dispute here is less about the acquisition price, and more about which company is the acquirer in the deal--i.e., which management team would take charge after the merger.
Martin Wolf, president of M&A advisory firm martinwolf, told CRN USA that the question of who should run the combined company is a central issue of the deal.
With Xerox touting $2 billion in cost reductions available post-merger, "the question is, who should be the one to manage that change?" Wolf said.
Notably, in order for Xerox to increase its bid for HP, the company might end up having to offer more equity--which could make HP shareholders the controlling shareholders in the combined company, Wolf said. Xerox's current proposal would give HP shareholders a 48-percent stake in the merged company.
Who is the stronger company?
A related issue is which of the two companies is stronger--and thus in a better position to be the acquirer in the deal. HP's board has pointed to a number of financial metrics at Xerox that it finds troubling, including an 8-percent decline in Xerox revenue over the past year and a track record of missing consensus revenue estimates in four of the company's latest five quarters.
"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."
HP, meanwhile, has seen its revenue climb by 2.9 percent over its four most recent quarters, year-over-year, and has hit or surpassed its earnings guidance in its past 15 quarters.
"We believe 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 M&A," HP’s board said in its Sunday letter.
Xerox, on the other hand, has pointed to its increased stock price over the past year--even as HP's share price has slumped--as evidence that it has a strong trajectory.
"On February 5, 2019, Xerox announced a three-year strategic plan that was built on four initiatives: (i) optimizing operations, (ii) driving revenue, (iii) reenergizing innovation and (iv) focusing on cash flow and capital returns. We are already outperforming this plan," Visentin said in his letter to HP's board on Tuesday. "Through the first nine months of 2019, we have increased our guidance for adjusted earnings per share and free cash flow while also increasing investments in innovation and our core business, which is why our stock is up 96% year-to-date."
Meanwhile, HP's board had cited a recent decline in customer Total Contract Value at Xerox in its letter Sunday. In his Tuesday letter, Visentin fired back that "your comment regarding total contract value is little more than a diversion."
"Your own public disclosure states that backlog information is 'not a meaningful indicator of future business prospects' or 'material to an understanding of our overall business,'" Visentin said.
Who is obstructing due diligence?
At this point, the management teams of HP and Xerox are each accusing the other of blocking due diligence on the deal.
"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."
In his letter Tuesday, Visentin responded that it is HP that is guilty of "refusal to engage in mutual due diligence."
"While you may not appreciate our 'aggressive' tactics, we will not apologize for them. The most efficient way to prove out the scope of this opportunity with certainty is through mutual due diligence, which you continue to refuse, and we are obligated to require," Visentin said in the letter.
Is Financing Certain For The Deal?
HP's board also raised concerns about Xerox's financing for the proposed deal. Xerox leadership has said it has an assurance of financing from Citi for the deal.
Xerox’s proposal is “highly conditional and uncertain," HP’s board said in its Sunday letter. "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.”
Visentin responded to this point as well, saying in his letter that "our offer is neither 'highly conditional' nor 'uncertain' as you claim. It does not contain a financing contingency, and the combined company is expected to have an investment grade credit rating."
What's the best way to create HP shareholder value?
The battle for shareholder support could pit Xerox's offer of an HP share price premium versus HP's own options for boosting share value, such as stock buybacks.
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, just before the news of the takeover bid surfaced.
"We have put forth a compelling proposal – one that would allow HP shareholders to both realize immediate cash value and enjoy equal participation in the substantial upside expected to result from a combination," Visentin said in his letter Tuesday. "The market clearly understands the industrial logic of this transaction. HP and Xerox shares are up 9.5% and 6.6%, respectively, since the date our proposal was first made public. We have already received inquiries from several HP shareholders and are encouraged by their interest in our offer."
HP has cited its own financial strength—with comparatively low debt and solid cash flows—as key to creating shareholder value rather than taking the deal from Xerox. The board specifically pointed to the potential for increased share repurchases in its Sunday letter, enabled by "the deployment of our strong balance sheet."
Ultimately, "the HP Board of Directors is committed to serving the best interests of HP shareholders, not Xerox and its shareholders. HP has numerous opportunities to create value for HP shareholders on a standalone basis," the board said in the letter.
Notably, 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.