What happened
Shares of HP (HPQ -0.25%) have popped today, up by 14% as of 3:30 p.m. EDT, after the company released an open letter to shareholders yesterday after the market closed. The broader indexes are also jumping on continued hopes that the U.S. government will pass a historic stimulus bill to mitigate the economic fallout of the COVID-19 outbreak.
So what
After first asking nicely, Xerox (XRX) formally launched a hostile takeover of HP earlier this year by commencing a tender offer. HP's board had spurned multiple offers from Xerox. In a tender offer, an acquirer appeals directly to an acquisition target's shareholders as opposed to negotiating with the board of directors. In this case, Xerox is offering to acquire all outstanding HP shares for $24 per share -- the same price that HP's board turned down.
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HP's letter to shareholders urges them not to tender their shares to the famed maker of printers and copiers. The focus right now is dealing with the coronavirus crisis, and the board believes the takeover represents a distraction at the worst possible time and also undervalues HP.
Now what
"Any complex, large-scale, highly leveraged transaction in the current economic environment could be disastrous for HP, its shareholders and our entire ecosystem," CEO Enrique Lores and Chairman of the Board Chip Bergh wrote. "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 argues that the offer's structure -- which includes $18.40 and 0.149 Xerox shares for each HP share -- is "irresponsible," as it would saddle the combined business with massive amounts of debt at a time when companies need as much financial flexibility as possible to weather a potential recession caused by the virus. HP's market cap is currently about six times as large as Xerox's.
"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," HP wrote.
