News fresh out of the USA is that Xerox's offer to acquire HP is valued at USD$33 billion in cash and stock and is backed by Citigroup, with investor Carl Icahn masterminding the deal in the background - but what is the real reason behind this mega-strategy? Could it be largely to supply the global food & beverage packaging and textile markets?
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| Key to the flexible packaging kingdom? HP's Indigo 20000, a stellar disruptive success |
The Xerox-to-buy HP meme is gaining traction and now it has confirmation of the offer from HP itself, and a number valuing the company at a 30% premium over last month's share price. Citigroup has been mentioned as the potential backer - credible since it is worth over USD$1.8 trillion in assets. The offer is mostly cash - 77% - with the other 23% as Xerox stock. Make no mistake, if the deal happens, HP will be the junior partner, holding about 48% of the 'newco.'
Apart from the Wall Street dealings side, what might be attractive to investors if this merger goes ahead? Could the stellar success of HP Indigo's 20000 deals with ePac have something to do with it - setting the agenda for the way much flexible packaging will be produced in the future? Despite its unfashionable image, print-related revenue is still HP's major cash generator although office/consumer print revenues are dragging this down, while industrial/commercial print is still growing at around 3%.
ePac was created only in 2016, in the US, and last year placed an order for another 20 HP Indigo 20000s that, by 2020, will bring their tally to 28 of these $5 million flexible packaging machines over 16 sites, including the newly-opened UK plant in Northamptonshire. (Late note - since publishing this, ePac announce a further order for 26 HP Indigo 20000s for gradual installation at new sites over next 2 years, bring their total to 54 machines). ePac is a full service converter, offering a range of end-to-end solutions including HP Indigo Pack Ready Lamination, eBeam curing, and pouch-making lines. So what's the big deal?
The demand and growth rate for short-run, fast-turn around flexible packaging is huge, so much so that ePac has experience a growth rate not measured in mere double-digits but triple digits - as much as 300%. As commercial print and office-type MFPs and copiers decline, packaging printed digitally is literally on a roll and unlikly to be replaced by electronic means, as informational/directory printing has. You can't put Tuna slices inside a USB stick.
With a global revolution in the way that flexible food and beverage (stand-up pouches) are produced, HP is in the box seat to take advantage and supply the hardware, systems and most importantly - ink and services. Australian packaging giant Amcor was one of the first to deploy an HP Indigo 20000, at their Ghent, Belgium plant.
Xerox has virtually no footprint in the flexible packaging sector and has stood flat-footed in office 'copiers' MFPs and mid-level production print for many years. Ironically, its best products in digital commercial print are made by the jilted Fujifilm company. Packaging is growing, office and commercial print is not - well maybe a couple of per cent. Offset displacement is providing growth for digital machines, with some printers abandoning offset altogether in favour of HP Indigo digital.
While Indigo uses a liquid based toner, the principles behind Xerox's core rechnology - electrophotography - and HP Indigo's are very similar, so the technology mix is adoptable: dry toner and liquid toner. Also not one drop of non-Indigo ink has ever gone through a commercially-installed printer, wheras third-party dry toner refillers abound.
There was an old adage for business success, refering to people: "Feed 'em, clothe 'em, bury 'em." Somewhat crude but it does reflect the most critical consumer items on the planet are food, drink and textiles. HP recently entered the textile market with its Stitch range of wide-format dye sublimation printers, also capable of direct-to-garment printing. There can be no doubt that this represents a first step into textiles, with more to come either by acquisition, innovation or both.
It's not rocket science to see why a merger between Xerox and HP is attractive. Both companies are experiencing declines in office-type printing sales and MPS (managed print services) - it's all because of the Internet of Things. With G5 mobile being rolled out, this will accelerate.
But things to eat, drink, pour, decorate and wear will always be with us and in fact, as innovative packaging such as stand-up pouches plus the growth in FMCGs in developing countries booms; these sectors will grow faster.
If the Xerox-HP marriage succeeds, it will have a profound effect on our industry at every level. With Indigo's inventor Benny Landa surging ahead in packaging with the Nanography-powered S10 and W10 - the scene is set for massive disruption to the way flexibles and folding cartons are delivered to FMCG packagers and consumers over the next few years.
Mr Carl Icahn has used minnow-vs-whale take over strategies before and also taking positions in companies, demanding seats on the board and then forcing what is known as the 'Icahn lift' where share prices go up and he is in a win-win position whether he holds or sells his stake. Some companies have even resorted to paying 'greenmail' money to get him to step away from their companies. The Xerox-HP deal fits his contrarian investment strategy to a tee.
Whatever the outcome, change is afoot at HP - Australian-born CEO Dion Weisler, Monash-educated, has resigned for family reasons and a new CEO - former head of Imaging & Printing Solutions Enrique Lores - was appointed in August. 7-9,000 global HP jobs are being axed by 2021. That a PC division CEO was not appointed is telling.
It will be a very interesting ride over the next few weeks.
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| Andy McCourt visited Xerox's famed invention lab in Palo Alto,CA 'a couple of years ago' |
