$35 billion? HP refused Xerox again, and it was difficult to give up cash cattle, but the general situation was difficult to violate

From the perspective of stock market capitalization, HP is three times the size of Xerox, which seems to be a typical "snake swallowing elephant" acquisition case. But in the shrinking printing industry, the integration of oligarchs is also a matter of time

Text | "Finance" reporter Chen Xiaoxiao

Edit | Xie Lirong

Xerox's plan to buy HP is getting harder and harder. On March 5, HP once again formally rejected Xerox's $35 billion takeover offer and asked shareholders not to respond to the bid. This is the second time HP has rejected Xerox.

Previously, on Feb. 10, Xerox updated its latest offer to buy Hewlett-Packard from $22 to $24 per share. This means that the purchase amount has increased to $35 billion from $33 billion in October last year. If HP refuses to discuss the merger with Xerox, Xerox will initiate a "hostile merger" process.

In response to Xerox's aggressive takeover, on Feb. 24, HP threw out a share buyback plan, increasing the $5 billion announced in October to $15 billion and returning it to shareholders by fiscal year 2022.

At the same time, HP is also stepping up cost reductions in an attempt to save the company nearly $1 billion in operating costs by reducing its workforce by 9,000 people. As of October last year, HP had 56,000 employees worldwide.

The reason why HP has repeatedly rejected acquisition offers is that the core concern is whether the bid is reasonable. Last October, Xerox first proposed a deal to buy at $22 per share, and according to this calculation, Xerox will pay HP about $33 billion in transaction consideration, which is higher than HP's market value of $280 at the time.

But HP has always argued that Xerox is underestimating its value.

HP is currently one of the world's largest printer manufacturers, and Xerox is one of the largest copiers. Hp's current market capitalization is $29.5 billion, and Xerox's market capitalization is $8.444 billion, just one-third of the former.

A number of industry insiders told Caijing that although the direction of the acquisition is still unknown, it is inevitable that the industry will enter the integration period.

< h2 class="title" > cash cows</h2>

In addition to copiers, Xerox focuses on the high-end printer market, with more than half of the market share in Japan, China and other Asian regions. There is no doubt that Xerox's acquisition of HP is focused on its printer business.

HP is the inventor of printing technology and the world's largest printer brand. According to IDC data, a third-party organization, the global printer currently has 500 million units, and the annual shipment volume is 100 million units, and HP occupies 40% of the share.

From a revenue perspective, the printing business accounts for only about one-third of HP's revenue, and it has continued to decline for many years. HP's global printing business revenue was $18.26 billion in 2016, down 14% year-over-year. In the fourth quarter of 2019, printer business revenue was $4.98 billion, down 6 percent, lower than the market estimate of $5.03 billion.

The printer business has always been the company's cash cow. In terms of gross profit and net profit margin, the printing business far exceeds HP's PC business, accounting for the majority of the company's profits.

HP's Q1 2020 financial report showed net revenue of $14.6 billion, down 0.6% year-over-year. Among them, the net revenue of the printing division was $4.724 billion, down 7% year-on-year, but the operating margin was still as high as 16%, maintaining the average level for many years. In contrast, the PC business had an operating margin of 6.7 percent.

An investor who has long observed the secondary market told Caijing that the printer is a typical business with good cash flow, and from the terminal data analysis, the total income of the original and non-original consumables in the printer life cycle is basically 3 times the printer revenue.

This is because the printer adopts a "razor plus blade" business model, which mainly makes money through consumables. "Almost all printer manufacturers use low profits or even losses to attract users, and then rely on the sale of special consumables to make a profit." "Finance" reporters check hp's financial reports in recent years, and consumables account for 65% of the printer business revenue all year round.

That is to say, for HP, although the performance continues to shrink, the printer business is still a fairly high-quality asset.

This is also the strategic intention of Xerox's acquisition of HP, which can not only alleviate the continuous decline of its own business, but also strengthen the synergy between the printer and photocopier business.

