The HP/Xerox Tango Moving to Finals. Xerox Sets Monday Deadline Before Moving to a Hostile Takeover Action.

A Print Industry Commentary 

By Andy & Julie Plata , Co-CEOs, the OutputLinks Communications Group

Published Nov, 18, Updated on Nov. 22 & Updated again Nov. 26, 2019

The Nov. 26 Update: For the latest installment titled "Xerox Says HP's Response Defies Logic" and the battle begins to turn ugly Click Here>>>

The Nov. 25 Update: For the installment titled, "HP’s Latest ‘Dear John Letter’ Turns the HP/Xerox Dance to a Duel" Click HERE>>> https://www.linkedin.com/pulse/hps-latest-dear-john-letter-turns-hpxerox-dance-duel-andy-plata/

The Nov. 22, 2019 Update

HP notified Xerox this past Sunday that it unanimously rejected Xerox’s acquisition proposal. The reason given was that the offer “significantly undervalues HP and is not in the best interests of HP shareholders.” {see rejection letter below}

Four Days later, Xerox responded aggressively saying its $22 per share offer valued HP at a considerably higher value than the $14 per share that HP's financial advisor, Goldman Sachs, had set. AND THEN, Xerox threated a hostile action by going directly to HP's shareholders if the HP Board does not accept Xerox's original offer in four days! {see Xerox's Monday response letter below}.

Maybe

Upon our review of HP's rejection letter, HP’s “No” seemed more like a “Maybe.” Read these excerpts from HP’s rejection letter and see if you agree.

• “We recognize the potential benefits of consolidation…”
• “…we are open to exploring whether there is value to be created for HP shareholders through a potential combination with Xerox…”
• We remain ready to engage with you to better understand your business and any value to be created from a combination.”

Lesson: Open-ended refusals can lead to aggressive responses

Concerns

The above text indicates HP’s awareness of potential gains from a combination of the two companies. But rather than an outright rejection, HP seems to be saying maybe a combination could work if approached differently, due to the following concerns:

• The decline of Xerox’s revenue since June 2018;
• The impact of the multi-billion-dollar debt level from a Xerox acquisition.

Who Should Buy Who?

This past May, we predicted that HP would buy Xerox before the end of 2019. That prediction now seems very close to coming true as HP's rejection of Xerox’s purchase offer appears to be communicating that HP buying Xerox would make more sense than Xerox buying HP.

Another Possibility: What if HP's response induces other prospective buyers for either or both companies? If so, Who?

The Letters: HP and Xerox

We have made HP’s rejection letter and Xerox’s offering letter available below. After reading them, let us know if you agree or disagree with our ‘who buys who’ conclusion.

You may also notice that the letters indicate that Xerox and HP have been discussing merger or consolidation long before Xerox’s November 5 offering letter. How long?

In our prior Xerox/HP post regarding Carl Icahn’s ownership position in both Xerox and HP, we noted that he purchased his HP stock this spring and summer with no intention of influencing a merger between the two companies. To read our prior post regarding Carl Icahn’s part in the HP/Xerox roller coaster ride, click here>>>

Stay Tuned

We will continue following this transaction closely. Our goal is to provide our readers with a series of short synopses of what we learn as we learn it

For consistent updates and to share your views on the Xerox / HP transaction, join us at LinkedIn’s ‘Print Industry Thought Leaders’ group.

Thanks for Reading.

Promoting print tech for the digital age,

Andy & Julie Plata, Co-CEOs, the OutputLinks Communications Group

Following is the full text of the letter that Xerox sent on November 21, 2019, to members of HP's Board of Directors

Dear Chip and Enrique,

We were very surprised that HP’s Board of Directors summarily rejected our compelling proposal to acquire HP for $22.00 per share, comprising $17.00 in cash and 0.137 Xerox shares for each HP share, claiming our offer "significantly undervalues" HP. Frankly, we are confused by this reasoning in that your own financial advisor, Goldman Sachs & Co., set a $14 price target with a "sell" rating for HP's stock after you announced your restructuring plan on October 3, 2019. Our offer represents a 57% premium to Goldman’s price target and a 29% premium to HP’s 30-day volume weighted average trading price of $17. 

Moreover, our offer is neither "highly conditional" nor "uncertain" as you state. There will be NO financing condition to the completion of our acquisition of HP.

