HP rejects Xerox offer but leaves the door open

HP rejected a bid from Xerox to buy the company but indicated it was willing to keep talking about some sort of merger.

“Our Board of Directors has reviewed and considered your unsolicited proposal dated November 5, 2019 at a meeting with our financial and legal advisors and has unanimously concluded that it significantly undervalues HP and is not in the best interests of HP shareholders,” wrote Enrique Lores, president and CEO of the Palo Alto, California-based company, in a letter that the company made public on Nov. 17.

In particular, HP said it was concerned about the debt levels the merger could produce – reportedly $25 billion – a concern shared by a number of industry watchers after the initial proposal.

But Lores left the door open a crack.

“We recognize the potential benefits of consolidation, and we are open to exploring whether there is value to be created for HP shareholders through a potential combination with Xerox,” he wrote. “We remain ready to engage with you to better understand your business and any value to be created from a combination.”

Specifically, Lores cited several requests for diligence from Xerox on issues such as revenue decline and potential synergies. HP is currently in court with Autonomy, a British company it acquired in 2011 for more than $11 billion – a deal ranked by CB Insights as the sixth-worst corporate merger of all time. HP had to write off $9 billion of the purchase price the following year and was criticized by having done insufficient due diligence on Autonomy’s revenues.

HP also released a copy of the Xerox offer letter, which noted that $2 billion of synergies Xerox believed the acquisition could produce consisted of $0.5 billion by leveraging scale, supply chain and distribution, and $1.5 billion by combining research & development groups and streamlining corporate functions.

It is unclear what the effect of such a merger would have been on the HP facility in Boise.

Some analysts had speculated after the initial offer that it was a ploy to get HP – which has a market capitalization ranging from $27 billion to $29 billion, compared with Xerox’ market capitalization of about $8 billion – to buy Xerox instead.