Xerox-HP: It’s a Long-term Deal in 3-D
On Monday 10 Feb., Xerox Corp. upped its non-solicited, cash-plus-equity bid for printer+PC maker HP to a total value of $18.40 in cash and 0.149 Xerox shares for each HP share, or about $24 in total value per share. Rather than reject this as it did Xerox’s previous offer, HP says it will give further details about Xerox’s buyout bid during its quarterly earnings report on 24 Feb.
If a deal occurs, it will have little effect on the IT industry; limited effect on resellers and retailers; and practically no effect on large enterprises or consumers. The meaningful impacts? Besides a short-term boost for investors in both firms, this deal could catalyze growth in 3-D printing globally, and really disrupt any manufacturing-centric marketplace.
Underneath everything, there just isn’t much else that strategically benefits both firms.
The economics of the proposed acquisition continue to be debated, with little consensus seen among Wall Street or IT market analysts. Some, for example, see particular synergy between the Xerox and HP printing businesses, including HP’s fast-growing 3-D printing (aka, “additive manufacturing”) business and associated initiatives. Others see very different but potentially complementary, business models and markets. For example, HP’s printing and PC businesses primarily focus on consumers and small businesses by leveraging a global reseller-plus-retail channel. Xerox’s primary customers are large enterprises that rely more on direct sales relationships for printing and associated services, along with a sprawling IT outsourcing/services business (Conduent).
The two firms have remarkably dissimilar internal business and organizational structures. The costs of business integration would probably force Xerox to take a chainsaw to org structure and staffing costs, and disrupt business management significantly for at least a few years.
But 3-D printing could make this a worthwhile endeavor for Xerox. Consensus estimates are that 3-D printing will account for over $50 billion just in pharma, industrial parts and materials, and metal fabrication output by YE 2025. Beyond the accelerating market for printers, though, is the faster-growing need for 3-D printing materials – the “ink cartridge” lifeblood that will supply high-margin cash flow for printer makers. 3-D printing materials already bring in more than $1 billion globally across all vendors. That number is expected to be at least $3 billion by YE 2025.
Xerox has a fledgling 3-D business, but nothing as advanced as HP. To spur investment in 3-D, Xerox could conceivably spin off HP’s PC business – but the number of likely buyers for that business is very small, and those buyers already have their own PC market challenges. More likely, HP’s high-churn PC and printer business combined would enable ongoing cashflow to build out and accelerate the combined company’s 3-D business.
IT Industry Impact
Will a Xerox-HP deal reshape the IT industry? Not much if at all. While no other firms have the dominant positions enjoyed by HP and Xerox in printing and associated services, easily-obtainable alternatives exist. And alternatives to HP PC hardware abound. Any substantive effect on what enterprises buy and use will be years away if and when a deal is reached.
I can see some short-term disruption for consumers, SMBs, and associated resellers and retailers. PC and printer retail is already an uncertain business relying on a few critical aspects (e.g., print cartridges, setup fees, maintenance contracts) for the most profit. Alternate manufacturers exist, but none approach HP’s current dominance. Any threat to that is a threat to printer retailers. Reselling, especially of PCs, may be a little more adaptive with less disruption because so much of the business centers on software that runs on a wide range of Windows-standard hardware from multiple vendors.
If Xerox wins out, it will have advanced itself strategically in 3-D printing at a relatively low cost. If it rebuffs Xerox, HP should be In a stronger position to borrow and invest in 3-D growth, assuming it can maintain whatever takeover-induced share price boost results.
And, of course, investors with large stakes in both Xerox and HP may do quite well, especially as both companies’ share prices are up on this week’s announcement.