Commentary

HP Turns Down Xerox's Proposal But Leaves Door Open For Due Diligence

The HP board of directors yesterday unanimously rejected a takeover bid from the smaller Xerox yesterday. It cited several reasons, starting with what it perceives as a lowball bid of $22 per share, but that doesn’t mean it’s not interested in being courted -- or courting.

HP “said Sunday that the cash and stock deal undervalues its business and its board cited concerns about ‘outsized’ debt levels should the companies combine,” writes  the AP’s Sarah Skidmore Sell. 

But “we remain ready to engage with you to better understand your business and any value to be created from a combination,” concludes  the “Dear John” letter from HP president and CEO Enrique Lores to Xerox Holdings Corp. vice chairman and CEO John Visentin.

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“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,” the letter also states, suggesting that “a rigorous analysis of the achievable synergies from a potential combination” is in order.

“HP pressed for access to Xerox’s books as a step toward any potential combination, which would unite iconic brands and reshape the printing industry. Norwalk, Connecticut-based Xerox is one of the biggest sellers of photocopiers, while Palo Alto, California-based HP is one of the world’s largest printer makers. A representative for Xerox wasn’t immediately available for comment,” write  Bloomberg’s Jim Silver and Scott Deveau.

“The potential union got a significant push last week from activist investor Carl Icahn, who told The Wall Street Journal that a deal is a ‘no-brainer' that would increase returns for shareholders of both companies. Mr. Icahn has a long history with Xerox, in which he owns a 10.6% stake, and he revealed a 4.24% investment in HP that makes him its fifth largest shareholder, according to FactSet,” Cara Lombardo writes for The Wall Street Journal.

“Mr. Icahn indicated he is open to alternate structures too, which presumably include an HP takeover of Xerox, an approach some analysts have said may make more sense,” Lombardo continues.

“I’ve found over the years that these types of companies that are in shrinking industries tend to decline much more slowly than many market participants may predict, while continuing to generate substantial amounts of cash,” Icahn said.

“Many analysts have said there is merit in the companies combining to better cope with a stagnating printing market, but some cited challenges to integration, given their different offerings and pricing models,” Reuters’ Greg Roumeliotis writes.

“Xerox scrapped its $6.1 billion deal to merge with Fujifilm last year under pressure from Icahn and [fellow billionaire businessman Darwin] Deason. Xerox announced earlier this month it would sell its 25% stake in the joint venture for $2.3 billion. Fujifilm also agreed to drop a lawsuit against Xerox, which it was pursuing following their failed merger,” Roumeliotis adds.

“HP announced in October that it will cut between 7,000 and 9,000 jobs by the end of fiscal 2022 as part of a broader restructuring plan that it estimates will save $1 billion a year. The cuts would amount to nearly 16% of its 55,000 employees across the world, according to data from FactSet,” CNBC’s Emma Newburger reports.

“HP and Xerox are indeed in shrinking industries. Arguably, their long-term declines were inevitable, for the number of big corporations that can remain at the apex of technologically vibrant industries for more than a generation or two can be counted on the fingers of one hand,” writes  Michael Hiltzik for the Los Angeles Times.

“But it’s also arguable that lack of imagination and stagnation bred by success also contributed to their fates. It’s possible to craft another rule of thumb out of the life stories of both Xerox and HP: When a company runs out of ideas for new products and new markets and turns instead to playing around with corporate restructuring, the handwriting is on the wall.”

Indeed, ink and paper-based products are not on anybody’s list of hot trends. I still remember the advice a mid-level editor at the then-vibrant New York Daily News gave to me when I was a 16-year-old copyboy adept at photocopying.

“The secret to my success is I never learned how to operate the Xerox machine,” he said. Only recently have I begun to understand that there might have been some wisdom in his arrogance.

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