Friday, April 12, 2024

The Xerox HP Merger: A Good Idea?

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This week it was announced that Xerox wants to buy HP and is putting together a package to make it happen. On paper this looks like a good idea.  Two iconic brands with similar cultures coming together in a market that has struggled to show growth, while Xerox is trading high and HP is trading low.  

But the devil is in the details and, without a lot of work, this won’t end well. 

Let’s break this down this week.

Looks Good On Paper

HP came to be because Meg Whitman concluded that the future was in servers and not in PCs and printers, so she spun out HP and was surprised when HP seemed to do substantially better than the HPE server unit she retained.

HP remains under pressure for a variety of reasons, including the US and Chinese tariffs, increased competition in the PC segment, and pressures to reduce all activities that consume natural resources like printing. In response, HP has become the leader in PC security, introducing revolutionary designs like the Spectre Folio, and became a leader in industrial-grade 3D printing. They did this while reducing their ecological footprint and making huge sustainability advances in printing. 

The related IP could be incredibly powerful at scale, but HP lacks the resources to break out, and the market has undervalued its stock as a result, which is forcing HP to cut expenses to increase their valuation.  Right now they are a bargain, and when you are a bargain someone will attempt to buy you.

That someone is Xerox, which has already shed a substantial amount of cost and is heavily influenced by Carl Icahn, a corporate raider, famous for tactically increasing valuations.  Xerox is still a major power in printing and imaging but lacks much of the forward-looking technology in textiles, wraps, 3D printing, and sustainability that HP has built. HP has an iffy present but a strong future, while Xerox has an iffy future but strong present.  

Done right, this merger could save Xerox, but the devil is in the details.

Reality Is Problematic

Both Xerox and HP have strong brands, but HP still strongly connects back to its founders and its current CEO is a 30-year veteran. With Xerox buying, the HP brand will be at risk, and that likely will be unpalatable for the HP team. I doubt there is any amount of money that will motivate any of the long term HP employees to want to risk killing that brand and going down in history as the team that killed the company they’ve loved and supported for decades. 

While it is ironic given Xerox PARC is where the PC was born, because they believed the core technologies had no market for them to get one of the most powerful PC companies in the world, I doubt they want it. This lack of interest means a major chunk of HP is just not interesting to them, but they’ll still have to pay a premium for the company. That means they’ll need to sell or spin out this unit, and doing that in a way that doesn’t kill the unit will be very difficult; the PC market is a highly competitive segment. 

Carl Icahn is one of the key architects behind Xerox’s strategy, but he is known for selling off parts of companies, many of which don’t survive his attention. This relationship doesn’t bode well long term for either Xerox or HP, and, I expect, the HP rank and file already expecting sharp layoffs won’t support this merger as a result. 

As of this writing there is no support for this move from HP.  Large mergers are very difficult to pull off, and neither HP nor Xerox has shown the skills necessary for a merger of this scale.  (Several decades ago the old HP did buy Compaq, but the success of that merger came out of an ugly proxy fight and managed by Michael Cappales Compaq’s ex-CEO, who is long gone).  Hostile mergers, unless the plan is to kill the company and keep the assets, are virtually impossible to do because the acquired company’s employees, particularly in a tight labor market like this one, will look to exit or not cooperate. 

Finally, of the two firms, HP is more visionary, but the acquiring firm, not the acquired firm, tends to drive strategy.  This dichotomy means this merger should be HP buying Xerox, not the other way around, for it to be optimal.  Now, this does suggest a path to success, and while risky, large mergers can work – as Dell demonstrated with EMC. But Carl Icahn tried to kill that merger and would likely block HP either buying Xerox or taking over control of it as a result. 

Wrapping Up

On paper the merger looks interesting, but the details are problematic. Large mergers generally fail to meet expectations due to the massive complexity of them and require a unique process that neither HP nor Xerox has demonstrated. There is a vision miss-match where the acquired company, not the acquiring company, has the needed skills, most of which are likely to move to other firms given a tight tech labor market before the merger is complete. And these people would likely lack the status they’d need to execute if they stayed, coming from HP. 

Given it appears HP isn’t backing this and that hostile mergers at any scale are problematic, I doubt they can either get this approved or execute without substantially reducing the value and ability to execute of the combined company. There is a path to success, but that would have HP buying Xerox and using Dell’s acquisition process which has proven to be successful. And they have people on staff that know that process. However, that isn’t the plan of record, so the outcome of this effort is likely to end badly unless something significant changes. 

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