01 December 2019 Business

Xerox and HP prepare for takeover battle

HP has rebuffed Xerox's suggestion that two could become one, leading Xerox to prepare to engage HP shareholders over the heads of the company's board.

Xerox says it is preparing an all-out assault on HP, being prepared to launch an aggressive build for the computers to corrugated printing press business. HP’s board has rejected Xerox’s initial approach and has refused to engage in any discussions about a merger between the two.

Furthermore, HP has engaged the services of law firm Wachtell, Lipton, Rosen & Katz which has previously tackled Carl Icahn when he attempted to acquire Dell Computers. This is judged a move in readiness for a bitter takeover battle.

It will be a battle fought in terms of office equipment, personal computers and home printers, not production printing machinery. For HP, its commercial print operations, spanning from Samsung printers for business to the large format, Indigo and Page Wide T series web presses, represent just 8% of its business.

Xerox simply does not have this breadth of technology and while showing a prototype 3D printer, is not shipping them in the volume that HP is doing. It has a success on its hands with the FujiXerox Iridesse, but sales of iGen are at best static. Its inkjet press strategy is in transition with the announced closure of the Impika operations at the end of the year and there have been only tentative steps into digital packaging.

While commercial print is more important to Xerox, it is not as important as the mid range office equipment which amounts to 69% of revenues. This is the focus of a forthcoming battle.

This is an area in decline, both in terms of machinery sold and in terms of consumables, service and supplies to support these products. Both companies are involved in restructuring to reduce costs to reflect this demising market sector. In the first nine months of this year, Xerox sales dropped 7.3% in this sector.

The company says that this is due to reorganisation of the Xerox Business Services network of resellers and supplies companies that had retained their corporate identity and had sometimes been promoting rival machines rather than the Xerox offering. That has ended under the change of direction and the reorganisation has been responsible for the fall in sales, says Xerox.

However, there is no disguising the systemic shrinking of this market. For example, according to research organisation IDG, sales of copiers, printers and the like have fallen in 16 of the last 17 quarters and sales of uncoated woodfree papers that are used in these machines has fallen just as sharply.

Something has to give. The logical conclusion is that consolidation is necessary. As acquisition of one of the Japanese competitors, Ricoh, Canon, Konica Minolta, let alone Kyocera or Riso, is virtually impossible, HP presents itself as the clear target. It is an opportunity to create a market leader, Xerox CEO John Visentin has stated in his initial letter to the HP board. He adds that there are “substantial cost and revenue synergies that could be achieved through a combination”.

The two have worked together, Xerox rebranding some HP laser printers and supplying these with EA toner produced at its Webster plant, but not enough to usurp products made by Fujifilm in Japan. With the ending of the Fuji-Xerox joint venture, HP will continue to source existing products from the Japanese company for a further two years at least.

HP has issued a strong rebuttal to Xerox’s initial letter. “We have concerns as to the state of Xerox's technology resources, research and development pipeline, future product programs, and supply continuity and capability," says a letter from HP to Visentin, himself a former HP employee. And with the sale of the 25% stake in Fuji-Xerox, Xerox now needs an alternative channel to reach the fast growing Asia-pacific region. HP has a 38% market share of the office printer market in India, for example. Fuji-Xerox generates something like $10 billion of sales from Japan down to Australia and New Zealand.

In order to win HP, Xerox is now ready to launch a hostile takeover, having been reassured, it says, by approaches from key HP shareholders. As one of these is Carl Icahn himself with something like a 4% holding in HP and 10.6% of Xerox, this is not surprising.

If a contested takeover pushes up the share price of either company he will be a winner, and HP shares have risen from around $14 earlier this year when he was buying shares to $22 now, increasing 9.5% since the announcement of Xerox’s interests. Xerox shares have also been rising, by 6.6%, and perhaps would rise again with the addition of HP’s brand, presence and technology.

“The potential benefits of a combination between HP and Xerox are self evident. Together, we could create an industry leader – with enhanced scale and best in class offerings across a complete product portfolio – that will be positioned to invest more in innovation and generate greater returns for shareholders,” says John Visentin in a second letter warning that Xerox will approach HP shareholders directly: “While you may not appreciate our 'aggressive’ tactics, we will not apologise for them.”

By Gareth Ward

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John Visentin wants HP to be "powered by Xerox" and is prepared to launch a hostel bid for its larger rival in order to achieve this. HP has so far spurned his attempts at courtship and has declined to cooperate by opening up its books for a due diligence process.

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