In recent years, HP and Xerox have separately expanded their tentacles into their respective fields. In the past two years, Xerox has begun to penetrate the low-end printing market, which is the main position of HP. On the one hand, HP is moving towards the high-end market, but it is also eating into the market share of traditional copiers in Xerox.

Analysts generally believe that due to the overlap in business between the two sides, the merger and synergy can significantly reduce costs and enrich product lines. Xerox believes that if the acquisition of HP goes well, it can cut more than $2 billion in annual expenses for the new company.

< h2 class="title" > industry consolidation is inevitable</h2>

However, according to the experience of "snake swallowing elephants" in the past, acquisition, divestiture and integration are not easy, and after the completion of the transaction, Xerox may face a situation of high asset-liability ratio. This is another reason why Hewlett-Packard refused to be acquired.

HP is three times the size of Xerox. To complete the acquisition, Xerox has raised funds from Citigroup. There is widespread speculation that Xerox may need to borrow at least $20 billion. This means that if the acquisition is successful, Xerox will be under significant financial pressure.

With Xerox's current self-hematopoietic capacity, this solution is actually very risky. Since the beginning of 2018, Xerox's performance has continued to decline. Xerox's financial report showed that net profit attributable to common shareholders of the parent company in the fourth fiscal quarter of fiscal 2019 was US$818 million, an increase of 497.08% year-on-year; operating income was US$2.371 billion, down 6.4% year-on-year.

In fact, Xerox has been cutting costs in recent years to maximize cash flow. Through cost savings in the third quarter of last year, Xerox generated a cash flow of $339 million, which brought the company's full-year cash flow to $1.1 to $1.2 billion in 2019. Xerox also plans to cut spending by $640 million in 2020.

A number of industry insiders analyzed the "Finance" reporter that Xerox is willing to bear such a large acquisition risk because the industry has reached a period of consolidation. Printers are a very good cash flow business, but due to the impact of paperless, digital office, the decline in demand for printed documents in the market is almost irreversible.

Combined with the data of third-party institutions IDC and Shenwan Hongyuan, the global printing business market has entered negative growth for three consecutive years, and the market fell by 2% in the entire 2019. A core component supplier of Canon told the "Finance" reporter that affected by the downturn in the industry, several giants cut 30% of orders last year.

An investment banker told the "Finance" reporter that the printer industry will become more and more giant in the future, and the living space of small companies will be further compressed. In fact, since Hewlett-Packard announced its $1.05 billion acquisition of Samsung's printer business in September 2016, the five giants of printers have become the four, with HP, Canon, Brothers, and Epson dividing up 90% of the industry.

For a shrinking oligopolistic market, bad news is coming. Ba Shanshan, senior research manager of the computer system and peripheral product department of IDC, a third-party organization, believes that the impact of the wuhan new crown epidemic on the entire printing market in 2020 is unprecedented.

There are two main aspects of the impact: First, delivery is limited, and the lack of logistics capacity has led to a sharp decline in procurement in the commercial market. On the other hand, most factories cannot resume work on time, and production capacity is limited. The supplier told Caijing that as of early March, factories in China, including Canon and Brother, still had not restored production capacity. At the same time, because most of the raw materials are imported from China, the factories of these giants in Vietnam and other regions are also in a state of shutdown due to supply cuts.

According to the "Finance" reporter, 80% of the world's printers are produced in China and Southeast Asia. This means that the pandemic will fully impact product supply in the second quarter of 2020. Third-party agency IDC expects that the shipments of The Chinese printer market in the first quarter of 2020 will decline by 21.1% year-on-year, and the annual shipments will decline by 8.3% year-on-year.

This means that the market space will only get smaller and smaller. The above-mentioned investment bank analyzed the "Finance" reporter that under the general trend of the industry continuing to shrink and decline, it is the best choice to heat the group through resource integration. "On the one hand, it solves the problem of competition between Xerox and HP, and on the other hand, it helps to make rational use of resources." He said.