While we are glad to see that HP's Board of Directors acknowledges the substantial merits of a business combination between Xerox and HP and are open to exploring the value opportunity for our respective shareholders, your response lacks a clear path forward. You have requested customary due diligence, which we have accepted, but you have refused to agree to corresponding due diligence for Xerox. Any friendly process for a combination of this type requires mutual diligence—your proposal for one-way diligence is an unnecessary delay tactic. In light of favorable markets and terms, Xerox is determined to capture the compelling opportunity for our respective shareholders and strongly encourages HP’s Board of Directors not to sanction further delay in light of our extensive discussions to date.

Xerox remains willing to devote the resources necessary to complete mutual due diligence over the next three weeks and confirm the substantial cost and revenue synergies that we both believe could be achieved through a combination.

The Xerox Board of Directors is determined to expeditiously pursue our proposed acquisition of HP to completion—we see no cause for further delay. Accordingly, unless you and we agree on mutual confirmatory due diligence to support a friendly combination by 5:00 p.m. EST on Monday, November 25, 2019, Xerox will take its compelling case to create superior value for our respective shareholders directly to your shareholders. The overwhelming support our offer will receive from HP shareholders should resolve any further doubts you have regarding the wisdom of swiftly moving forward to complete the transaction.

We look forward to your prompt response.

Sincerely,

John Visentin

Vice Chairman and CEO

Xerox Holdings Corporation

Following is the full text of the letter that was sent on November 17, 2019 to John Visentin, Xerox Vice Chairman and CEO:

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

Following is the full text of the Xerox Offering Letter sent November 5, 2019:

Board of Directors

HP Inc.

1501 Page Mill Road,

Palo Alto, California 94304

Attention: Chip Bergh, Chairman

Ladies and Gentlemen:

I want to thank you for facilitating our recent discussions regarding a potential business combination between our two companies. The substantial synergies generated from a transaction are only the beginning of the unique value creation opportunity you and we identified together – enhanced capital allocation, revenue growth, diversification, balance sheet strength and best in class human capital all result from combining our two industry leading companies. Consequently, our Board of Directors fully supports the transaction outlined below. The nature of the opportunity and the moment, combined with the overwhelming support we believe your and our shareholders, employees and other stakeholders will extend to our coming together as one company, furthers our resolve to pursue a potential transaction with you.

Accordingly, we are providing you with the following definitive written proposal to affect the combination of Xerox Holdings Corporation (“Xerox”) and HP Inc. (“HP”):

The Proposal

1. Offer. 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 share1, 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% cash consideration, with the balance comprised of Xerox shares, resulting in HP shareholders owning approximately 48% 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.

Our compelling offer represents:

·      a 20% premium to the closing share price of $18.40 as of November 5, 2019

·      incremental value of at least $14 billion to our respective shareholders based on a 7x multiple of EBITDA

·      a 29% premium to the 30-day volume weighted average trading price of $17.00, excluding the significant value of the shared synergies

·      an implied transaction multiple of 6.9x HP’s LTM Adjusted EBITDA of $4.8 billion 

2. Strategic Rationale and Potential Synergies. A combination between us is supported by strong industrial logic given our respective strengths 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.

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.

3. Financing. 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.

4. Fuji Xerox Relationship. 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.

5. Due Diligence Timetable. 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.

6. Required Approvals and Closing Conditions. This proposal and potential business combination have been extensively reviewed and approved by Xerox’s Board of Directors – we have their full support. Completion of the proposed transaction would be subject to the approval of the Board of Directors of each of Xerox and HP, as well as our respective shareholders. As you know, we have been working diligently with our regulatory advisors and have a strong understanding of the regulatory framework for a transaction of this nature and do not anticipate any meaningful regulatory hurdles to its completion. 

7. Governance. We anticipate that the parties will agree to a governance framework, including board representation, that is customary for a combination of this type.

8. Confidentiality/Definitive Agreement. This letter is submitted to you on a strictly confidential basis and is intended for the Board of Directors of HP only. The terms outlined here are subject to the completion of due diligence and the negotiation and execution of mutually acceptable definitive transaction documents.

Our Board of Directors and management are excited about the opportunity to create significant value for both of our shareholders, employees and other stakeholders through this unique combination of our two companies. Please do not hesitate to contact me with any questions. I look forward to hearing from you.

Our offer remains open until Wednesday, November 13, 2019.

Sincerely,

John Visentin

Vice Chairman and CEO

Xerox Holdings Corporation

Cc: Board of Directors

Xerox Holdings Corporation

1 Based on Xerox share price of $36.37 as of November 5, 2019.