HP says its new strategic plan, “supported by HP’s market leadership across personal systems, print, and 3D printing & digital manufacturing,” will deliver significant earnings growth and a new capital return program of about $US16 billion during 2020 to 2022. At its first quarter earnings announcement, HP dismissed a new takeover offer from competitor Xerox as irresponsible and overstated but added it was “reaching out to Xerox to explore if there is a combination that creates value for HP shareholders."
“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,” said Enrique Lores, president and CEO, HP Inc.
Xerox last week began hosting dinners for HP shareholders seeking support for its $35 billion bid to buy its larger printing market rival.
HP Inc. announced “a multi-year strategic and financial value creation plan that is expected to deliver $3.25 to $3.65 non-GAAP diluted net EPS by 2022. This significant expected earnings growth is supported by HP’s market leadership and track record of execution across Personal Systems, Print, and 3D Printing & Digital Manufacturing, disciplined and sustained cost actions, as well as a new capital return program of approximately $16 billion during fiscal 2020 to fiscal 2022.
"HP expects to generate: $4.7 billion to $5.1 billion of non-GAAP operating profit in fiscal 2022; $10.7 billion to $11.7 billion of cumulative free cash flow in fiscal 2020 through fiscal 2022; and $1.2 billion structural cost reductions in fiscal 2022 with flow through to non-GAAP operating profit of approximately $650 million."
The new strategy was outlined at HP Headquarters in Palo Alto, California as the company released its first quarter results and a video (above).
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'Xerox proposal meaningfully undervalues HP':
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"HP is out of the gate strong in Q1, with outstanding earnings and a robust plan to create significant value for shareholders,” said Lores. “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.”
HP’s Board of Directors authorized a capital return program that will target the return of capital of approximately $16 billion to HP shareholders during fiscal 2020 to fiscal 2022. This represents approximately 50% of HP’s current market capitalization. The Company has also increased its total share repurchase authorization to $15 billion, up from the $5 billion share repurchase authorization announced in October 2019.
“HP expects implementation of this capital return program to include the repurchase of at least $8 billion of HP shares over 12 months, commencing following HP’s 2020 annual meeting,” said a press release. “This plan builds on HP’s strong history of generating strong free cash flow and returning capital to shareholders, with a total return of $9.1 billion over the last three years."
The company described Xerox’s latest takeover proposal as flawed, irresponsible and overstated.
“HP believes there is merit in industry consolidation which is why it acquired Samsung Printing in 2017. However, consolidation must benefit HP shareholders. The revised Xerox proposal, announced on February 10, 2020, meaningfully undervalues HP, creates significant risk, and compromises HP’s future.
“The revised Xerox 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.”
But HP did not slam the door shut. “HP 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.”
Expansion in Print
“HP is the market leader in Print with 40% unit share and the highest operating margins in the industry. In Print, HP is announcing today that it is establishing a long-term target operating margin range of 16% to 18%.
“HP 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, optimizing 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 monetizing 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.
“Over the last three years, HP has grown revenue by $10.5 billion, grown GAAP diluted net EPS by 45%, generated $12.9 billion in cumulative cash flow from operations and returned $9.1 billion, or 80% of free cash flow to shareholders.”
Last week, in a bid to fend off Xerox, HP said it would implement a stockholder rights (or 'poison pill') plan to stop investors from amassing more than 20% stake in the company.
Xerox, which has raised its buyout offer by $2 to $24 per share, said it had already received overwhelming support from HP shareholders for its bid.
“The HP board clearly adopted a poison pill because our offer is receiving overwhelming support from their shareholders,” Xerox said. “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.”
Activist investor Carl Icahn, who has a 4.2% stake in HP and a 10.9% stake in Xerox, has urged HP shareholders to accept the offer.
Xerox plans to nominate 11 independent candidates to HP’s board at the company’s next annual meeting.
