HP Inc warns of M&A uncertainty due to coronavirus

Wth Xerox set on its attempt to oust the HP Inc board, HP has written to its shareholders, emphasising the goal of the existing board to increase the value of their investments.

Starting the letter by referring to the coronavirus crisis, Enrique Lores, president and CEO of HP, wrote: “As a community, we are all focused on managing the unprecedented Covid-19 pandemic with urgency and a deep sense of care. 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.”

Lores went on to say that while HP has continued to support millions of customers, 250,000 partners and its team of about 55,000 employees during the crisis, it remained committed to protecting shareholders’ investment. “Since Xerox launched its unsolicited exchange offer and nominated directors, the global social, economic and financial environments have changed radically,” he wrote. “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 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 is abundantly clear that now is not that time.”

As global stock markets plummet because of market concerns over government remedies and stimulus packages to combat the economic fall-out from coronavirus, HP Inc has seen its share price fall from $23.70 on 25 February to a low of $12.90 on 18 March, according to data from the financial blogging site Seeking Alpha. The share price, as of 26 March, is $16.12, which puts the company’s market capitalisation at $22.1bn. 

Given that in February, Xerox increased its offer price for HP Inc from $22 to $24 per share to acquire its rival for $36bn, the stock market decline has pushed the value of HP Inc considerably lower than the Xerox bid.

In a bid to allay investors’ fears, Lores said: “Our focus must now be on ensuring that we remain strong and resilient throughout this crisis while continuing to position the business for the opportunities ahead. This includes continuing to advance our leadership in our core businesses and disrupting new industries with breakthrough innovation, while significantly reducing our costs to become a more agile company.”

Lores suggested that, in the current economic climate, Xerox may not be able to raise the equity it requires to acquire HP, and any deal would require regulatory approval. “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,” he said.

“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.”

On 10 March, Xerox reaffirmed its commitment to push ahead with the proposed acquisition of HP, stating: “As a result of market-wide circuit breakers procedures implemented by the NYSE [New York Stock Exchange] on 9 March 2020, the trading of HP shares was temporarily suspended. For the avoidance of doubt, Xerox does not consider this temporary trading halt to constitute a failure of any condition to its offer to acquire HP.”