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Another Power Deal in the Making

15 Oct, 2008 By: Infotrends Authors/Analysts imageSource

Another Power Deal in the Making

Once again, imageSource is reporting on yet another major industry
acquisition and “shake up” that affects the national dealer community. Late
August, IKON Office Solutions, the world’s largest independent channel for
document management systems and services, announced that it had signed a
definitive agreement with Ricoh Company, Ltd. In essence, Ricoh is acquiring
IKON for $1.617 billion.

intention is that the combination of IKON and Ricoh will leverage IKON's sales
and services capabilities with Ricoh's engineering and manufacturing expertise
to better meet the needs of customers, thus offering full end-to-end office
solutions and services. This major transaction is expected to close during the
fourth quarter of  2008, whereby IKON will become a subsidiary of Ricoh while
maintaining its headquarters in Malvern, PA.

The consolidation has analysts, researchers, consultants, dealers, among many
others in the office equipment channel, intrigued and concerned to say the
least, with most having lots to say on how this acquisition will effect the
industry.  InfoTrends, a leading worldwide market research and strategic
consulting firm for the digital imaging and document solutions industry, 
created an analysis on the transaction and its implications, with an excerpt
here in addition to keen insight from Strategy Development principal and
consultant, Tom Callinan, a former IKON executive who sees a lot of light at the
end of the tunnel for independent dealerships.

The InfoTrends Analysis

Ricoh Chairman and Chief Executive Officer Kirk Yoshida, said in part that
the move represented an opportunity for Ricoh to expand its market share, and
that the existing rules of engagement would be applied to limit channel conflict
and that Ricoh maintains its strong commitment to its dealer channel. He went on
to state that IKON would “refrain from soliciting any Ricoh, Lanier, Savin, or
Gestetner account of an authorized Ricoh, Lanier, or Savin dealer.”

IKON Chairman and Chief Executive Officer Matthew Espe, sent a letter to IKON
customers assuring them that the acquisition was in the best interests of IKON
and its customers, as well as noting that IKON fully expected that its suppliers
would continue to do business with IKON on the same terms and conditions that
they have in the past.

End of an Era

This acquisition marks the end of an era – IKON was the last of the
mega-dealers. IKON describes itself as the world’s largest independent
distributor of document management products and services. It integrates systems
from manufacturers including Canon, HP, Konica Minolta, Kyocera Mita, and Ricoh.
Most of these products are sold under the partners’ brand except for Konica
Minolta’s products and some Ricoh printers, which are offered under an IKON
brand. IKON is also a distribution partner for Kodak Digimaster production
printers through Canon. It supports the Canon imageRUNNER Pro products with
finishing options from Lasermax Roll Systems and Standard Hunkeler. IKON also
has a growing business selling wide format Canon and Ricoh products.

About IKON

IKON’s services go well beyond its wide range of hardware products. The
company offers document software from a range of vendors. Its services
organization, IKON Enterprise Services, offers document management services,
including professional services and on-site or off-site facilities management
(FM) services, legal document services, customized workflow solutions, and
support.  IKON’s total of about 24,000 employees in 400 locations in North
America and Western Europe includes a service force of 15,000 employees with
6,000 customer service technicians and support resource employees. IKON prides
itself on having a broad product and service portfolio covering technology,
outsourcing, document strategies, and equipment lease financing services (with
its partner GE Capital).


Ricoh’s acquisition of IKON is the most recent in a series of acquisitions
that have broadened the company’s footprint in office and production
environments. With over $17 billion in annual sales, 81,900 employees, and
offices in over 150 countries, Ricoh already had considerable market impact. The
addition of IKON builds on its continuing expansion efforts. In 2001, Ricoh’s
purchase of Lanier expanded the company’s direct sales and service capability
and provided expertise in verticals like healthcare and real estate. Ricoh
acquired Hitachi Printing Systems in 2004 and followed it up with the 2007
purchase of InfoPrint Solutions (currently a joint venture with IBM). Also in
2007, a few months before it previewed the RICOH Pro C900, Ricoh launched a new
unit, the Production Printing Business Group (PPBG), to expand its efforts
further into production environments. PPBG now operates as a strategic business
unit within Ricoh and has multi-channel responsibility for Ricoh America,
including dealers, IKON, RBS (Ricoh Business Solutions) direct, PPBG direct,
OEMs, and VARs.

