Xerox (NYSE:XRX) recently ended its hostile bid for HP (NYSE:HPQ) amid the escalating COVID-19 crisis. Xerox's final offer for HP was valued at $24 per share, but the offer consisted of $18.40 in cash and 0.149 shares of Xerox for each HP share.

Xerox's stock price has plunged more than 50% since the beginning of the year, so it needed to either boost its cash offer or offer more shares to maintain that $24 per share offer. Xerox, which is smaller than HP, was already stretched thin after securing $24 billion in funding in January, so it probably couldn't have offered more cash.

Letter dice spelling "Deal? Yes/No"

Image source: Getty Images.

HP also adopted a poison pill strategy in late February, which allows current investors to buy additional shares at a discount if Xerox accumulates over 20% of its existing shares. That dilution would have made it tough for Xerox to gain a controlling stake through its tender offer, which directly courted HP's investors instead of its board.

The end of the hostile bid marks a significant setback for activist investor Carl Icahn, who owned stakes in both companies and aggressively promoted the merger. But what does it mean for HP, which now faces an uncertain future without a savior waiting in the wings?

Reviewing HP's core problems

HP generated 68% of its revenue from its personal systems business, which sells notebooks, desktops, and workstations, last quarter. The remaining 32% came from its printing business, which sells printers and supplies. The personal systems remained broadly stable over the past year, but the printing business withered with poor sales of hardware and supplies.

Revenue Growth (YOY)

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Personal Systems

2%

2%

3%

4%

2%

Printers

0%

(2%)

(5%)

(6%)

(7%)

Total

1%

0%

0%

0%

(1%)

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

The weakness of HP's printing business is an ongoing problem since it generates a large portion of HP's profits via its higher-margin ink and toner business. HP is struggling to sell more printers, due to long upgrade cycles and paperless offices. Meanwhile, generic ink and toner makers are undercutting HP's prices. This toxic cycle is dragging HP's printing business deeper into the mud, but some investors -- including Icahn -- believed it could survive by merging with Xerox's printing unit to scale up and cut costs.

What's next for HP?

With the deal now dead, HP's printing business faces an uncertain future again. It's attempting to counter generic challengers with its Instant Ink subscription program, which offers unlimited refills each month, but that isn't an economical solution for customers who only occasionally use their printers. HP is still developing new technologies like industrial 3D printers and metal printers, but those next-gen devices won't move the needle anytime soon.

A color printer.

Image source: Getty Images.

Its sales of notebooks could accelerate throughout 2020 as more people work from home or upgrade their gaming PCs, but it still faces intense competition in that market from rivals like Lenovo, Dell, and Apple. Moreover, memory prices are expected to rise this year -- which could throttle its PC margins and offset its accelerating revenue growth.

In February, HP boosted its share buyback plan by $5 billion to $15 billion (more than half its enterprise value), and it declared it would repurchase at least $8 million in shares within the first 12 months after its annual meeting. It also planned to return about $16 billion to shareholders via buybacks and dividends between fiscal 2020 and 2022.

However, HP might suspend those buybacks to protect its dividend and preserve cash until the market stabilizes. HP will likely provide an update when it reports its second-quarter earnings, but investors shouldn't be surprised if it scales back those buyback plans.

A bumpy road ahead

HP still faces tremendous challenges, and the coronavirus crisis could limit its ability to expand or boost its EPS growth with buybacks. Without Xerox, HP's best hope is a wave of fresh PC upgrades riding the work-at-home boom, which could offset the weakness of its higher-margin printing unit.