There may be a thaw in HP Inc.’s merger standoff with Xerox Holdings Corp. During a call with reporters and analysts ahead of the release of its first-quarter earnings on February 24, HP’s two highest-ranking executives left open the door to a combination with the printing company, but only under strict conditions. 

Chief executive Enrique Lores said, that 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.” In a conference call with analysts late on February 24, Lores indicated discussions with Xerox had started.

The companies must find ways to reduce costs and invest in areas to grow in order to find a match, Lores and HP CFO Steve Fieler told MarketWatch. Xerox’s latest bid of $24 a share, announced Feb. 10, “meaningfully undervalues HP, creates significant risk and compromises the future of our company,” said Lores, who took over as CEO on Nov. 1.  Xerox has been trying to force a merger since November, but HP has so far blocked its entreaties. In an announcement, HP detailed three issues with the Xerox bid: “a fundamentally flawed value exchange,” “an irresponsible capital structure,” and overstated synergy possibilities. 

The slight change in stance toward Xerox arrived as HP announced its latest strategic plan, which seeks to cut more than $1 billion in structural costs for the 2022 fiscal year. HP plans to return $16 billion to shareholders through the 2022 fiscal year, and increased its share-repurchase authorization to $15 billion on February 24. “We have a winning plan,” Lores said in a conference call with analysts.

The stock buyback plan could make Xerox’s takeover bid more difficult despite HP’s change in tone, confusing some analysts during the conference call. HP shares were up 6% in after-hours trading on February 24 and up 4.4% premarket on February 25.

HP also reported first-quarter earnings, showing a decline from the previous holiday quarter and results that were slightly short of Wall Street estimates. The original Silicon Valley garage startup reported net income of $678 million, or 46 cents a share, in the quarter, compared with net income of $803 million, or 51 cents a share, in the year-ago first quarter. Revenue dipped slightly to $14.62 billion from $14.71 billion a year ago, largely due to a 7% decline year-over-year in printing.  Analysts surveyed by FactSet had expected net income of 48 cents a share on sales of $14.63 billion. HP forecast second-quarter EPS of 46 cents to 50 cents a share — short of the 53 cents a share forecast by FactSet.

The quarterly results represent Lores’s first since taking over as CEO, but also come against a backdrop of corporate internecine warfare. Late on February 20, HP implemented a shareholder rights plan, or “poison pill,” to make it more difficult for Xerox to proceed with its hostile takeover bid, as a three-month battle between the two companies continued.

“The HP board clearly adopted a poison pill because our offer is receiving overwhelming support from their shareholders. Regardless of what the company and its army of advisers announce on February 24, we believe HP shareholders appreciate that the value we could create by combining Xerox and HP outweighs — and is incremental to — anything HP could achieve on its own,” a Xerox spokesperson said in an email to MarketWatch. “Despite the HP board’s intention to deny shareholders the chance to choose for themselves, we will press ahead with our previously announced tender offer and electing our slate of highly qualified director candidates.”

HP shares are down 7.5% over the past 12 months. The broader S&P 500 index has gained 15.4% in the past year.

Source: Market Watch