Company releases strategic plan to convince investors to reject its rival’s takeover efforts
HP is proposing massive share buybacks and aggressive cost-cutting as part of a multi-year plan meant to keep investors in the fold and keep them from considering Xerox’s $35 billion bid for the company.
The Lowdown: Even as HP officials reiterate that Xerox’s unsolicited proposal undervalues the company and overplays potential cost savings, they said in a statement that they’re “reaching out to Xerox to explore if there is a combination” that will create shareholder value above and beyond HP’s own plans.
The Details: The release of a strategic and value-creation plan is the latest effort by HP to push back at Xerox’s pursuit of the company, which not only includes the proposed price but also plans a tender offer to HP shareholders and an effort to have those shareholders replace the HP board with a slate chosen by Xerox.
Key parts of HP’s plans include:
> A $15 billion share buyback plan, up from an earlier $5 billion initiative.
> At least $8 billion in share repurchases within 12 months of its annual meeting.
> $16 billion in capital returns over three years, which is about half of HP’s current market capitalization.
> Increasing long-term return of capital to 100% of free cash-flow generation and keeping dividend-per-share growth at least in line with earnings.
> Following through on a recently announced cost-cutting program that will save $1.2 billion a year and increased productivity efforts that will bring in at least $1 billion.
The strategic plan will create $4.7 billion to $5.1 billion of operating profit in fiscal-year 2022 and $10.7 billion to $11.7 billion in free cash flow from fiscal-year 2020 through fiscal-year 2022.
The Impact: Along with returning more money to shareholders, HP also is continuing to criticize Xerox’s proposal, saying the bid is too low and that it would create an “irresponsible capital structure that would jeopardize the future value of the combined company and constrain its ability o invest in growth and innovation.” HP is about four times larger than Xerox and owns about 40% of the print market.
However, HP officials kept the door open to a possible merger with Xerox if such a deal was beneficial to HP investors.
Background: The release of the strategic plan came the same day HP announced quarterly financial numbers that were essentially flat. Revenue came in at $14.6 billion, compared with $14.7 billion during the same period last year. Net earnings were about $700 million, a slight year-to-year decline from $800 million. The plan also came days after HP unveiled a shareholder rights plan.
The Buzz: “HP is out of the gate strong in Q1, with outstanding earnings and a robust plan to create significant value for shareholders,” HP President and CEO Enrique 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. 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 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.”