HP: Here's Why Merging With Xerox Is a Bad Idea

HP this weekend pushed back on Xerox's hostile takeover bid in a letter that characterizes the printer maker as deadweight that risks dragging down HP's business. The same letter also wonders whether Xerox can even raise the cash to buy HP.

"The HP Board of Directors is committed to serving the best interests of HP shareholders, not Xerox and its shareholders," the company said in the letter, which added: "We will not let aggressive tactics or hostile gestures distract us from our responsibility to pursue the most value-creating path."

One of HP's main complaints is Xerox's sagging revenue, which has been posting year-over-year declines in recent financial quarters. "Xerox's revenue has fallen from $10.2 billion to $9.2 billion (on a trailing 12-month basis) since June 2018, and this is expected to continue," the letter notes.

The PC maker also disagrees with Xerox's key reason for proposing the merger: that it'll save both companies $2 billion in costs over two years. HP last month already announced it was cutting up to 16 percent of its workforce, so the company doesn't expect a merger with Xerox to produce major savings.

The other problem is Xerox's recent decision to sell the company's stake in Fujifilm for $2.3 billion. According to HP, "Xerox essentially mortgaged its future for a short-term cash infusion," all the while leaving a "sizeable strategic hole" in the printer maker's technology portfolio, the company claimed in the letter.

"In addition, we have concerns as to the state of Xerox's technology resources, research and development pipeline, future product programs, and supply continuity and capability," HP added. "Finally, we note that Xerox will have to get access to the fastest growing Asia Pacific region."

So far, Xerox hasn't responded to the letter. But last week, the printer maker threatened HP with a hostile takeover bid unless the two held a meeting by Nov. 25 to go over the details of a potential acquisition. Xerox is offering to buy HP at $22 per share, or $33.5 billion.

"The overwhelming support our offer will receive from HP shareholders should resolve any further doubts you have regarding the wisdom of swiftly moving forward to complete the transaction," Xerox wrote at the time.

HP isn't completely killing off the idea of a merger. But the company claims Xerox has no interest in going over the fine details of whether the deal makes business sense. According to HP, Xerox brought up the potential merger in private discussions back in August and September. But during all that time, Xerox declined to let HP carry out "due diligence" and scrutinize the printer maker's business.

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"We repeatedly raised our questions; you failed to address them and instead walked away, choosing to pursue a hostile approach rather than continue down a more productive path," HP said in the letter. "But these fundamental issues have not gone away, and your now-public urgency to accelerate toward a deal, still without addressing these questions, only heightens our concern about your business and prospects."

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