Xerox Corp. (NYSE: XRX) has dropped its takeover bid for HP Inc. (NYSE: HPQ) citing difficulties created by the coronavirus outbreak. This could be a relief for HP since the PC maker appears to be quite better off without its persistent suitor.
For starters, HP delivered stable results for its first
quarter in February. Though revenues dipped by 1%, it matched forecasts, and adjusted
EPS climbed 25%, beating management’s and analysts’ estimates. The company saw
a 49% increase in operating cash flow and a 66.6% growth in free cash flow.
HP stated in one of its press releases that it has beat or met adjusted EPS guidance in all its 17 quarters as a standalone company and that it has matched or exceeded free cash flow guidance for all four years since its separation from the Hewlett-Packard Company.
Xerox, on the other hand, has missed its revenue targets in four
out of seven quarters. So HP has a better track record when it comes to
achieving targets on its metrics.
Over the past three years, HP grew its revenue by $10.5
billion and GAAP EPS by 45%. The company has generated $12.9 billion in
cumulative cash flow from operations and returned 80% of free cash flow to
shareholders. Xerox has been seeing a drop in its sales and the sale of its
interest in the JV with Fuji did not go down well with HP, with the PC maker
raising concerns over Xerox’s future.
Xerox had estimated cost synergies of at least $2 billion within
two years of a combination. However, HP plans to implement its own cost reduction
program which is expected to yield restructuring and productivity savings of
$2.2 billion in total during the period from 2020-2022. So it appears HP can
save more cash all by itself without any partnerships.
In the first quarter, HP posted a revenue increase of 2% in
its Personal Systems business, which accounted for 68% of total revenue. The Personal
Systems market is estimated to grow to more than $330 billion by FY2023 and the
company plans to leverage this opportunity through market expansion and increasing
the lifetime value of its devices.
Although HP saw a revenue decline of 7% in its Printing
business in Q1, the company said it still holds a leading position in the
market with a 40% unit share. HP has a strategy in place to turn around its
Print business which involves growing its contractual business, reducing the
number of unprofitable customers and growing its graphics and 3D portfolio.
It remains to be seen how these measures pan out for the
company’s Print business but the positive side is HP is seeing growth in its
Personal Systems division which accounts for the majority of its revenue.
HP had concerns about Xerox’s proposed capital structure
which would have brought about a level of debt that it could not support thus
depriving it of the cash needed to run its business efficiently. It would have
also suspended share buybacks indefinitely and reduced dividends to HP
shareholders by 79%.
In summary, HP appears to be well-positioned to drive growth and savings by itself going forward and it can be safely assumed that the company is perhaps better off without Xerox. HP’s shares were down 13% in afternoon hours on Wednesday.