The move to return about half of HP’s market capitalisation to investors is a de facto poison pill to block Xerox’s takeover approach. The added leverage makes it a lot harder for Xerox to buy HP, which is three times its size

By Ian Horswill

Posted on February 25, 2020

Xerox CEO John Visentin had launched a hostile takeover of rival PC, printer and related supplies multinational business HP.

Xerox, it was reported in November last year, had a bid around US$33.5 billion for its bigger rival rejected on the grounds it undervalued HP and wasn’t in the best interest of shareholders. Xerox then after meeting directly to shareholders several times raised the offer by about 10% – US$24 per share (US$18.40 per share in cash and 0.149 Xerox share per share of HP), about US$34 billion – earlier this month.

Xerox said in a media release the sweetened bid would enable HP’s shareholders to “accept Xerox’s compelling offer despite HP’s consistent refusal to pursue the opportunity”.

“The value created by the synergies realised in a combination of Xerox and HP is incremental to any value that HP can create by revising its strategic plan or dramatically changing its capital allocation policy to incorporate additional share repurchases,” Xerox said in the release. “Xerox’s offer provides HP stockholders with both significant, immediate cash value, and meaningful upside via equity ownership in the combined company.”

HP did not immediately make a public statement. However, after reporting earnings for its fiscal first quarter 2020 with sales down a fraction of a percent year over year and earnings down 10% at $0.46 per share, higher than analysts had predicted, it revealed its free cash increased 67%.

The Palo Alto, California-based company announced an aggressive plan to return up to US$16 billion to its shareholders in the next three years.

HP said that it would repurchase at least US$8 billion worth of HP shares over the next 12 months. By 2022 it planned to buy back US$7 billion more worth of stock and generate savings of US$1.2 billion.

Ranked No. 58 in the 2018 Fortune 500 list of the largest US corporations by total revenue, the company said it would divert all of its free cash flow to share buybacks unless other opportunities emerged with a higher return potential. The remainder of the buyback cost would be funded with debt, increasing HP’s debt ratio to up to two times earnings before interest, tax, depreciation and amortisation.

The move to return about half of the company’s market capitalisation to investors is a de facto poison pill to block Xerox’s takeover approach. The added leverage makes it a lot harder for Xerox to pay for a takeover.

CEO Enrique Lores told the Financial Times that a deal was possible under different terms, such as HP buying Xerox. 

“We are willing to engage with them,” Lores told the Financial Times in a phone interview. “It is not about who buys what, it is really about creating value.”

Lores was appointed CEO in August last year, effective 1 November, succeeding Dion Weisler. He joined the company 31 years ago as an engineering intern and rose to increasingly prominent leadership positions across the company’s Print, Personal Systems and Services businesses. From his technical roots, he developed broad leadership expertise and relationships working at the country, region and worldwide level. Throughout his career, he has been known for his relentless focus on serving customers and partners and his passion for driving innovation.

During the separation of Hewlett-Packard Company in 2015, Lores was a key architect of one of the largest and most complex corporate separations in business history and successfully led the Separation Management Office. He was instrumental in transforming HP’s cost structure while simplifying the organisation and creating the capacity to invest in innovation to drive profitable top and bottom-line growth.

Since 2015, Lores has served as President of HP’s Imaging, Printing and Solutions business, which had revenues of over US$20 billion for fiscal 2018 and has consistently outperformed the company’s printing peer set. He continues to reinvent HP’s Print business with a focus on differentiated innovation, business model transformation and strategic M&A – including HP’s acquisition of Samsung’s printer business in 2017 – while fostering important ecosystem partnerships and demonstrating an industry-leading commitment to sustainable impact and the environment, the company said.