HP to Xerox: Can we talk…

February 25, 2020

As the to and fro of the hostile takeover continues HP said it is reaching out to Xerox to explore if there is a combination that creates value for HP shareholders that is additive to HP’s strategic and financial plan.

HP Inc. (HP) recently announced a multi-year strategic and financial value creation plan that is expected to deliver $3.25 (€2.99) to $3.65 (€3.36) non-GAAP diluted net earnings per share (EPS) by 2022 and said it is reaching out to Xerox to explore if there is a combination that creates value for HP shareholders that is additive to HP’s strategic and financial plan.

According to HP, this significant expected earnings growth is supported by HP’s market leadership and track record of execution across Personal Systems, Print, and 3D Printing and Digital Manufacturing, disciplined and sustained cost actions, as well as a new capital return programme of approximately $16 billion (€14.75 billion) during the 2020 to 2022 financial years.

Under this value creation plan, HP expects to generate:

$4.7 billion (€4.33 billion) to $5.1 billion (€4.7 billion) of non-GAAP operating profit in fiscal 2022
$10.7 billion (€9.86 billion) to $11.7 billion (€10.79 billion) of cumulative free cash flow in fiscal 2020 through fiscal 2022; and
$1.2 billion (€1.1 billion) structural cost reductions in fiscal 2022 with flow through to non-GAAP operating profit of approximately $650 million (€599 million).

“HP is out of the gate strong in Q1, with outstanding earnings and a robust plan to create significant value for shareholders,” said Enrique Lores, President and CEO, HP Inc. “Our three-year financial targets reflect a company at the top of its game, combining the industry’s best innovation with disciplined cost management and aggressive capital returns to support a compelling investment in both the short and long term.”

Lores added: “Our commitment to HP shareholders is unwavering and it’s abundantly clear the revised Xerox proposal meaningfully undervalues HP, creates significant risk and compromises the future of our company.”

“The HP Board is united in its full support of the Company’s strategy and team. HP has a proven track record of consistent value creation and it is well positioned in both Print and Personal Systems to drive operating profit growth and attractive shareholder returns,” said Chip Bergh, Chair of HP’s Board of Directors. “Our new capital return program enables us to optimize our balance sheet while maintaining the appropriate capital structure for the business.”

HP says it believes there is merit in industry consolidation which is why it acquired Samsung Printing in 2017. The company added that consolidation, however, must benefit HP shareholders. The revised Xerox proposal, announced on 10 February 2020, meaningfully undervalues HP, creates significant risk, and compromises HP’s future, the company said.

HP added it is reaching out to Xerox to explore if there is a combination that creates value for HP shareholders that is additive to HP’s strategic and financial plan. HP’s Board of Directors is committed to pursuing the most value-creating path and to serving HP shareholders’ best interests.

HP announced it is executing a consistent strategy to evolve its Print business model to deliver greater choice, convenience and value to its customers, and increasing the recurring nature of print revenue. This includes executing on its playbook to increase share in supplies, continuing to grow contractual revenues in consumer and enterprise, optimising system profitability to rebalance system value towards hardware, and growing its graphics and 3D portfolio to lead the analogue to digital transformation.

In 3D Printing & Digital Manufacturing, HP’s decades of innovation investment have created new businesses for the Company and enabled a strong track record of growth. By monetising its highly differentiated IP, HP is extending beyond hardware to transform manufacturing and build a complete solutions ecosystem to capture substantial market opportunity and unlock new sources of value.

Editor’s Opinion: The HP board is united in the strategy, sounds a bit like a football club united in support of the manager who then gets fired a few weeks later. You have to ask yourself if the HP reinvention plan will work when HP’s Printing segment net revenue was down 7% year-over-year and the supplies net revenue was again down 7%.

Expect Xerox to come back again with a stronger offer and the two of them will get closer to a deal.