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Xerox To Launch Direct Plea To HP Shareholders In Takeover Bid

CEO John Visentin says Xerox will attempt to rally support among HP shareholders for its $33 billion acquisition offer.

Xerox CEO John Visentin said the company will appeal directly to shareholders of HP Inc. for support of its proposed takeover, following a series of rejections of the acquisition offer by HP's board of directors.

In a letter to HP's board, posted on Xerox's website Tuesday, Visentin promised to follow through on previous threats to take the proposal to HP shareholders.

[Related: HP Slams Xerox For Going 'Hostile': 5 Things To Know]

"While you may not appreciate our 'aggressive' tactics, we will not apologize for them. The most efficient way to prove out the scope of this opportunity with certainty is through mutual due diligence, which you continue to refuse, and we are obligated to require," Visentin said in the letter. "We plan to engage directly with HP shareholders to solicit their support in urging the HP Board to do the right thing and pursue this compelling opportunity."

The battle for shareholder support could pit Xerox's offer of a 20 percent HP share price premium versus HP's options for boosting share value, such as stock buybacks.

"We have put forth a compelling proposal—one that would allow HP shareholders to both realize immediate cash value and enjoy equal participation in the substantial upside expected to result from a combination," Visentin said in the letter.

CRN has reached out to HP for comment.

In two letters to Visentin this month, HP's board has said it is interested in exploring a merger with Xerox but has a number of unaddressed concerns about Xerox's financial status.

Xerox's declining revenue and consensus revenue estimate misses in recent quarters are among the concerns, as is a decline in customer Total Contract Value, HP's board said in its latest letter, sent on Sunday.

In his Tuesday letter, Visentin fired back that "your comment regarding total contract value is little more than a diversion."

"Your own public disclosure states that backlog information is 'not a meaningful indicator of future business prospects' or 'material to an understanding of our overall business,'" Visentin said.

The HP board also raised concerns about Xerox's financing for the proposed deal, saying there are questions about Xerox's ability to raise the cash for the deal—and also about the "outsized debt burden" that would result even if the financing were obtained.

Visentin responded to this point as well, saying in his letter that "our offer is neither 'highly conditional' nor 'uncertain' as you claim. It does not contain a financing contingency, and the combined company is expected to have an investment grade credit rating."

In its letter to Xerox on Sunday, HP pointed to its own financial strength—with comparatively low debt and reliable cash flows—as the solution to creating shareholder value rather than taking the deal from Xerox.

There are "numerous opportunities available to HP to drive sustainable long-term value, including the deployment of our strong balance sheet for increased share repurchases of our significantly undervalued stock and for value-creating M&A," HP's board said in the Sunday letter.

Activist investor Carl Icahn has sizable ownership stakes in both Xerox (10.6 percent of shares) and HP (4.24 percent). Previously, Icahn was a central figure in dissolving Xerox's planned merger with Fujifilm in 2018 and installing Visentin—a longtime loyalist of the investor—as CEO of Xerox.

HP's board said in its letter to Xerox on Sunday that "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."

"We will not let aggressive tactics or hostile gestures distract us from our responsibility to pursue the most value-creating path," HP's board said in the letter, which was posted online and signed by HP CEO Enrique Lores and Board Chairman Chip Bergh.

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

However, HP is by far the larger company of the two. HP had a market capitalization of $29.82 billion as of the market close on Monday, compared to Xerox's market cap of $8.37 billion. HP had installed Lores, formerly the company's printing business president, as CEO just days before Xerox made its takeover offer.

Xerox's proposal offers $22 a share for HP, with $17 per share in cash and the rest in Xerox stock. That would represent a roughly 20 percent premium above HP's closing stock price on Nov. 5, just before the news of the takeover bid surfaced, and would value HP at about $33 billion. HP shareholders would end up with a 48 percent stake in the combined company.

The debt that would be used to finance the acquisition would likely be secured against HP's free cash flow, an analysis of Xerox's offer published by Bloomberg has found.

"Based on the gauntlet thrown down by Xerox, it looks as though the industry is headed for a shareholder fight with all its ensuing distractions," said Harry Zarek, president and CEO of Compugen, No. 57 on CRN's 2019 Solution Provider 500, in an email to CRN. Richmond Hill, Ontario-based Compugen in March was named HP Inc. Personal Systems Partner of the Year for Canada.

"HP tends to be very professional and conservative. If this is going to be a ‘street fight’ then HP needs to put everything into the approaching battle and go on the offensive," Zarek said. "Keep in mind the Xerox plan is to offer only sufficient stock so that the Xerox board will control HP with 52 percent of the equity of the combined entity. With its majority, Xerox will simply take HP’s cash to pay for part of the acquisition. The ‘icing on the cake’ would be having Xerox sell off the PC business to pay down the cash portion of the purchase."

Seeing this hostile move "should force the obvious strategic move by HP: Buy Xerox," Zarek said. "HP, with a market cap of $29 billion, should turn around and buy Xerox with a market cap of $8 billion. Does HP have the conviction to do this? Let’s hope so."

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