HP Says Xerox Offer Flawed, Irresponsible, Overstated but Willing to Explore Merger

HP Inc. today 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.

Under this value creation plan, 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.
Enrique Lores, President and CEO, HP Inc.

“HP is out of the gate strong in Q1, with outstanding earnings and a robust plan to create significant value for shareholders,” said Enrique Lores, President and CEO, HP Inc. “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.”

Lores added, “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.” 

Chip Bergh, Chair of HP’s Board of Directors

“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 it 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.”

As part of HP’s value creation plan for shareholders, HP’s Board of Directors has 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. 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.

HP is increasing its target long-term return of capital to 100% of free cash flow generation, unless higher return opportunities emerge. HP intends to maintain dividend per share growth at least in line with earnings.

HP is committed to maintaining an investment-grade rating, targeting a gross Debt-to-EBITDA ratio of 1.5x to 2.0x. HP plans to use its cash and available debt capacity to support this capital return program.

Xerox Proposal: Flawed Value Exchange, Irresponsible Capital Structure, Overstated Synergies

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.

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.

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 has beat or met non-GAAP diluted net EPS guidance for all 17 quarters as a standalone company, including strong earnings growth as separately announced today, and has beat or met free cash flow guidance for four out of four years since HP’s separation.

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.

HP’s Board and management team are committed to continuing this record of profitable growth, strong cash generation and capital return. The Company’s strategy is focused on advancing its leadership in Personal Systems and Print, disrupting industries with breakthrough technologies across Graphics and 3D Printing & Digital Manufacturing, and transforming the way it works to continue to optimize its cost structure.

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