HP has announced it will return US$16-billion to shareholders, primarily through buybacks, and boost cost cuts, trying to rally investors against Xerox for control of the world’s second largest PC maker.
HP will increase share repurchases to $15-billion from a $5-billion programme announced in October. This will result in adjusted profit of $3.25 to $3.65/share in the 2022 financial year, which is about $1 more per share than analysts’ projections. HP executives also said they have engaged Xerox to discuss a potential combination on their terms, rather than succumbing to the printer maker’s hostile takeover effort.
The hardware giant raised its profit forecast for fiscal 2020 to as much as $2.43/share, excluding some expenses, bolstered by the surge of share repurchases scheduled after the company’s annual meeting. For the current period, profit will be $0.49 to $0.53/share, the Palo Alto, California-based company said on Monday in a statement. The forecast fell short of Wall Street’s estimate of $0.54, according to data compiled by Bloomberg.
HP executives said supply-chain disruptions related to the coronavirus outbreak will cost the company about $0.08/share in adjusted profit in the current quarter. HP doesn’t expect the virus known as Covid-19 to affect performance in the second half of 2020.
The company also said it would raise its cost-cutting programme to $1.2-billion by 2022. HP, which had 56 000 workers as of October, is in the midst of a restructuring that could result in as many as 9 000 employee dismissals.
HP’s shares gained about 4% in extended trading after closing at $22.10 in New York. The stock has declined about 7% in the past 12 months.
HP has repeatedly rejected Xerox’s effort to secure a $35-billion acquisition, saying it “significantly undervalues” the company. A deal would unify two icons of the technology industry that pioneered innovations consumers and office workers still use today, but have faded in an industry increasingly driven by software. Xerox has said it will launch a tender offer “on or around 2 March” for HP shares valued at $24 in cash and stock. For each HP share, a holder would get $18.40 in cash and 0.149 Xerox shares. Norwalk, Connecticut-based Xerox has also started a proxy fight, nominating 11 candidates for HP’s board to help close the deal.
“We had a very strong first quarter, are putting in place a very aggressive plan and we are confident we can deliver on it, as we have in the past,” HP CEO Enrique Lores said in an interview. “We are open to explore a combination. Any combination needs to address three issues: it needs to reflect the right value exchange, needs to have the right capital structure and needs to have the right assessment of synergy.”
HP believes a deal with Xerox would only unlock $1-billion in cost savings, not the $2-billion Xerox executives have promised, because only 10% of their businesses overlap, Lores said. HP will use a combination of cash on hand and debt to fund the buybacks. Chief financial officer Steve Fieler said he expects to take out a “few billion” dollars of debt. The company is committed to retaining a debt ratio of 1.5 times to two times profit, from 1.1 times currently.
Xerox’s largest investor, activist Carl Icahn, has pushed for a tie-up in any form, so long as Xerox CEO John Visentin leads the combined company.
HP structured the buybacks as an incentive for investors to reject Xerox’s director candidates. If shareholders vote against the challengers, they’ll start to see a benefit from $8-billion in buybacks over the next year, according to HP. The company said it would issue a proxy statement in the next week to announce the date of its annual meeting, which is usually in April.
For a year, HP has sought to stabilise its profitable printing division, which started stumbling in February 2019 due to lower customer demand for ink and toner. Revenue declined less than 1% to $14.6-billion in the period ended 31 January. Sales in the printing division fell 7% to $4.7-billion, with ink supplies dropping 7% in the period ended 31 January. Consumer hardware revenue declined 13% and commercial devices decreased 1%.
In response to the falling ink sales, HP plans to change its business model starting late this year to make some printers profitable upfront, rather than heavily discounting them and making up the difference with ink sales. The company’s cheap printers will now be incompatible with generic or counterfeit ink cartridges.
HP is the leader in the printing industry, with 20.6% of the market by revenue, according to research firm Gartner. Xerox is fourth, with 10% of the industry.
Revenue from PCs increased 2.4% to $9.9-billion in the quarter, despite disruptions from the coronavirus outbreak. There were sales increases across laptops, desktops and workstations. Corporate clients are upgrading their computers to adopt Microsoft’s Windows 10 operating system. — Reported by Nico Grant, with assistance from Scott Deveau, (c) 2020 Bloomberg LP