Xerox’s HP Inc takeover looks good on paper
I can see why the news that Xerox has made a takeover bid for HP Inc is a significant story. They are both big beasts in the printer/copier markets and, in HP’s case, it’s a very big noise in the PC business as well.
It’s no secret that the relationship between both companies has been growing stronger in recent times. Back in June, they announced that Xerox would be sourcing A4 and entry-level A3 products from HP “with the majority running on Xerox’s award-winning ConnectKey controller software and Xerox will supply toner to HP for these and other products”.
They also announced that Xerox would become a device-as-a-service (DaaS) specialist in HP’s Partner First programme in the US. “Xerox’s services capabilities and customer reach in the small to mid-size business market, combined with HP’s award-winning DaaS PC offerings, will allow both companies to meet a wider range of customer needs,” the announcement stated. “Xerox will be authorised to sell HP PCs, displays and accessories to its commercial customers through DaaS.”
At the time, Enrique Lores, president for imaging & printing at HP Inc said: “This arrangement is an extension of our existing relationship and creates incremental opportunities for HP in several important areas.”
So you can see how a takeover bid by Xerox makes sense from the perspective of bringing together two companies that are very strong in the print and copier arenas. But what’s interesting is that this is not a merger that is being talked about in terms of creating something bigger than the sum of its parts, which is the usual rationale for a takeover. Instead, any potential merger of Xerox and HP is being talked about in terms of rationalising both businesses to probably create something smaller than a straight combination of the two separate companies as they exist today.
TechCentral’s report on the takeover states that “combining HP and Xerox would streamline both businesses and take costs out of the equation”. That’s not particularly surprising. In nearly every instance, one of the justifications advanced for taking over another business is that it will enable some streamlining of the combined operation and a reduction in costs.
But what’s different here is the context for the proposed takeover. Both companies have reported declining printer sales. HP has already put forward a restructuring plan to reduce gross global headcount by approximately 7,000-9,000 employees. In other words, this is not a deal being conducted in an expanding market where both businesses are flourishing and expecting increased growth going forward.
So, this consolidation could also be viewed as a retrenchment, a recognition that it is unsustainable for both businesses to try and operate and continue to grow separately in the printer and copier markets going forward.
It’s interesting that it didn’t take HP long to confirm there had been a bid and to reveal that the possibility of a merger was something the companies have discussed on a few occasions. In a statement, HP said: “We have had conversations with Xerox Holdings Corporation from time to time about a potential business combination. We have considered, among other things, what would be required to merit a transaction. Most recently, we received a proposal transmitted yesterday.”
And it certainly didn’t look as if it was shutting the door to any approach. “We have a record of taking action if there is a better path forward and will continue to act with deliberation, discipline and an eye towards what is in the best interest of all our shareholders,” HP added.
For its part, Xerox confirmed the takeover bid in fairly bullish terms. In a statement, the company claimed: “Our industry is long overdue for consolidation, and those who move first will have a distinct advantage. We look forward to expeditiously moving this process forward and creating additional value for shareholders.”
There’s some truth in that argument. If consolidation is inevitable, it often pays to be first and not to hang about. If the market has reached a point where growth will be difficult, it probably pays to merge before one or both businesses starts to decline even further. But there’s no point in being first if you don’t do it right.
Also, whatever the merits of consolidation in the printer/copier space, what happens to HP’s PC business if a deal between Xerox and HP goes through? It’s worth remembering that Xerox played a crucial (if unwitting) role in the evolution of the PC with the Xerox Alto, but how enthusiastic is the company likely to be about the prospect of returning to the PC business if it acquires HP?
Yes, it has become a DaaS specialist but there’s a marked difference between reselling someone else’s devices and the commitment required to design, manufacture and sell your own. Besides, that’s another market which has experienced consolidation in the past (as HP can attest) and that many believe is ripe for further consolidation in the future.
And there’s no getting away from the fact that in a combined Xerox/HP, the PC share of the business will be smaller than it is for HP as a standalone company. In that context, what compelling reason will Xerox have to hold onto the PC business rather than allow it to be acquired by another company or spun off into a separate entity?