10 Big Things HP Just Said About Xerox

HP offers its most detailed rebuttal yet of Xerox's proposed takeover, saying the deal 'compromises the future of HP and the value of HP's shares.'

HP Inc. on Monday signaled that it's prepared to fight Xerox's hostile takeover bid on all fronts.

Along with committing to return $16 billion to shareholders in the next three years, HP executives laid out their fullest case yet for why they believe the Xerox proposal is a bad deal for everyone other than Xerox.

[Related: HP Touts 'Incredibly Strong Foundation' In Latest Quarterly Results]

The moves follow HP's adoption last week of a shareholder rights plan that aims to stymie the takeover.

The Xerox bid “compromises the future of HP and the value of HP's shares,” HP CEO Enrique Lores said during the company's quarterly call with analysts Monday. “Their proposal has a number of fundamental problems.”

HP's board of directors has repeatedly rejected the takeover deal since it was first proposed by Xerox in November.

But Xerox has not backed down, and has promised to launch a tender offer— starting "on or around" March 2—that will ask all HP shareholders to sell their shares to Xerox. The company also recently upped its offer for HP to $24 a share--or $34.9 billion in total--from $22 a share initially.

What follows are 10 key things that HP executives said Monday about Xerox and its takeover bid.

"Two Very Different Companies"

With HP Inc. and Xerox, "we are looking at two very different companies," Lores said. "HP is a global leader in both personal systems and print. Xerox has no presence in personal systems. Xerox's position in print is not nearly as robust as HP. We are a technology leader, and with Xerox's exit from the Fuji-Xerox joint venture, Xerox has no long-term technology or supply roadmap."

Meanwhile, HP "has grown by $10.5 billion over the last few years. This revenue growth is meaningfully more than Xerox's total company revenue,” he said.

Ultimately, "HP does not need a Xerox combination to create significant value for shareholders," Lores said.

Xerox did not immediately respond to a request for comment.

Synergies

One of Xerox's key arguments for the takeover is that there would be substantial synergies—estimated at $2 billion—between the two companies.

However, these synergies are "overstated" and "include many of the initiatives and cost saving activities we are already doing," Lores said Monday.

Due to factors such as Xerox not having a PC business, there is actually minimal overlap between the workforces of Xerox and HP, he said.

"There is no overlap between Xerox and over 90 percent of HP's business," Lores said.

Value From Restructuring

HP is in the midst of expanding its profitability with a restructuring program that was announced last fall. The company has said it will reduce its total headcount by up to 16 percent—or approximately 7,000 to 9,000 job cuts—between now and the end of its fiscal year 2022. HP disclosed that 800 workers exited the company during its fiscal first quarter, ended Jan. 31.

"It's important that our investors get the benefit of HP's cost take-out program—and not Xerox taking credit for it in terms of the synergies they're claiming," HP CFO Steve Fieler said during the call with analysts.

Lores added, "if we are driving significant cost out of this company, then the value of that needs to go to HP shareholders. This is their money—which is why we think a big part of why the current proposal doesn't work for HP shareholders."

Debt Level

In recent months, HP has been highly critical of the way that Xerox's proposal would depend on taking a large amount of debt that is secured against HP's own cash flows. On Monday, HP executives again emphasized the issue, while framing it as an unprecedented level of debt in the industry.

"The proposal creates a highly leveraged and irresponsible capital structure," Lores said. "Considering the nature of our business, which operates with a negative cash conversion cycle as well as a macro economic cycle, this level of debt creates significant unnecessary risk."

Specifically, the combined company's "resulting debt to EBITDA ratio would be the highest in the S&P hardware index," Lores said.

Fieler added that "there's no hardware company in the S&P index with a leverage beyond three and a half. And so we view it as irresponsible."

Capital Returns

HP said on Monday that its capital return plan will include an $8 billion share buyback that is targeted for the 12 months following HP's 2020 annual meeting. And the company indicated that additional share repurchases could be ahead, as HP announced it is expanding its total share repurchase authorization to $15 billion from $5 billion previously.

However, capital returns to shareholders would be threatened if Xerox's takeover was successful, HP executives argued.

The level of debt that Xerox is proposing would "extinguish the capital returns that have been an important driver for value creation for HP," Lores said.

"Value Exchange"

Ultimately, Xerox's proposal "meaningfully undervalues HP" and constitutes a “flawed value exchange" for HP shareholders, Lores said.

“The Xerox proposal does not reflect the value of our company, or the plan that we announced today. The value exchange simply does not work,” he said.

Channel Impact

HP is also keeping in mind the potential impacts on channel partners from Xerox's attempted takeover. Lores indicated that among the many reasons HP is fighting the Xerox bid, one is that it would likely be a negative outcome for HP partners.

"We do the big, big majority of our business through channel partners, and this has been a critical part of how we go to market," Lores said Monday during a call with reporters and analysts, in response to a question from CRN. "Xerox has a very different approach. And as you can imagine, this has created some concerns from some of our key partners, and they have publicly said that."

While Xerox "has historically been a direct sales organization and is still in the early stages of understanding how the channel model works," HP is a "mature, channel-focused business," said Harry Zarek, president and CEO of Richmond Hill, Ontario-based Compugen, in a previous comment to CRN. "There is a big cultural mismatch around Xerox being able to understand how today's IT channel model works."

Reaching Out To Xerox

Still, HP on Monday said it continues to leave open the possibility of a merger with Xerox under different terms—a possibility that had not been mentioned by the company for several months.

HP is "reaching out to Xerox to explore if there is a combination that creates value for HP shareholders that is additive to HP’s strategic and financial plan," HP said in a news release.

Lores clarified that "any conversation we will have” must address three key issues.

"First, we need to make sure that the value exchange between the two companies reflects the real value of each of them," Lores said. "Second, the resulting entity needs to have a capital structure that makes sense, and that will be able to address the needs of the businesses that we will be running. And third, it needs to be based on synergies that are realistic and that can be achieved."

“This is a conversation that we think is possible to have at this point. And this is what we have ... opened engagement to talk about," Lores said.

Who Would Lead Combined Company

After an analyst question on whether HP's leadership is open to an acquisition at any price—if that would mean Xerox leadership taking over the combined company—Lores pointed again to the need to resolve the issues around value exchange, capital structure and synergies.

"This is, I think, the important conversation for our shareholders," Lores said. "Once we clarify that, then who, how— things like that—will be discussed after that."

"First Mover"

On Monday, HP also responded to the argument by Xerox CEO John Visentin that the takeover is necessary because the waning printer and copier industry needs to see more consolidation. For instance, in January, Visentin said during a Xerox call with analysts that "the printing industry is decades overdue for consolidation and the first mover will have a significant advantage."

HP does agree that "additional value can be created through consolidation," Lores said.

"In fact, instead of talking about being a first mover, we have been a first mover," he said. "Our acquisition of Samsung's printer business in 2017 is an important example. However, anything we consider and anything we do must first and foremost make sense for HP shareholders."