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HP to Xerox: now is not the time

“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,” HP has told its shareholders in a letter. It warned that any large-scale transaction in the current economic environment could be disastrous.

Building 3 Entrance Med
  HP HQ in Palo Alto, California

"As a community, we are all focused on managing the unprecedented COVID-19 pandemic with urgency and a deep sense of care,” said the letter signed by CEO and president Enrique Lores and chairman Chip Bergh:

1200px HP logo 2012.svg We are committed to doing everything we can to support those in need and respond to the challenges at hand. This pandemic is still unfolding, and it will impact people, the economy and business activities for months, if not longer.

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, including our shareholders, our millions of customers, our 250,000 partners, and our team of approximately 55,000 employees. We are actively managing many challenges, including assuring the health and safety of our people, addressing supply chain disruptions, monitoring and addressing our customers’ liquidity needs and, more broadly, ensuring HP is well-positioned to support people working remotely.

Xerox

At the same time, we are committed to protecting your investment in HP. Since Xerox launched its unsolicited exchange offer and nominated directors, the global social, economic and financial environments have changed radically. Despite this, Xerox continues to advance its tender offer and its proposed slate of directors in an effort to force a combination.”

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.

HP is a strong company with market-leading positions across Personal Systems, Print, and 3D Printing & Digital Manufacturing. We have a healthy cash position and balance sheet that helps us to navigate unanticipated challenges such as the crisis now before us, while preserving strategic optionality to allow us to build on our strengths for the future.

We have consistently expressed deep concerns about the irresponsible capital structure that is reflected in Xerox’s proposal. Their proposed structure would saddle HP with a level of debt that it could not support, potentially leaving the company without the cash needed to effectively run the business. We believe this would put the company at risk of being in financial distress immediately upon consummation of Xerox’s proposed transaction. On top of this, the highly leveraged capital structure Xerox wants to implement could threaten the stability of the entire HP ecosystem and the livelihoods of our employees, customers and partners.

With regard to the cash portion of Xerox’s proposal, it is also important that HP shareholders understand that there would be six to 12 months of significant uncertainty before knowing whether the conditions are satisfied, and the transaction could be funded and closed. Even if Xerox is able to maintain its bridge commitments and raise additional equity financing, which is far from certain in the current climate, there are many conditions to its proposal that create uncertainty. These include regulatory approval across many countries, funding of the bridge commitments, new funding for the ongoing business, and Xerox’s securing approval of the transaction by its own shareholders.

We remain firmly committed to creating value for our shareholders and the principles that we have articulated that drive value. This includes our focus on execution of our recently announced plans, achieving the cost savings we have announced, and returning capital to our investors while dealing with the unprecedented new circumstances in which we must now operate. 

We continue to be guided by our mission and values, as well the discipline of our management team and board who have the experience, skills, long-term perspective and temperament to provide stability and help HP navigate through the challenges and opportunities ahead.

We believe the Xerox proposal fundamentally undervalues HP, threatens the future of both companies, and creates an unacceptable level of risk to both HP and Xerox shareholders. Our duty now is to protect our organization – and your investment. And that’s exactly what we are going to do.

On Behalf of Your Board of Directors,

Enrique Lores and Chip Bergh.

 The full letter is here.