The Danger in Xerox’s Interest in HP (HPC)

Ever since Xerox announced their hostile bid to merge with HPC, I have received many calls from press and friends who know my historical connections to both companies.

For 30 years, I have covered HP’s PC business and on many occasions, consulted with them in various projects. When HP introduced their first PC in 1984, I was at this launch, and it was notable and memorable for me in that I also got to spend time with HP Co-Founder, David Packard, who was just about to retire.

I helped HP start their original Industry Analyst Council and on various occasions, worked with top Sr management on everything from strategy to PC and laptop designs over the years. In the case of Xerox, I served four years on the advisory board of the Xerox Venture Fund and worked closely with Xerox and Xerox PARC to commercialize IP created inside PARC. As a result, I got to know a lot about Xerox products, culture, and, more importantly, how they worked. I was in Beijing when the word hit that Xerox was making a bid for HPC.

My immediate reaction was that Xerox taking over HPC, and especially the PC division, would be a disaster. One thing I knew from my time with Xerox is that they in no way are a PC company, and their marketing skills when it comes to technology are not the greatest.

My second reaction was that there would be a major culture clash. These companies are managed very differently and have extremely different cultures. Merging them would be a major, if not an impossible challenge.

My third thought was that it did not make sense for Xerox to bid for the PC business. This is an area they tried their hand with in the early days of the PC, and it was a total failure. The PC business is a very different one that Xerox still excels at, and I think it would be more of a problem for them to try and keep this business should this merger ever go through.

On Monday, Xerox started making their bid to HP shareholders and argued the following:

Xerox (XRX -0.8%) says it has started meeting today with HP (HPQ +0.2%) shareholders to make the case for its proposed $33B merger of the companies.

In a new investor presentation, XRX argues the combined company would be worth ~$31/share to H-P investors on a Pro-forma basis and would generate $4B-plus in free cash flow in the first year before taking any synergies into account.

XRX already has said it sees the combination creating ~$2B in synergies, which could be achieved in 24 months; the new presentation goes further, saying a merger would allow cross-selling and a unified platform for clients which could yield $1B-$1.5B in revenue growth.
H-P last month rejected XRX’s unsolicited, cash-and-stock offer worth $22/share, arguing it undervalued the company, which prompted XRX to say it would take its case straight to H-P shareholders.

If you read this Xerox presentation carefully, you will see it mainly focuses on the financial goals and more importantly, the synergy of both of their printing businesses. Xerox also sees it as a service arm for HP’s PC business, especially SMB, but if I read this right, it does not do much for HPC’s enterprise business and goals.

My biggest fear if this merger goes forward is that HPC will suffer greatly under Xerox leadership unless they spin it out and let it run as a wholly own subsidiary, without the printing business. What Xerox really wants, besides the combined incomes, is HPC’s 3D printing technology. Xerox and HP’s printing business would have many synergies and could end up as the powerhouse in printers and especially 3D printers, which will be a very profitable business in the future.

The unknown in this deal at the moment is Carl Icahn. He has entered the process, and given his history, he would want a controlling interest in the combined companies. Then, once, combined, he would spin off or sell some of the technologies or groups and leave the combined company weaker.

One way that HP could counter this move by Xerox and Icahn would be to spin out the PC business ASAP and operate it as its own entity. That would lessen the total value of what Xerox wants. That way, the PC company could operate more freely, and without the printer business taking resources away from them, that is really needed to stay competitive.

Since Xerox is most focused on HP’s printer business, with an eye on HP’s 3D printing technology, they may still want to go through with a deal even if the PC division is spun off.

If not, I am afraid that if the deal goes through as Xerox would like, HP’s PC business would be deeply impacted and not in a good way.e.

Published by

Tim Bajarin

Tim Bajarin is the President of Creative Strategies, Inc. He is recognized as one of the leading industry consultants, analysts and futurists covering the field of personal computers and consumer technology. Mr. Bajarin has been with Creative Strategies since 1981 and has served as a consultant to most of the leading hardware and software vendors in the industry including IBM, Apple, Xerox, Compaq, Dell, AT&T, Microsoft, Polaroid, Lotus, Epson, Toshiba and numerous others.

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