HP Board Rejects Xerox Takeover, Saying Deal 'Significantly Undervalues' Company

HP said it is still “open to exploring whether there is value to be created for HP shareholders through a potential combination with Xerox.”

HP Inc.'s board of directors has unanimously rejected Xerox's takeover offer but is leaving open the possibility of a merger with Xerox under different terms.

In a letter to Xerox CEO John Visentin made public by HP on Sunday, HP's board said that it has reviewed the "unsolicited" takeover proposal from Nov. 5 and "has unanimously concluded that it significantly undervalues HP and is not in the best interests of HP shareholders."

[Related: 5 Reasons HP Might Oppose The Xerox Takeover Bid]

“We have great confidence in our strategy and our ability to execute to continue driving sustainable long-term value at HP,” the company said.

HP also confirmed for the first time the terms of Xerox's proposal, which offers $22 a share for HP--$17 per share in cash and the rest in Xerox stock--with HP shareholders ending up with a 48-percent stake in the combined company. That would represent a roughly 20 percent premium above HP's closing stock price on Nov. 5, and would value HP at about $33 billion.

HP had a market capitalization of $29.9 billion as of Friday, compared to Xerox's market cap of $8.42 billion.

HP's board acknowledged that it does "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," HP's board said in the letter. "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."

Additionally, HP said it believes it is “critical to engage in a rigorous analysis of the achievable synergies” from a potential merger. “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," HP's board said. "We remain ready to engage with you to better understand your business and any value to be created from a combination."

CRN has reached out to Xerox for comment.

Activist investor Carl Icahn has sizable ownership stakes in both HP and Xerox, and has apparently been keeping an open mind on which company should be the acquirer in the deal, the Wall Street Journal reported Thursday.

Bob Venero, CEO of Holbrook, N.Y.-based solution provider Future Tech, an HP and Xerox partner, No. 101 on the CRN 2019 SP500, applauded HP management for rejecting the offer.

“I give kudos to HP’s management and board of directors for standing their ground and doing what is best for their stockholders, partners and customers,” said Venero.“There was no way that Xerox was going to buy HP. They don’t have the financial wherewithal or the business strength and acumen to pull off a deal like this regardless of the rhetoric of Carl Icahn. I love the fact HP said in so many words that you are not going to buy us but we may well look at buying you as a company that is six times smaller with a declining revenue trajectory.”

A Xerox HP deal would be disastrous for the partner community, said Venero. “It’s a bad deal for partners especially if Xerox has the controlling interest,” he said. “Xerox has a luckluster channel alignment compared with HP’s true go to market with partners. Xerox has a less channel friendly and channel focused model than HP particularly in the enterprise market.”

Furthermore, Venero said, Xerox’s offer never properly valued the HP PC business. “The PC business is alive and kicking and is going to continue to grow,” he said.

As for Icahn’s next move, Venero said: “This was a bad deal born out of nothing that was logical or doable. If you look at who benefitted from this, it was Icahn who profited when Xerox stock went up and when HP’s stock went up. I am sure Icahn accomplished what he wanted to at this point. Hopefully he goes quietly into the night because as they says this ship isn’t going to sail and this dog isn’t going to hunt.”

Combining Xerox and HP would bring together the leaders in printer and copier devices at a time when the industry is waning.

The Xerox takeover bid came just days after Enrique Lores took the helm as CEO of HP and the company began rolling out a reorganization and restructuring plan meant to improve efficiency and support investment in key areas.

Key partners of HP told CRN previously that they didn’t see the upside for HP if Xerox was successful in the takeover bid.

"This proposed move by Xerox has only negative outcomes for HP’s channel partners," said Harry Zarek, president and CEO of Compugen, No. 57 on CRN's 2019 Solution Provider 500.

"Xerox has historically been a direct sales organization and is still in the early stages of understanding how the channel model works," Zarek said. "Contrast that with HP as a mature, channel-focused business. There is a big cultural mismatch around Xerox being able to understand how today’s IT channel model works."

Notably, HP's personal systems business is nearly twice the size of its printing business, and the company is the second-largest PC maker worldwide and the largest in the U.S. HP generated $28.27 billion in personal systems revenue during its latest three quarters, up 2.4 percent year over year.

"Xerox has no skills in the PC market and would only be a negative influence on that business," Zarek said.

Additional Reporting By Steven Burke