And – it’s over. The COVID-19 pandemic has upended a number of things – including the HP/Xerox deal. On March 31, Xerox issued a press release stating “The current global health crisis and resulting macroeconomic and market turmoil caused by COVID-19 have created an environment that is not conducive to Xerox continuing to pursue an acquisition of HP Inc. Accordingly, we are withdrawing our tender offer to acquire HP and will no longer seek to nominate our slate of highly qualified candidates to HP’s Board of Directors.” Read the full release here.

The ending was a bit anticlimactic after the months of back and forth, and not really all that surprising given the events of the last two weeks. Xerox had already given notice that it would postpone any activity, issuing a statement on March 13 saying, “In light of the escalating COVID-19 pandemic, Xerox needs to prioritize the health and safety of its employees, customers, partners and affiliates over and above all other considerations, including its proposal to acquire HP … we believe it is prudent to postpone releases of additional presentations, interviews with media and meetings with HP shareholders so we can focus our time and resources on protecting Xerox’s various stakeholders from the pandemic.”

On March 25, HP issued a letter to its shareholders emphasizing its answer was still “no” regardless of Xerox’s timeline. “Our primary responsibility in this difficult period is to focus on HP’s business and address the needs of our ecosystem of stakeholders around the world,” reads the letter in part. “It is important for shareholders to understand that, under these circumstances and consistent with our fiduciary duties, we believe that we should not divert valuable time, attention and resources to a dialogue with Xerox about its proposed transaction. Any complex, large-scale, highly leveraged transaction in the current economic environment could be disastrous for HP, its shareholders and our entire ecosystem. While we remain open-minded about M&A as a tool to add value for HP shareholders at the right time and on the right terms – it’s abundantly clear that now is not that time.”

Looking back

On March 9, Xerox announced it is filing a preliminary proxy statement with the SEC in support of its slate of independent candidates to replace the board of directors of HP Inc. at HP’s 2020 Annual Meeting of Stockholders. Xerox had previously announced a slate of 11 directors for election; following the expansion of HP’s board slate from 11 to 12 members, Xerox is adding Erroll B. Davis, Jr., former chairman and chief executive officer of Alliant Energy Corporation. “Today’s filing reflects continued progress towards a combination between Xerox and HP,” said Xerox vice chairman and CEO John Visentin.

On March 5, HP announced it recommended the rejection of Xerox’s March 2 tender offer to acquire all outstanding shares of HP Inc. for $24 per share in cash and stock. Upon receiving the offer, HP reported it would “carefully review and evaluate the offer.” After consultation with its independent financial and legal advisors, HP again stated the offer undervalues HP and is not in the best interests of HP shareholders, and unanimously recommended HP shareholders reject the offer and not tender their HP shares. The HP announcement included a list of 15 bullet points outlining factors that went into the determination, including the fact that the offer would disproportionately benefit Xerox shareholders, that Xerox does not have experience operating businesses in HP’s sectors, and that Xerox’s urgency in launching the offer “evidences Xerox’s desperation to acquire HP to address its continued business decline.” Read the full release here. The same day, Financial Times quoted HP CEO Enrique Lores as saying there are other M&A offers HP is analyzing.

Serving as a reminder that HP and Xerox are not the only two companies involved in the potential combination, on March 4, Nikkei Asian Review reported that longtime HP manufacturing partner Canon would cut ties with HP if Xerox’s acquisition plans went through. “The foundation of this partnership is, above all else, built upon a relationship of trust between the top management of both companies,” Canon CEO and Chairman Fujio Mitarai told Nikkei.

The March 2 Xerox offer followed HP’s Feb. 24 earnings announcement that was, as expected, accompanied by a “strategic and financial value creation plan” that includes a targeted return of capital of approximately $16 billion to HP shareholders. At the same time, HP once again stated that Xerox’s bid “meaningfully undervalues HP, creates significant risk, and compromises HP’s future,” also noting it is reaching out to Xerox to explore whether there is a “combination that creates value for HP shareholders that is additive to HP’s strategic and financial plan.”

