HP's $16 Billion Stock Buyback Plan: What Shareholders Can Expect

HP's $16 Billion Stock Buyback Plan: What Shareholders Can Expect
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Known as a leader in the printing market for both home and business users, Hewlett-Packard has faced some financial struggles in recent years due to a decline in printing and an increase in digitization. HP has taken steps such as layoffs, smaller stock buybacks and shifts to focus on other products to try to improve its financial health. But at the same time, its struggling competitor Xerox is interested in a merger and continues to make takeover offers. HP's reluctance to give in to Xerox has led to the recent HP stock buyback plan that serves to please shareholders and push Xerox further away. If you're one of the many HP shareholders, it's helpful to understand what to expect as the plan unfolds.

Xerox's Proposed Buyout of HP

In early November 2019, Xerox began to consider taking over HP through a cash-and-stock offer. Bloomberg reported that Xerox found a merger appealing since it could help the struggling company save money and increase its free cash so that it could reduce its future reliance on debt. However, market analysts were skeptical of the idea of the smaller company buying the giant HP. Market analyst Jim Cramer didn't write off the benefits of an HP and Xerox merger, but he did believe that HP would be in a better position to take over Xerox since it has a market value three times the size.

In late November, Xerox ended up offering a takeover proposal to HP at approximately $22 per share. While acknowledging the potential benefits of the merger, HP ended up rejecting bids from the company twice by early December due to a feeling of undervaluation in light of a positive earnings report. HP also felt skeptical that Xerox could pull the deal off financially, but by early January 2020, Xerox had secured $24 billion more of the cash needed for the HP takeover and had slightly raised its offer price per share to $24. Xerox also doubled down to try to get more supportive candidates on HP's board to improve the chance of a takeover.

While HP still continued to reject Xerox's takeover attempts and even announced a "poison pill" to make a stock purchase look less financially rewarding, things seemed to look like they were changing this week. HP executives addressed lower-than-expected holiday sales and showed more of a willingness to look more into a potential merger. In response, HP began talks with Xerox to find a potential solution that would provide the most value and cut costs for the companies. However, the recently announced HP stock buyback plan sent some mixed messages that confused analysts and could complicate an actual merger happening.

The HP Stock Buyback Plan

On February 24, 2020, shortly before news broke to HP reconsidering some kind of combination with Xerox, HP had announced a $16 billion stock buyback plan. The aim of the plan is to try to create more value for shareholders and get Xerox to stop trying to take over the company. The company sought to keep its shareholders happy by buying back half of its own shares versus selling them to Xerox. It hoped that shareholders in response wouldn't want to sell out the money.

The composition of the plan would involve HP using its free cash to make $15 billion in share repurchases with the remaining $1 billion coming from rising dividends. Shareholders can expect the whole HP stock buyback process to take three years and happen from 2020 to 2022. However, HP has set a goal of completing a minimum of $8 billion of the buybacks within a year from its next annual shareholders' meeting. Although the meeting's date is not yet officially set, it's likely to happen this April as it had last year.

Since the deal will cut HP's number of shares on the market in half, shareholders can expect to benefit financially from the deal. Along with the premiums on share prices they'll gain, HP's stock will have more value due to an increased earnings per share. Further, shareholders can get some tax benefits if they choose to defer their gains on HP's rising stock.

Impact on HP's Stock Prices

After the announcement of the HP stock buyback plan on Monday, the company's share prices saw some jumps over the next few days, illustrating that shareholders likely felt positively about the deal. The company's stock price data showed that after opening at $22.28 on Monday morning, it jumped just slightly to $22.38 in the afternoon. However, the biggest gains came during after-hours trading when the price had a peak increase of 6 percent. On Tuesday, it opened at $22.98 and saw a 3.5 percent jump to $23.79 in the afternoon. HP opened at $23.50 on Wednesday but closed at $22.71.

As of publication, a group of 11 analysts made some predictions on how HP's stock price might change over the next 12 months. They estimated a top share price estimate of $28.00 and a low estimate of $22.00. The median price estimate is set to $24.00, slightly above the stock's highest price this week.

Ultimately, factors like the impact of the coronavirus fears on the stock market and the remaining possibility of a Xerox and HP merger can impact HP's stock price in the future. Despite its rise after the stock buyback plan announcement, HP's stock has taken some small drops over the last day as the markets experience losses amid the global coronavirus outbreak. And if Xerox and HP do agree on a merger of some kind, HP could experience a short-term stock price jump as the target company if the valuation and takeover price are fair, but the long-term financial results will depend on the success of the merged company.

Whether HP eventually gives in to a takeover by Xerox is yet to be seen, so keep an eye on the news for updates. The company's next shareholders' meeting should shed more light on how the HP stock buyback plan unfolds along with any hints about a deal with Xerox. It's also helpful to continue to monitor HP's stock price and general market news to get alerts about any major changes.