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HP Inc unveils shareholder value plan to curb Xerox bid

While Xerox gets ready to oust the HP Inc board, the company used its Q2 earnings call to announce a multi-year value creation plan

HP Inc says it is reaching out to Xerox to explore whether the two companies can reach a deal that creates value for HP shareholders. Any deal would need to build on HP’s latest strategic and financial plan, it said. 

To combat the Xerox threat, HP’s plan is to generate shareholder value and cut costs. As Computer Weekly has reported previously, Xerox’s announced intention is to replace the existing HP Inc board with 11 new members. At the time, HP claimed Xerox’s tactics were self-serving.

To tie in with its first-quarter 2020 results, HP Inc issued a statement describing the latest Xerox offer as a flawed value exchange, with irresponsible capital structure and overstated synergies. “The revised Xerox proposal, announced on 10 February 2020, meaningfully undervalues HP, creates significant risk, and compromises HP’s future,” said the company. 

It claimed that Xerox would use HP’s balance sheet as transaction consideration and create an “irresponsible capital structure” that would jeopardise the future value of the combined company and constrain its ability to invest in growth and innovation.

The transcript of the earnings call, posted on the Seeking Alpha financial bloggings site, shows that Xerox was referenced 36 times. Not surprisingly, the analysts on the call were keen to question the HP Inc executive team over Xerox’s proposal.

When asked about HP Inc’s plans to explore a deal with Xerox, CEO Enrique Lores said: “I think that any conversation we will have needs to address every issue that we outlined in the call. First, we need to make sure that the value exchange between the two companies reflects the real value of each of them. Second, the resulting entity needs to have a capital structure that makes sense, and that will be able to address the needs of the businesses that we'll be running. And third, it needs to be based on synergies that are realistic, and that can be achieved.

“This is a conversation that we think is possible to have at this point. And this is what we have opened the communication to – opened the engagement to talk about.”

HP Inc CFO Steve Fieler also referenced the forecast of $3bn to $3.5bn in free cash flow that HP Inc is expecting by the end of 2020, to demonstrate the company’s resilience. “Candidly, if we just reflect on the current situation with coronavirus and the working capital required to run a Personal Systems business, it is really important that you have that flexibility in your operating cash as we do today,” he said.

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HP Inc reported 2020 first-quarter net revenue of $14.6bn, down 0.6% from Q1 2019. Its Personal Systems saw an increase in net revenue of 2%, driven by sales of commercial PCs (up 7%). Printing net revenue was down 7% year on year. 

HP also unveiled a multi-year strategic and financial value creation plan that it claimed would deliver between $4.7bn and $5.1bn  of operating profit in fiscal 2022 and a capital return programme to include the repurchase of at least $8bn of HP shares over 12 months.

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

Responding to HP Inc, Xerox said: ““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 advisers announce on 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.”

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