On Feb. 20, HP announced it had adopted a limited duration shareholder rights plan and declared a dividend distribution of one preferred share purchase right on each outstanding share of HP common stock. The “poison pill” plan, in place for a year, is designed to stop any entity from acquiring 20% or more of HP shares — in effect, it is a way for HP to increase intrinsic shareholder value and make it more difficult for Xerox to woo HP shareholders directly in its efforts to force a merger of the two companies.

Forbes reports a Xerox spokesperson, in response to the announcement, said the HP board adopted the plan because “[Xerox’s] offer is receiving overwhelming support from their shareholders.”

In separate but equally interesting news, Bloomberg reported that, just as Xerox was planning to go public with its takeover offer, Carl Icahn, on a phone call with HP’s Enrique Lores, proposed the idea of HP acquiring Xerox for $45 a share. HP executives reportedly felt the offer overvalued Xerox.

On Feb. 10, Xerox increased its offer for HP to $24 per share, an offer comprised of $18.40 in cash and 0.149 Xerox shares for each HP share.  Xerox said the offer will enable HP stockholders to “accept Xerox’s compelling offer despite HP’s consistent refusal to pursue the opportunity.” Xerox said it had met with HP’s largest stockholders, who want the “enhanced returns, improved growth prospects and best-in-class human capital that will result from a combination of Xerox and HP.”  Xerox also launched a website, XeroxplusHP, to provide “additional details on the offer, the benefits of the transaction to both companies’ stockholders, and the Xerox management team.” In case the money wasn’t enticing enough, Reuters reports Xerox plans a “charm offensive,” inviting some HP shareholders to a dinner at a restaurant in Greenwich, Connecticut, on Feb. 18.

HP did not directly respond to the offer, instead noting in a press release advising of its Feb. 24 Q1 earnings announcement, “when out of its quiet period, HP will share additional information about its plan to drive sustainable long-term value for its shareholders, including through the execution of the Company’s multi-year strategic and financial plan and the deployment of its strong balance sheet. HP wants its shareholders to have full information on the Company’s earnings and the value inherent in the Company before responding to Xerox’s February 10 press release.” Barron’s reports a stock buyback seems likely, quoting analyst Amit Daryanani who noted that based on the language in HP’s press release, he thinks “HP will likely pursue a stand-alone path, perhaps initiating a large share repurchase, and could announce incremental cost-cutting measures.”

On Jan. 28, Xerox announced its own fourth-quarter and full-year 2019 earnings, which exceeded EPS guidance. “We are delivering on our three-year plan. We grew earnings per share, increased cash flow and expanded adjusted operating margin for the full year, and we improved our revenue trajectory in the second half of the year as our investments in the business gained traction,” said Xerox Vice Chairman and CEO John Visentin. “We accomplished this while returning more than 70 percent of free cash flow to shareholders, paying down approximately $950 million in debt and increasing investments in our innovation areas. We are well-positioned to carry this momentum into 2020 and lead the way for long-overdue industry consolidation.”

HP was not impressed.

“Xerox’s results do not alleviate the fundamental concerns about the continued revenue declines and health of the Xerox business,” HP said in a statement Tuesday morning, reported by Barron’s. “The fact remains: Xerox is relying on HP’s balance sheet to advance its proposal, which significantly undervalues HP and would require our shareholders to exchange the value of our businesses and the opportunities afforded by our balance sheet for stock in a company of questionable value and exposed to meaningful risk, due to inordinate leverage and sustained, declining performance.”

Xerox recently bought a small stake in HP and plans to nominate 11 members to the HP board of directors, according to a Jan. 21 Wall Street Journal report. Xerox confirmed the board nominations in a Jan 23 press release stating it intends to nominate 11 independent candidates to replace HP’s Board of Directors at HP’s 2020 Annual Meeting of Stockholders. The release lists the names and bios of its nominees, which include former senior executives from companies including Aetna, United Airlines, Hilton Hotels, Novartis and Verizon. There was no further information on Xerox’s stake in HP.

HP quickly responded to the news with a statement of its own, calling the move “a self-serving tactic by Xerox” and stressing the value of its current board. It noted, “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.”

On Jan. 6, Xerox announced it had secured $24 billion in financing for its planned HP purchase. Xerox’s Visentin noted, “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.” 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.

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. Bloomberg reported 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 … .”

This is a continually updating story, and new information is added as it is received.

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