HP Unfettered By Xerox – States Hostile New Move Is “Self Serving Tactic”

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The back and forth between Xerox Holding  Corporation (NYSE:XRX) and HP Inc (NYSE:HPQ) reached a new level today as the Norwalk, Connecticut-based company has officially published a list of directors that it will push forward for election at HP's upcoming shareholder's meeting. The list consists of executives with areas of expertise ranging from mergers and acquisitions to banking, legal and finance.

The photocopy and office equipment manufacturer has currently made an acquisition offer of $22/share to HP Inc's board and shareholders. HP's management has been stubborn in its efforts to refuse Xerox's price and consistently stated that the price undervalues HP and is therefore against the best interests of the company's shareholders.

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For its part, Xerox has steamrolled ahead and provided HP's shareholders with detailed plans of what it believes is an opportunity capable of providing them with an equity value worth $14/share. Now, in response to its tactic of aiming to force out current board members, an HP spokesperson has stated that Xerox's tactics are self-serving. As per the complete emailed statement, HP believes that:

These nominations are a self-serving tactic by Xerox to advance its proposal, which significantly undervalues HP and creates meaningful risk to the detriment of HP shareholders. 

Xerox 6500 in 1973.

HP Maintains Offer By Xerox Undervalues It and Does Not Serve Shareholder Interests

Xerox's $22/share offer to HP has a cash component of $17/share, and it's this area that the Palo Alto, California-based company's management has consistently stated will hurt shareholder interests. HP has been trading around for $22.08 on the market today, and the $14/share equity value boost that Xerox promises HP's shareholders is based on a price-to-earnings multiple reflecting Xerox's smaller size. HP has 1.5 billion shares outstanding at the time of writing, while Xerox has 229 million shares of its common stock floating on the market, and a higher share price.

However, when Xerox's cash offer of $17/share is combined wth the implied equity value of $14/share, this takes the total offer made by the office equipment manufacturer to HP's shareholders higher than the officially quoted $22/share. It is also higher than what the market currently deems HP to be worth.

Xerox promises that the deal will result in a 12.7% gross margin for the new entity, higher than what both companies can comfortably achieve at the moment. This will be possible through the utilization of both companies' strengths to create a balanced portfolio of products.

Xerox's premium calculations are based on a 30-day Volume Weighted Average Price for HP at November 5, 2019; Xerox Shareholder Presentation.

In its proposal, the company highlights that it sees the potential to cut down supplier size, cut IT costs, reduce SKU burden by streamlining logistics and bring down costs by 30%. Naturally, these measures will not sit well with what HP's current management has in mind for the company, and it's up to them to convince shareholders about how these reductions will, in the long run, reduce the combined entity's value to lower than what HP is currently trading for on its own on the open market.

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At this point, it's also important to keep in mind that Xerox plans to pay $24 billion for the entire deal through binding commitments made with a host of investment banks including names such as Citigroup and Mizuho. For reference, the $17/share cash portion of its offer translates roughly into $25.5 billion based on HP's share outstanding, so it's clear that Xerox will have to generate additional funds for the deal too, and from sources that it has not publicly stated as part of the deal. One wonders if Mr. Carl Icahn will step in here help Xerox and its chief executive officer Mr. John Visentin to make up for the shortfall.

For reference, Xerox had $1.084 billion in cash and $4 billion in long term debt at the end of its latest fiscal year. Cash is generally used by companies to fund working capital requirements.

Commenting on Mr. Icahn's involvement, HP's management has released the following remarks:

We believe that Xerox’s proposal and nominations are being driven by Carl Icahn, and his large ownership position in Xerox means that his interests are not aligned with those of other HP shareholders. Due to Mr. Icahn’s ownership position, he would disproportionately benefit from an acquisition of HP by Xerox at a price that undervalues HP.

Mr. Icahn has meaningful influence over Xerox and its Board of Directors given this ownership position; the role he played in the appointment of Xerox’s current CEO, who is a former Icahn consultant; and the ties Mr. Icahn has to members of the Xerox Board, including Xerox’s Chairman, an Icahn employee.

HP Inc's revenues have remained consistent over the past quarters but increasing costs have hurt net income. Source: Koyfin

HP's board has previously used its argument that Xerox's offer is undervalued to state that it will not proceed with the company's requests for due diligence. The board worries that the more debt Xerox takes for the deal, the larger the new entity's leverage will be. Which, if you're astute then you'll realize, will end up reducing the implied equity value benefit of $14/share that Xerox is offering HP's shareholders.

Now it'll be up to Xerox's board nominees to convince shareholders to give them and Xerox a chance at a time when HP is busy introducing changes to its top-line products. At the Consumer Electronics Show this year HP introduced the HP Elite Dragonfly notebook featuring 5G connectivity, a new Spectre x360 and the Envy 32 All-in-One desktop personal computer.

The company's revenues have steadily grown over the years since 2016 when they stood at $49 billion. Through its latest strategy shift, HP hopes to breathe new life in its printer and ink cartridge sales and focus on 3D printers.

Defending its board, HP Inc states that:

HP’s Board includes world-class directors who bring relevant skills and proven experience in advancing HP’s strategy across personal systems, print and 3D, and driving sustainable, profitable growth and value creation. This expertise includes:

  • Developing and implementing cost cutting plans to support both profitable growth and brand competitiveness in global markets as demonstrated by HP’s performance over the past three years, which includes $10.5 billion in revenue growth and $12.9 billion in cumulative cash flow from operations;
  • Evaluating and executing strategic mergers and acquisitions, including successfully overseeing complex integrations, including the Samsung printing business consolidation transaction;
  • Assessing capital allocation opportunities to maximize returns;
  • Developing disruptive technology and driving innovation across the consumer and enterprise technology landscape; and
  • Serving in executive leadership and corporate operating and strategic development roles for other large, global companies, including six current or former CEOs.

HP’s highly qualified directors also have experience in finance and accounting; government and public affairs; scientific research, product development and issues management; corporate governance; and international business in key regions where HP operates around the world.

Updated with full contents of the press release. 

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