Love in the age of digital transformation: What a Xerox-HP merger tells us about the printing industry

Founded in 1939 by two Stanford graduates at a garage in Palo Alto, HP Inc. was once the envy of Silicon Valley.

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Former superpower Xerox recently rekindled its interest in old flame HP, making a USD 33.5 billion cash-and-stock acquisition offer on November 5.
It is never too late to find love. A decade is a very long time in Silicon Valley. Older technologies make way for the new. Outmoded products are euthanized at the end of ever-shrinking life cycles. Companies that are out of step with developments at the bleeding edge often fall by the wayside. Life expectancy is shrinking. And more companies are joining the ranks of the dead, their tombstones visited by the odd fan caught in a time warp.

Earlier this month witnessed the takeover of 12-year-old Fitbit by Google for USD 2.1 billion. It can be argued that the union was strategic. The pre-teen wearable company will receive a much-needed cash injection to take on rivals like Garmin and Xiaomi in global markets. Google, on its part, showed moxie by closing the deal, giving it a toehold into the health-and-fitness market where it trails Apple. The Apple Watch, which is in its fifth iteration, is the market leader in the wearables market, as per data collated by the International Data Corporation (IDC).

The pre-teen wearable company, Fitbit, will receive a much-needed cash injection to take on rivals like Garmin and Xiaomi in global markets.​
The pre-teen wearable company, Fitbit, will receive a much-needed cash injection to take on rivals like Garmin and Xiaomi in global markets.


But such alliances are not just for spring chickens. Founded in 1939 by two Stanford graduates at a garage in Palo Alto, HP Inc. was once the envy of Silicon Valley. Its printing division raked in billions of dollars, giving a tough fight to the established players like Connecticut- based Xerox, and Japanese brands like Toshiba and Brother Industries. But the onset of the digital revolution has not boded well for the industry. Domestic consumers and corporate clients are printing less, causing companies to diversify their offerings or merge with rivals to bolster their balance sheets.

Former superpower Xerox recently rekindled its interest in old flame HP, making a USD 33.5 billion cash-and-stock acquisition offer on November 5. The 113-year-old Xerox once held a stranglehold on the printing business, so much so that a Federal jury held that Xerox was a monopoly in 1978. Xerox was forced to license all its patents to Japanese companies. Almost overnight, its market share fell from 100 per cent to 17 per cent in the United States. Xerox has hence held its own in a saturated market for printers and copiers, but its fortunes have faded with age.

The centenarian company has been out of the dating game for a while now, and the rustiness showed. HP, which has problems of its own, swiped left. The USD 33.5 billion offer was deemed “significantly” inadequate by HP, which is roughly thrice as valuable as its venerable suitor. But its board has not closed the door on a possible merger – a subject that has divided analysts and shareholders. HP’s hardware business has been modestly successful in the recent past, but the printing industry has been in flux, owing to disruption by digital communication. Xerox is no sugar daddy, but rebuffing a better offer, even from a company not in the pink of financial health, could prove to be counterproductive as slowing growth could affect profitability in the future.

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While Hewlett Packard is better known for its laptops and corporate servers, it sold everything from power banks to laser printers until four years ago.

The rise of cloud computing companies like Amazon Web Services and Microsoft Azure meant that more data would be stored remotely. The writing was on the wall for printing companies, whose sales were majorly driven by sales to corporations. It was decided that Hewlett Packard would be hived off into two smaller, nimbler businesses that would be able to compete in their respective domains and generate more value for shareholders. Hewlett Packard Enterprises would focus on selling corporate data centres while HP Inc. retained personal hardware like printers, PCs, and laptops. The latter rebounded positively after the split, generating USD 58.5 billion in sales over the three years, ending FY18. The PC business rose nearly 20 per cent in the aforementioned period to USD 37.7 billion, making it the second-largest manufacturer behind Lenovo, but well clear of the chasing pack led by Dell, Apple, Acer, and Asus.

Expenses were pruned to drive up profits. Shareholders stood to gain. Thousands of employees lost their jobs. From a position of vulnerability, HP Inc.’s share had gained 26 per cent since it debuted as an independent company in 2015. It also began forays into emerging technologies like 3D printing and graphic designing - growth areas that it hoped would offset a potential decline in its core printing business.

The rot, in fact, seems to have already set in. HP acknowledged in August that quarterly sales of its printing unit had declined 5 per cent over the year ago period to USD 4.9 billion. Moreover, the sale of printing supply equipment fell 7 per cent in the same quarter to USD 3.2 billion. HP’s printing business is made up of tiny ka-chings like selling ink cartridges and toners. It enjoys higher profits that in-house money-spinners including the PC and laptop divisions. However, the proliferation of cheaper ink by third party sellers has begun to erode earnings, potentially weaning customers away from branded printing supplies.

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Around the time that HP Inc. acknowledged its printing unit’s troubles, its CEO announced his departure from the company. He was succeeded by Enrique Lores, who used to head the embattled printing division. Lores has possibly held out for an improved offer from Xerox, which said in a statement that the "industry is long overdue for consolidation, and those who move first will have a distinct advantage.” Analysts have been skeptical of the prospects of the combined entity if a merger were to go through. The printing industry is in decline, and PC sales have hit a plateau. And a deal would not help counter the rise of Chinese companies that sell toners and cartridges at steep discounts on the internet. Xerox’s current circumstances are far removed from its halcyon days prior to the Federal jury ruling.

Unlike HP Inc., it has not diversified its portfolio and has resisted the temptation to invest in emerging technologies like 3D printing which could cost a lot of money initially, but potentially yield significant returns. The sales of Xerox hardware fell 9 per cent to USD 9.8 billion between 2016 and 2018. Bernstein Wealth Management analyst Toni Sacconaghi, Jr. did not shy away from taking a pessimistic view of Xerox’s courtship of HP Inc., titling his note “Xerox buying HPQ: Brilliance? A Dare? ‘Two Garbage Trucks Colliding?’”

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Love, they say, is blind.

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