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Is HP’s “Poison Pill” Defense Against Xerox Toxic for Investors?

By Leo Sun - Feb 26, 2020 at 7:20AM

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The tech giant’s defensive measures against a possible takeover bid could trap its own investors.

It's been a busy week for HP (HPQ 4.01%) investors.

On Feb. 20, the PC and printer maker adopted a shareholder rights plan to fend off Xerox's (XRX) hostile takeover bid. The "poison pill" plan would allow HP's current investors to buy additional shares at a discount if a single stakeholder accumulates over 20% of the company's existing shares.

That condition, which will last for a full year, would dilute Xerox's stake and make it difficult to hit the 80% threshold required for its tender offer to be approved. HP calls the plan a defensive move against Xerox's "coercive tactics to gain control without paying all shareholders an appropriate premium."

On Feb. 24, HP announced mixed first-quarter numbers. Its revenue dipped nearly 1% annually to $14.62 billion and missed estimates by $20 million. Its non-GAAP EPS, boosted by buybacks, rose 25% to $0.65 and beat expectations by $0.11. It also reiterated its stance against Xerox, stating that its latest bid "meaningfully undervalues HP, creates significant risk, and compromises HP's future."

HP also boosted its $5 billion buyback plan so it now totals $15 billion -- representing nearly half its market value -- and announced plans to return $16 billion to shareholders via buybacks and dividends between 2020 and 2022. Those moves could shore up HP's defenses against Xerox and buy it time to execute a turnaround. But could HP ultimately poison its own investors instead?

Two poison pills.

Image source: Getty Images.

HP's core business is still in trouble

HP generates most of its revenue from its personal systems business, which sells PCs and workstations. That business has remained broadly stable over the past year. However, HP generates most of its profits from the printing business, which sells printing hardware and supplies. The unit operates on a razor-and-blades model, in which HP sells lower-margin hardware to support recurring sales of its higher-margin ink and toner cartridges.

The printing business has been struggling over the past year. Sales of its commercial and consumer hardware declined amid longer upgrade cycles, and demand for its supplies withered due to competition from cheaper generic brands. That decline consistently offset the stable growth of HP's personal systems unit over the past year:

YOY revenue growth

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Personal Systems


















YOY = Year-over-year. Source: HP quarterly reports.

HP is trying to fix its printing business with three strategies. First, it scaled up the business by acquiring Samsung's printing unit and office equipment dealer Apogee. Second, it launched the Instant Ink subscription plan, which offers automatic refills for a monthly fee. Lastly, it pivoted the business toward industrial 3D printers.

Yet those plans haven't paid off. Its takeover of Samsung simply increased the weight of a dying business, the Instant Ink plan generally isn't economical for users who only occasionally use their printers, and its 3D printing business is still too small to move the needle.

What will HP's poison pill and buyback plans do?

Xerox's latest offer for HP values the company at $24 per share and consists of $18.40 in cash and 0.149 shares of Xerox per HP share. Xerox is also trying to replace HP's board with its own nominees and bypass the management with its tender offer.

Money flies out of a woman's tablet.

Image source: Getty Images.

HP's poison pill plan makes it nearly impossible for Xerox to close the deal, since its current investors would be allowed to buy a number of HP shares at a 50% discount if Xerox's stake ever rises above 20%. Xerox is significantly smaller than HP, and its balance sheet is already stretched thin after securing $24 billion in funding from three banks in early January.

HP's $15 billion buyback plan could set a floor under the stock, lower its valuation to demonstrate that Xerox's bid undervalues the company, and boost its EPS growth as its revenue growth stagnates. That's why HP expects its EPS to rise 4%-8% to $2.33-$2.43 for fiscal 2020, and continue climbing to $3.25-$3.65 by fiscal 2022.

However, HP didn't say much about generating revenue growth, so the poison pill and buyback plans could merely allow it to tread water as it explores divestments or mergers with other companies.

HP could also be leveraging these plans to force Xerox to raise its bid. In a press release, HP stated that it was still "reaching out to Xerox" to see if there was "a combination that creates value for HP shareholders."

Will HP poison its shareholders instead?

HP's poison pill plan and buybacks could temporarily prop up its stock if Xerox walks away, but they don't solve the company's long-term problems.

Instead of diluting or buying back its own shares, HP should consider buying Xerox, which has an enterprise value of just $10 billion, to scale up its printing business while maintaining control over the combined company. Otherwise, HP could merely be poisoning its own shareholders with its defensive measures.


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