Financial Aspects of the Acquisition

In 2007, IKON reported revenues of $4.16 billion with an operating income of
$202 million. It is interesting to see how this compares to other recent
acquisitions in the document space. The proposed acquisition price of $1.617
billion produces relatively low revenue and operating income multiples (i.e.,
the acquisition price divided by the revenue or operating income) when compared
to the multiples for the Xerox/Global Imaging and Océ/Imagistics deals. The
multiples for the Konica Minolta/Danka acquisition are also low, which was
likely due in part to Danka’s declining revenue, negative profit, and its
divesture of its European business (which was acquired by Ricoh NRG).

We realize that there are numerous strategic, financial, and market
considerations that dictate the value of an acquired company to its acquirer.
Moreover, the differences of business scale and market coverage make it
difficult to make a true apples-to-apples comparison. Nevertheless, it is clear
that the multiples have come down considerably over past years due to changing
market dynamics and the worsening of the financial credit market. Xerox and Océ
paid amounts above annual revenue to acquire Global Imaging and Imagistics,
respectively. Ricoh and Konica Minolta paid amounts that were well under annual
revenue. The market downturn in 2008 has clearly contributed to this.

Ricoh’s acquisition of IKON will boost its revenues in the document space.
Ricoh’s Office Solutions group, which includes its digital copiers, MFPs, fax
machines, scanners  and other related software, maintenance services, and
supplies stood at $16 billion at the end of ‘07. The addition of IKON’s revenue
(while not quite fully additive considering the existing distribution
relationship) will definitely surpass Xerox’s $17.2 billion.

At $24.9 billion, Canon’s reported Business Machine segment for 2007 is still
much larger than Ricoh Office Solutions. At the same time, however, each of
these companies classifies and reports its business segments differently.
Canon’s Business Machine segment includes not only Office Imaging products
(e.g., copiers and MFPs), but also Computer Peripherals (e.g., laser and inkjet
printers) and Business Information Products (e.g., scanners and computer
information systems). If we only consider Canon Office Imaging, the segment’s
revenue stands at $11 billion. Canon does not break out its Computer Peripherals
business by office and consumer segments, but some of this would fall within the
document-related spectrum. HP and Océ stand at opposite ends of the spectrum in
terms of size. HP’s Imaging and Printing Group, which includes a significant
component of printer revenue, is the largest of the included companies in this
space. The acquisition of Imagistics increased Océ’s impact, but it is the
smallest of the companies shown here.

More Analysis

One of the biggest open questions is whether IKON will continue to offer
multiple vendors’ products. In the short term, this is likely. IKON says that it
will continue to operate as an independent subsidiary and that it will offer
best-of-breed products as it always has done. In the long term, however, it
seems unlikely that IKON’s suppliers would be comfortable with this or that
Ricoh would allow it. In fact, Ricoh has already been quoted in the press as
saying that it expects to replace Canon products over a period of several years.
Still, anything is possible. Canon moved quickly to cut ties with Global and
Danka after those acquisitions, but it has much more at stake now. Canon has few
options left open with the sale of Danka and IKON. Will it be content to
continue to sell through IKON, perhaps while it develops other direct channels?

It is possible, however, that this announcement could foreshadow other
acquisitions. Pairings of Japanese and U.S. entities are now the norm. One
relationship that is developing is Océ/Konica Minolta. Is a merger or
acquisition next for them? Do other companies become more attractive acquisition
targets in the wake of large acquisitions in this space? One of the interesting
realities of the market now is that if a company wants to acquire a major
channel in the future, they will have to do so by purchasing a vendor that owns
the channel simply because there are no sizeable independent channels left to

For now, there  is a significant amount of speculation about the impact that
this news  will have on IKON suppliers. Canon & Konica Minolta have been quiet.
Until Canon and Konica Minolta make public statements, and until  the  official
Ricoh/IKON   transaction  documents are filed, we will not have additional
 clarity.  InfoTrends  expects  these  documents to be filed momentarily.

