In tandem with its Q1 2020 earnings report, Palo Alto, California-based HP rolled out a strategic and financial value creation plan that does not envision a union with Xerox. But it doesn’t completely close the door on Xerox CEO John Visentin and maverick shareholder Carl Icahn, despite HP’s adoption of the poison pill strategy late last week.
What Monday’s release essentially does say is that the acquisition vehicle Xerox has proffered to HP and its shareholders is fundamentally flawed.
Poison Pill Strategy
HP’s current positioning took form late last week, when the company said it would implement a poison pill plan lasting one year. This stockholder rights plan is devised to prevent investors from accruing more than a 20% stake in the company.
“The rights will not prevent a combination of HP with another business, but should encourage Xerox (or anyone else seeking to acquire the company) to negotiate with the board prior to attempting to impose some combination that is not in the best interests of the HP shareholders,” HP explained in a statement.
Xerox was anything but nonplussed following the announcement. “The HP board clearly adopted a poison pill because our offer is receiving overwhelming support from their shareholders. Regardless of what the company and its army of advisors announce Monday, we believe HP shareholders appreciate that the value we could create by combining Xerox and HP outweighs—and is incremental to—anything HP could achieve on its own. Despite the HP board’s intention to deny shareholders the chance to choose for themselves, we will press ahead with our previously announced tender offer and electing our slate of highly qualified director candidates.”
On Monday, HP and its “army of advisors” delivered a crushing blow to Xerox’s latest proposal increase of $2 per share with a laundry list of flaws it sees in the proposition, punctuated with a multi-year strategic and financial value creation plan that anticipates generating up to $5.1 billion of non-GAAP operating value in fiscal 2022. On the first point, while HP acknowledges the value industry consolidation can provide, as evidenced by its 2017 acquisition of Samsung’s printing business, it felt Xerox’s revamped offer “meaningfully undervalues HP, creates significant risk and compromises HP’s future.”
Proposal Flaws
The company cited three main talking points in its assessment of the Xerox bid, believing the proposal:
- Exchanges HP stock for cash and Xerox stock at a fundamentally flawed value exchange that does not compensate HP shareholders for the value of HP executing on its strategic plan and transfers value from HP shareholders to Xerox shareholders;
- Uses HP’s balance sheet as transaction consideration and creates an irresponsible capital structure that would jeopardize the future value of the combined company and constrain its ability to invest in growth and innovation; and
- Overstates the potential synergies by including HP’s existing plans for independent cost reductions and productivity gains.
HP also indicated 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.” This could translate as HP CEO Enrique Lores and Board Chair Chip Bergh preferring to set the tone for the terms, as well as which company will play the lead role in a combination.
In addition to the $3.25-$3.65 EPS promise in 2022, HP also announced a $15 billion share repurchase authorization program, with at least $8 billion in share repurchase within 12 months. The company is also targeting $16 billion capital return planned over three years, which represents roughly 50% of HP’s current market capitalization.
“HP is out of the gate strong in Q1, with outstanding earnings and a robust plan to create significant value for shareholders,” Lores said. “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.”
