Xerox is serious about its acquisition of HP, and in case there was any doubt, on Jan. 6 it announced it has secured $24 billion in financing to do so. The announcement was, of course, accompanied by a letter signed by John Visentin informing HP’s CEO Enrique Lores and Board Chair Chip Bergh that Xerox is indeed capable of securing the funds to finance its proposed acquisition. “We have always maintained that our proposal is not subject to a financing contingency, but in order to remove any doubt, we have obtained binding financing commitments (that are not subject to any due diligence condition) from Citi, Mizuho and Bank of America,” reads the letter.

HP responded on Jan. 8 in a letter stating, “Xerox’s proposal significantly undervalues HP – and is not a basis for discussion. The HP Board of Directors remains committed to advancing the best interests of all HP shareholders and to pursuing the most value-creating opportunities.” Read it here.

The year has just begun, but it’s a safe bet this story will continue to capture our attention.

If we were making a movie about Xerox’s attempt to acquire HP, we would almost certainly include a scene where a disgruntled shareholder filed a lawsuit and the words “insider trading” were bandied about. Because of course, that is the kind of thing that is bound to happen in this type of situation — and it didn’t take long. Bloomberg reports that the Miami Firefighters Relief and Pension Fund, a Xerox Holdings shareholder, filed a lawsuit in New York state court on Friday, Dec. 13, alleging Icahn and his investment vehicle “breached their fiduciary duties to Xerox” by buying more than a billion dollars worth of shares of HP stock with the knowledge that “Xerox was either considering making an offer to purchase HP, had already approached HP about a possible merger into or acquisition by Xerox, or of the obvious merits of Xerox’s potential acquisition of HP.” If you recall, about a week after the first rumblings of the takeover bid, the Wall Street Journal reported Icahn had bought a $1.2 billion stake in HP, giving him a 4.24% stake in the firm. While it has not been revealed exactly when Icahn made that buy, Bloomberg reports that as of June 30 Icahn owned no shares of HP.

It’s unlikely the suit will derail the attempted takeover — that train keeps rolling as Xerox takes its takeover bid to HP’s shareholders. On Dec. 9, Reuters reported Xerox’s pitch said the combined companies could achieve revenue growth of $1 billion to $1.5 billion over three years, and the combined company would have free cash flow of more than $4 billion in the first year. Analysts remain skeptical.

Carl Icahn began the pitch in a Dec. 4 letter to HP shareholders, in which he called HP’s refusal to participate in mutual due diligence and plans to proceed as a standalone company “absurd,” “irrational,” and akin to “rearranging the deck chairs on the Titanic.” Icahn, who is the largest shareholder in Xerox and one of the largest in HP, calls the merger a “no-brainer” and implored “all HP shareholders who agree with me to reach out to HP’s directors to let them know that immediate action is necessary to explore this opportunity NOW while there is still a willing counterparty on the other side.”

On Nov. 26, after HP rejected its latest bid, Xerox issued a letter to HP beginning with “Dear Chip and Enrique, Your refusal to engage in mutual due diligence with Xerox defies logic,” went on to dispute HP’s claims that the Xerox offer is highly conditional and uncertain, espouse the benefits of a Xerox acquisition of HP, and attempt to refute what it calls “misleading claims” on the part of HP.

That entry in the chain of correspondence was a response to the Nov. 24 letter in which HP again rejected Xerox’s takeover bid, citing confidence in its own value-creating opportunities and stating it would not consider combining with Xerox without due dilligence. The letter addressed Xerox’s allusion to a potential hostile takover, noting, “It is clear in your aggressive words and actions that Xerox is intent on forcing a potential combination on opportunistic terms and without providing adequate information.” The letter continued by pointing out significant concerns about Xerox’s business, stating in part, “Given how much of your business is based on contractual revenue, we are concerned about the decline in customer Total Contract Value (TCV) in excess of revenue declines, which suggests your revenues may decline even faster in future years.” However it also states “We remain prepared to study the potential value of a combination and to work quickly to learn more about your business trajectory.” Read the full letter here.

The letter was a response to a Nov. 21 letter from Xerox regarding its rejected — and according to HP, “unsolicited” — offer to acquire HP. The letter noted “unless you and we agree on mutual confirmatory due diligence to support a friendly combination by 5:00 p.m. EST on Monday, November 25, 2019, Xerox will take its compelling case to create superior value for our respective shareholders directly to your shareholders.”

That letter, addressed to HP’s CEO Enrique Lores and Board Chair Chip Bergh, was a response to a Nov. 17 letter from HP rejecting the $33.5 billion cash-and-stock offer put forth by Xerox on Nov. 5, saying it “significantly undervalues HP.” However, it indicates the deal is not off the table, stating, “We remain ready to engage with you to better understand your business and any value to be created from a combination.” Read that letter as well as the original offer letter here.

What keeps this saga most interesting is the fact that Carl Icahn is seemingly quite invested — literally — in making a merger happen. On Nov. 13 the Wall Street Journal reported Icahn had bought a $1.2 billion stake in HP, giving him a 4.24% stake in the firm. Icahn owns a 10.6% stake in Xerox. In a statement, HP said, “We are aware of Carl Icahn’s investment and are committed to doing what is in the best interests of all HP shareholders.”

The background

On November 6, after several sources reported Xerox was planning to make a cash and stock offer for HP, HP confirmed the reports, issuing the following statement:

“As reviewed at HP’s most recent Securities Analyst Meeting, we have great confidence in our multi-year strategy and our ability to position the company for continued success in an evolving industry, particularly given the multiple levers available to drive value creation.

Against this backdrop, we have had conversations with Xerox Holdings Corporation (NYSE: XRX) from time to time about a potential business combination. We have considered, among other things, what would be required to merit a transaction. Most recently, we received a proposal transmitted yesterday.  

We have a record of taking action if there is a better path forward and will continue to act with deliberation, discipline and an eye towards what is in the best interest of all our shareholders.”

CNBC reported that Xerox’s cash and stock offer amounted to $22 per share, or $17 in cash and 0.137 Xerox share for each HP share.

Raising eyebrows is the fact that HP’s market value of around $27 billion is more than three times the size of Xerox, valued at approximately $8 billion. While rumors and speculation have centered around an HP-Xerox combination for some time, HP was expected to be the one doing the acquiring.

HP has been through some major changes in recent months, with Dion Weisler stepping down as CEO, to be replaced by Enrique Lores, and a major restructuring announced shortly after — all of which went into effect Nov. 1.

Xerox has also been in the news, with the acquisition rumors beginning less than a day after its announcement of a restructuring of the FUJIFILM relationship. That restructuring would include a sale of Xerox’s 25% stake in Fuji Xerox, a sale of its 51% stake in Xerox International Partners and a dismissal of the $1B lawsuit filed by FUJIFILM against Xerox last year after the failed merger attempt.

In that press release, Xerox CEO John Visentin said “These agreements reset our relationship with FUJIFILM and provide both companies with tremendous opportunities to grow, together and independently. These agreements also unlock significant unrealized value for our shareholders, provide greater clarity for our customers and help us speed our transformation to a digital-first company.”

The release also noted that Xerox “expects to use the proceeds opportunistically to pursue accretive M&A in core and adjacent industries … .”

We’ll be keeping an eye on this story and updating as warranted.

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