HP Inc. saw its stock jump more than 4% in after-hours trading after it launched an aggressive plan to return up to $16 billion to its shareholders in the next three years and saying it will consider a possible combination with Xerox Corp.

Still, the plan to return about half of HP’s market capitalization to investors is in addition to the “poison pill” it announced earlier this week, and both are designed to block a hostile takeover approach from Xerox, which is trying to acquire the much-larger firm.

The two companies are locked in an increasingly hostile battle that began in November when Xerox Chief Executive Officer John Visentin launched the takeover attempt with the backing of activist investor Carl Icahn, who owns shares in both firms and is one of HP’s largest shareholders.

Xerox attempted to sweeten the deal earlier this month with a revised offer that values HP at about $35 billion, but the offer has been questioned by investors worried that it would leave the combined firm extremely leveraged.

In a letter to shareholders today, HP CEO Enrique Lores rejected Xerox’s current offer, saying, “It’s abundantly clear the revised Xerox proposal meaningfully undervalues HP, creates significant risk and compromises the future of our company.”

Under Lores’ alternative plan, HP will repurchase about $8 billion worth of its own stock over the next 12 months, plus $7 billion more by the end of 2021. It would also generate cost savings of $1.2 billion, Lores said.

The company would divert all of its free cash flow to the share buybacks, unless another opportunity emerges that has a higher potential return. The rest of the buyback would be funded using debt, increasing the firms’ debt ratio to around twice its earnings before deductions.

Pund-IT Inc. analyst Charles King told SiliconANGLE the share buyback program HP has announced should be enough to curry favor with shareholders while perhaps going some way to appeasing Icahn.

Lores said in an interview with the Financial Times that he would also be willing to consider a deal with Xerox under different terms, such as HP buying its smaller rival.

“We are willing to engage with them,” he said. “It is not about who buys what, it is really about creating value.”

King said HP buying Xerox would make much more sense for both practical and strategic reasons.

“Frankly, HP knows more about PCs than Xerox ever will,” King said. “Plus, Xerox’s copier portfolio, especially its enterprise-focused systems, could complement and fill out HP’s printing and imaging business. Finally, HP is considerably larger than Xerox and has around $2 billion more cash on hand than Xerox does, meaning it would likely have an easier time finding financing for a deal.”

Lores’ comments came in the wake of mixed first-quarter financial results for HP. The company reported earnings before certain costs such as stock compensation of 65 cents per share on revenue of $14.6 billion, down a half-percent from a year ago. Wall Street had forecast earnings of just 54 cents per share on slightly higher revenue of $14.63 billion.

HP said it’s expecting second-quarter earnings in the range of 49 to 53 cents per share, lower than Wall Street’s forecast of 54 cents.

Photo: MD Shahariar Emon/Flickr