Friday, November 15, 2019

The Xerox Bid for HP

This week, Fortune's Jonathan Vanian reports on Xerox's takeover bid for HP.   Vanian writes:

HP Inc.'s printing division was once the envy of Silicon Valley for its billions of dollars in annual revenue and supersized profits. But in the increasingly digital world, consumers and companies are printing less, causing HP's printing business to fade. Last week, HP Inc. confirmed getting an acquisition offer from copy machine giant Xerox worth over $30 billion, a premium to HP's market valuation. The massive deal would combine two venerable but troubled names in tech, in the hopes that they would be stronger together. The takeover bid highlights the difficult position HP Inc. is in. If it rebuffs the deal, or any rival offer, it risks continued decline, while combining with another troubled company is also dangerous.

I have a few thoughts on this takeover bid.  First, I'm not sure how the Xerox takeover addresses the fundamental weaknesses in the HP business.  The printing business, as Vanian reports, has been profitable, but declining for some time.  There is no obvious upturn in site for that business.  Vanian reports that the personal computer business has been a bright spot, in that HP's PC sales have risen substantially in recent years.  The firm has reached #2 in global market share, and it has received very favorable product reviews for its laptops recently.   Having said all that, Vanian does not note the one most obvious concern about the PC business, namely that the industry is incredibly challenging.   If we conduct a simple five forces industry analysis, we can see why margins are slim in the PC business.  The competitive forces are not attractive/positive (i.e. consider buyer and supplier power, for instance). Thus, despite HP's recent success, it faces an uphill slog in that market.   It may achieve strong sales and market share, but strong profits will be hard to come by. 

Second, the history of mergers between two weakened companies is not a positive one.  Generally speaking, putting two weak companies together does not make a strong organization.  In fact, the challenges of merging two organizations and cultures can actually distract management from many of the key strategic challenges that it faces.  Companies can become inwardly focused during a merger integration process, and rivals can take advantage of the distraction at the newly merged entity.  

Finally, as NYU Professor Melissa Schilling noted in a recent tweet about the merger, "Both companies are huge and unlikely to gain further economies of scale (HP: 21.4% share in printers; Xerox: 23% share in copiers)."  In fact, one could argue that they will face potential diseconomies of scale and scope due to the increased complexity of the organization.  

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