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Dec 9, 2019

Xerox to woo HP investors with US$1.5 billion sales growth target

HP Rejects Xerox Offer as Too Low

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Xerox Holdings Corp. believes its proposed HP Inc. takeover would create as much as US$1.5 billion in potential revenue growth, according a presentation that will be made public Monday morning to HP’s shareholders.

The photocopier maker plans to outline its case for a tie-up between the companies Monday, arguing the combined firm will be worth about US$31 a share to HP investors on a pro-forma basis. The merged entity will generate more than US$4 billion in free cash flow in the first year before taking any synergies into account, according to the presentation.

“The value of the transaction goes beyond economics. In consolidating industries, first movers not only win but also have an opportunity to reshape the competitive landscape in an enduring way,” John Visentin, Xerox’s chief executive officer, said in the presentation.

Xerox has already said it believes the combination would create roughly US$2 billion in synergies, which it argues could be achieved in 24 months. Those savings could be achieved through streamlining their operations by reducing the number of suppliers the combined company would use, cost reductions on information technology and reducing its real estate footprint, among other measures.

The presentation for HP shareholders goes further, saying a merger of their operations would allow cross-selling and a unified platform for clients. That could yield an estimated US$1 billion to US$1.5 billion revenue growth, Xerox said.

To get to this amount, Xerox says it has a three-year roadmap that includes generating US$540 million to US$750 million from pitching complementary products to existing clients, US$50 million to US$100 million from manufacturing and distribution efficiencies and US$350 million to US$400 million from integrating HP products into Xerox’s office-as-a-service offerings.

It also said there could be US$300 million to US$400 million in growth from Xerox’s services and software and US$150 million to US$300 million from offering Xerox’s leasing options to HP customers. A representative for Xerox declined to comment, while a representative for HP couldn’t immediately comment.

HP last month rejected an unsolicited, cash-and-stock offer from Xerox worth US$22 per share, arguing it undervalued the company and citing concerns about the health of its smaller rival’s business. Xerox said it planned to take its case straight to HP’s shareholders after the Palo Alto-based hardware maker refused to grant the mutual due diligence it requested.

The presentation to be released publicly Monday is the first step in that effort, and Visentin will start meeting some HP shareholders this week to sell the plan. Xerox has asked for three weeks of mutual due diligence in order to validate its case for a tie-up, noting in the presentation it expects no financing conditions and no regulatory risks.

JPMorgan Chase & Co. analysts said this month that a merger carried risks and could cause some near-term downside in both stocks. Their Dec. 3 note added that the deal would leave investors more exposed to “a declining printer business.”

Activist investor Carl Icahn, who owns as stake in both companies, called on HP last week to push ahead with the talks, calling the deal a “no-brainer.” He accused the company’s directors and management of seeking to preserve their own jobs instead of protecting shareholders’ interests. He argued HP’s standalone plans amount “to little more than rearranging the deck chairs on the Titanic.”

Icahn is Xerox’s largest holder with a nearly 11 per cent stake in the Norfolk, Connecticut-based company. He also owns a 4.2 per cent of HP, making him its fifth-largest holder, according to data compiled by Bloomberg.