HP Is Playing Hard To Get, But Its Rejection Could Lead To Proxy Wars

HP Inc HPQ rejected Xerox Holding Corporation's XRX's $33.5 billion cash-and-stock offer. But this wasn't a simple second no to the bid but they went ahead to explain their sentiment of "feeling insulted." HP's board of directors found that this proposal significantly undervalues the company, as explained in a published letter on Sunday. So, things are definitely getting hostile.

HP Inc

Xerox had offered HP shareholders $22 per share. This deal involves a cash portion of $17 and 0.137 Xerox share for each HP share. HP feels that this is too little. Moreover, not only does HP feel that the proposal does not constitute a basis for due diligence or any sort of negotiation, but the board also wanted to emphasize that the company is not in any way dependent on a Xerox value combination. The company has great confidence in its strategy and its efforts to drive sustainable long-term value for its shareholders.

But there's no argument that HP is facing some heavy headwinds as the company announced in October it would lay off between 7,000 and 9,000 workers. But this is part of its broad restructuring plan is aimed at saving the company $1 billion a year by the end of fiscal 2022. And still, HP has a more than three times greater market valuation than Xerox, valued at about $29 billion.

Xerox

Also in its letter, HP expressed concerns regarding Xerox's ability to raise the cash portion in question along with the prudence of the resulting outsized debt burden on the value of the combined company's stock even if the financing were obtained. Also, HP is worried whether Xerox's exit from Fujifilm's FUJIY joint venture earlier this month left a "sizeable strategic hole in Xerox's portfolio". And everyone, including HP, noticed the decline of Xerox's revenue on a trailing 12-month basis from $10.2 billion to $9.2 billion since June 2018. Moreover, its revenue has been declining since 2012 and was expected to decline to 9.24 billion in 2019.

But, on a brighter note, its stock jumped 16% on its earnings beat a month ago. Its shares rose due to beating FactSet estimates and the fact that the company upgraded its earnings and cashflow guidance.

There's a reason why Xerox is an icon of the printing solutions industry, but the reality is that this is a declining market as the world is becoming more and more digitalized. However, comparing to HP whose stock fell 14.1 percent year to date, even despite declining revenue, Xerox stock jumped 77 percent year to date. So, from that perspective, Xerox outperformed HP and not by an inch. Moreover, considering what Xerox has been through, it is pretty amazing it is still ‘healthy enough' to pull off making such a credible offer for buying yet another faded legend.

Outlook

Considering that Xerox threatened on Thursday to take its $33.5 billion buyout bid for HP hostile unless the company agreed to a "friendly" discussion in which it would open its books for due diligence before Monday, there seems to be a storm brewing. Especially since HP revealed in the letter that it minds the "aggressive attitude" and that Xerox is showing intent on forcing a potential combination on opportunistic terms and without providing adequate information. Proxy wars are on the horizon as Xerox's board of directors threatened to go to HP's shareholders if the company didn't reconsider the acquisition bid by 5:00 p.m. EST on Monday, November 25, 2019.

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