On Sunday, HP’s board of directors nixed Xerox’s recent offer that lit up the printer copier market with buzz during the last two weeks as the legacy behemoths mulled coming together. HP said it was not tossing out the idea of the two giants merging at some point, but it was saying no to this Xerox offer.
“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,” HP’s board wrote. “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.”
While the move was ostensibly between the two companies and their boards, many see the hand of activist investor Carl Icahn at work, as he recently took a large position in HP. HP published the details of the offer Xerox CEO John Visentin sent to HP on 5 November.
The deal was structured to give HP shareholders a value for their stock that it has not seen since February after HP delivered disappointing Q1 results. However much of that US$22-per-share value was contingent on Xerox continuing to perform well.
“We are prepared to offer HP shareholders $22.00 per share comprised of $17.00 in cash and 0.137 Xerox shares for each HP share, for a total transaction value of approximately $33.5 billion, assuming 1,515 million fully diluted shares outstanding and the balance sheet as of July 31, 2019. Our offer implies 77 percent cash consideration, with the balance comprised of Xerox shares, resulting in HP shareholders owning approximately 48 percent of the combined company – allowing your shareholders to both realize immediate cash value and enjoy equal participation in the substantial upside of synergies resulting from our combination.”
Streamlining supply chain, distribution, and research and development were just some of the areas Xerox said it could leverage to save the new combined company $2 billion, according to its offer.
“Our preliminary analysis shows a clear path to cost synergies of at least $2.0 billion within 24 months: $0.5 billion in cost savings by leveraging our scale, combined supply chain and distribution footprint, and $1.5 billion in cost savings from combining our world class R&D groups and streamlining corporate functions.
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.”
For the cash portion of its offer, Xerox said it had a commitment from Citi backing the deal with “investment grade rated notes” Xerox promised to get “fully committed” financing before closing.
“We will fund the cash component of our offer with a combination of cash on hand and new financing to support the transaction and the new combined company. We have been engaged in ongoing discussions with Citi on the transaction financing and they have provided to us a highly confident letter evidencing their certainty in arranging financing for the transaction. Given the current status of the capital markets, we and they expect that we will be able to finance the transaction fully with investment grade rated notes. We will obtain a fully committed financing package before signing any final agreement, and closing of the transaction will not be subject to a financing contingency.”
HP was apparently hesitant about the deal due to the ongoing fight between Xerox and Fujifilm. Icahn and Fujifilm have been battling in some fashion since Icahn rebuffed the announced takeover of Xerox in January 2018. That led to a long series of state court battles where Icahn’s early victory let him reshape Xerox’s board and CEO, and led to Fujifilm filing a $1 billion lawsuit. Xerox offered the following to HP in order to ease their concerns:
“Many of your diligence questions to our management team concerned our relationship with FUJIFILM Holdings Corporation (“Fujifilm”) and our ownership stake in Fuji Xerox Co. Ltd. (“Fuji Xerox”). The transactions with Fujifilm and Fuji Xerox that we announced this morning, through which we will divest our ownership stake in Fuji Xerox at an attractive valuation (over 20x annual cash flow), permanently resolve pending litigation without any monetary payment and achieve a more flexible strategic sourcing relationship, will greatly facilitate the speed and ease with which you and we could effect a timely transaction and successful integration of our operations. Fujifilm has already obtained the necessary regulatory approvals in Japan, and as a result we expect to close the transactions with Fujifilm and Fuji Xerox on Friday, November 8, 2019.”
While the 5 November letter gave HP a 13 November deadline, Xerox told HP it could take weeks, if it chose to, to complete due diligence.
“We are prepared to devote all necessary resources to finalize our due diligence on an accelerated basis. Given our discussions to date and our familiarity with each other’s operations and business plans, we believe that you and we could complete our work and concurrently negotiate final documentation in 3 – 4 weeks. We have already engaged Citi as financial advisor and King & Spalding as legal advisor to assist us with completing the transaction.”