OEMs’ Strategic Initiatives in Context26 May, 2016 By: Brendan Morse, InfoTrends
In the past several months, we have seen HP, Xerox, Sharp, and Lexmark all making major strategic changes to their businesses. While these moves and the reasons behind them vary based on the manufacturer in question, I generally see these as initiatives as being positive for channel partners and end customers. Thus, I believe that the fear of doom and gloom conversation surrounding these initiatives lacks context.
OEMs’ financial statements, which often feature revenue challenges and cost savings measures, are one cited sign of decline. There’s simply no denying that the office technology industry is competitive and vendors see the impacts on their revenues and margins. Despite this, these office equipment manufacturers generate quite a bit of cash. For example, HP Inc. has projected its free cash flow will be $2.3B - $2.6B in fiscal year 2016. The vast majority of those revenues come from the print division. Xerox and Lexmark are much smaller in terms of revenues, but are still reporting hundreds of millions of dollars in income. While Sharp overall was in deep financial trouble, the Business Solutions division was actually seeing solid growth. Closer to home, Sharp America (SIICA) has made significant strides in improving the company’s operations and performance and is now seen as a standout performer through Sharp. While it varies across the industry, many of the other manufacturers are reporting fairly robust growth in revenues and/or profits. Putting it most simply, the manufacturers are far, far from broke as many industry watchers might have you believe.
HP, Xerox Splits Give New, Renewed Focus on the Core
Prior to the split, HP was one of the largest most diversified technology companies in the world with roughly 300,000 employees. The many difficulties in managing such a massive enterprise were immense. As one company it had too many lines of business and the synergies did not outweigh the problems that come with successfully operating such a company. The company leadership eventually settled on the idea that shareholder value and competitiveness in the market would be maximized by splitting the company.
The story of the Xerox split actually goes back to an acquisition—Affiliated Computer Services (ACS) for $6.4 billion in 2010. The strategy was to create a leading business process outsourcing (BPO) and technology manufacturing and services organization. However, the benefits of the acquisition never really played out. Xerox put it quite candidly when announcing the split when they said “it has become increasingly clear that the Document Technology and BPO businesses serve distinct client needs, have different growth drivers, and require customized operating models and capital structures.” The financials also spoke for themselves. Xerox only had $3m more in income than it did the company had in 2009 (pre-ACS acquisition). The company is now preparing to create two separate public companies, one focused document technology & services and the other focusing on BPO. The document technology and BPO organizations are still setup independent of each other operationally and financially, and this will actually make the split somewhat less expensive and perhaps less of a distraction than in the case of HP.
Despite the different background, Xerox and HP Inc. splitting may be very beneficial for partners and end-customers. Both companies will not be using print and imaging revenues to fund acquisitions or other initiatives in the different lines of business. While HP Inc. still has two major divisions in separate markets—Personal Systems (i.e. PC) and Print—it still represents a dramatic rationalization for the company. The Xerox document technology company will have 40,000 employees; thus freeing itself from the 100,000 employees tied to outsourcing. While both companies have announced more lay-offs and other cost-saving measures post-split, both have also announced investments. HP announced that R&D will not be cut and some growth areas will see more in funding. Xerox has indicated that once split, the document technology company will also invest in new technologies. In the cases of Xerox and HP Inc., I see the renewed focus on core document technology and growth areas around it as major steps toward improving these companies’ products and services.
Acquisitions Bring Much Needed Cash, Stability to Sharp, Lexmark
The 2008 recession, strong yen, plant overcapacity, and weakening demand in the large / consumer electronics [division] left Sharp in very poor financial condition. With the company bleeding billions of dollars, the management decided against another bail out by large Japanese banks, and instead gave a controlling stake to the giant Taiwanese electronics manufacturer known as FoxConn Technology Group. This is the first of its kind by a large Japanese manufacturer. The conventional wisdom is that together, the two companies’ consumer divisions can find more cost savings, maintain prices, and be more innovative together.
Back in October 2015, Lexmark announced plans to explore “strategic alternatives,” which many took to mean they were exploring a major move like splitting the company in two separate entities, selling a significant portion of the company, or to sell the entire company as-is. Six months later, Lexmark announced that it entered into a definitive merger agreement with a consortium of investors led by Apex Technology Co., Ltd. (Apex) and PAG Asia Capital (PAG), under which Lexmark will be acquired for $40.50 per share, representing a significant premium on the stock. Apex Technology Co., Ltd. is a Chinese company, which the largest manufacturer of aftermarket imaging supplies. The company that noted that Lexmark’s two business groups; Imaging Solutions and Services and Enterprise Software, as well as the company’s regional and country operations, is expected to not be materially affected in the near term.
While the end result of both acquisitions is not entirely yet clear, there are a variety of reasons to be optimistic. First, the end to much of the uncertainty is important for the employees, partners, and customers of each company. This unto itself will help each company retain their most talented employees, along with reassuring their partners and customer that their technology vendor is not disappearing. Each company also intends to invest in the print and imaging portfolio. The FoxConn deal calls for investment of $450M in the Business Solutions Group worldwide, with much of the investment centered on the operations in North America. As a clear bright spot in the company, Sharp’s new owners are likely to take hands off approach to the group as to not compromise one of the company’s growth areas. When it comes to Lexmark, the path forward seems somewhat less clear, but at this point it seems Apex has plans for growing Lexmark. Lexmark’s CEO stated that Lexmark will be able to use the relationship and resources to “invest in and grow the business to more fully penetrate the Asia Pacific market for hardware, software and managed print services.” This makes sense given that InfoTrends is forecasting that MPS alone will grow 9% YoY through 2019 in Asia Pacific. However, the announcement does not make clear exactly how private equity and a Chinese supplies remanufacturing company can accomplish this serious undertaking
A Good Time to be a Dealer and Customer
So, I have laid out the reason why the office equipment industry is not in as poor of shape as many claim. In fact, these should be viewed as just the most recent in a long series of on-going decisions that OEMs have made in the past decade to remain competitive in a dramatically changing industry. Not only is the sky not falling for the OEMs, it is a good to be a dealer or customer. The recent strategic shifts seen among HP, Xerox, Sharp and Lexmark mark renewed focus and dedication to their core technologies and new level stability for their partners and customers. Xerox, HP, Sharp, and Lexmark have all reiterated a commitment to invest resources and focus on their document technology portfolio. This strategy will pay dividends for channel partners and businesses. Generally speaking, the modern copier has become quite an impressive technology platform and output device. With renewed focus, the companies mentioned here will only improve it.
Additionally, the office equipment dealer channel is actually on fairly solid footing. Dealers are more valuable than ever. In fact, there is an argument to be made that individual dealers have more influence than ever because there are simply so few left. The total number of dealers has declined by 2/3 in the past two decades, and this trend is still moving at a brisk speed. However, this will result in very competitive partner programs, even at a time when revenues are challenging for the manufacturers. Strong, resilient dealers are a more valuable commodity than ever, and this means that dealers should be expecting more from their OEM partners—not less—despite OEMs’ revenue challenges.
Brendan Morse is a Senior Research Analyst with the Managed Services and Network Document Solutions advisory practice areas for InfoTrends, a leading worldwide market research and strategic consulting firm for the digital imaging and document solutions industry (a subsidiary of Buyers Lab/BLI). Mr. Morse holds a Master’s Degree from the University of Chicago and a Bachelor’s from the University of Southern Maine. For company information visit http://www.infotrends.com.