InfoTrends Authors/Analysts: Jon Bees, Zac Butcher, Randy Dazo, Omri Duek,
Jim Hamilton, Mike O'Leary, Robert Palmer, Barb Pellow, Alex Sumarta.


the three industry consolidators that have been acquired, Global Imaging, Danka,
and IKON, I believe Ricoh’s acquisition of IKON will be the most disruptive of
the three — and provide the most opportunity for the independent dealer.  Global
had revenues of approximately $1.1 billion and relationships with many of the
leading manufacturers, including Konica Minolta, Ricoh, Sharp, Canon, and
Kyocera Mita.  Because Global did not standardize on one or two product lines,
none of the major manufacturers lost a material portion of their revenue with
the Xerox acquisition.  Konica Minolta and Sharp continue to sell equipment to
Global and the other manufacturers will continue to enjoy supply and parts
revenue for the next four to six years.  The other unique aspect of the Global
sales was that Tom Johnson and his management team was able to get a significant
premium for their shareholders.  Global shareholders, followed by Xerox, were
the winners in this acquisition.

Clear Winner

With the acquisition of IKON, Ricoh increased their direct organization by
approximately $2.4 billion in the US.  I am taking IKON’s overall revenue, net
of foreign exchange gains, of approximately $4 billion and subtracting $600
million for European operations, $200 million for Canadian operations, $150
million for legal document services, and $650 million for facilities management
services.  There will be some loss of customers due to Canon brand loyalty
(let’s face it, brands do have value) and we can assume that Ricoh already owed
25% or more of IKON’s revenue, but clearly Ricoh significantly increased their
US Market Share.  That in itself is disruptive, and makes Ricoh the clear winner
in this acquisition.

On the other side of the equation, I believe IKON represented approximately
$820 million of Canon’s revenues.  Very little of this was from IKON’s European
Operations as they were predominantly Ricoh focused.  If you assume Canon US
lost—or will lose over time as the base of machines is replaced—$50 million with
Xerox’s acquisition of Global, $150M with Konica Minolta’s acquisition of Danka,
and $750 million with Ricoh’s acquisition of IKON you are looking at almost $1
billion in lost business.  I don’t care how big you are, $1 billion is a lot of

Dealer Opportunities

So where is the opportunity for the independent dealers?  First and
foremost, I believe IKON will be inwardly focused for the next three years, or
more.  I estimate that IKON has a North American (NA) base of machines in field
(MIF) of around 900,000 (based on industry measurement of aftermarket per unit
of MIF).  Let’s assume 180,000 of these are already Ricoh units, leaving a
competitive MIF of 720,000 units for Ricoh to upgrade.  If Ricoh converts 70% of
these 720,000 units to Ricoh equipment can you imagine the increased revenue and
profits they will realize as a company?  Just the NA MIF will pay for the
acquisition—the additional sales of parts and supplies, as well as the other
part of the business they acquired, will be a bonus.  Why wouldn’t you focus
your sales force on retaining the MIF and converting to Ricoh products?  Why
risk diffusing the focus with an offensive strategy that possibly leaves your
base vulnerable to competitors?  You can bet IKON will be inwardly focused.

Canon Refocuses

Canon has $1 billion of business to replace over the next three years just to
stay even.  This does not even take into affect the continued industry decline
in average unit selling price, migration to A4 products, or the continued
strengthening of HP as a viable player in the channel.  I don’t expect this next
statement to come as a surprise to anybody: Canon will be looking for more
distribution.  It is unlikely Canon will cancel IKON, as that has been their
history with past acquisitions by competitors.  IKON contributes too much
revenue to Canon and Canon has already suffered the loss of Global and Danka.

My experience with Canon is that they like independent dealers.  I don’t
think they were ever comfortable with IKON and, other than their original five
branches,  success seems to have eluded their direct operations.  Canon may look
to acquire dealers opportunistically—and I do believe they will be aggressive in
acquiring quality dealers that are considering selling to competitive
manufacturers—but I believe their primary focus will be to add quality dealers. 
Canon is considered a premier product line in the industry so this does not bode
well for the other manufacturers.  It will be good for the independent dealers.

Clearly, large Ricoh dealers will be squarely in Canon’s crosshairs.  Near
term I think the IKON acquisition will help these dealers—Ricoh will want to
keep them as satisfied customers and IKON will be inwardly focused—but the other
manufacturers will clearly fan the fires of concern with Ricoh’s largest
customers.  Nobody wants to be the thirteenth man on a twelve man team so there
will be concern about opportunities being closed by competitors taking action
first.  But Canon will not limit their recruiting efforts solely to Ricoh
dealers; every well run dealer with solid market share will be on Canon’s radar
screen.  Canon is not a “shoot from the hip” company and they will plan out
their distribution needs market by market and then target the channel coverage
they need. 

I believe Canon dealers will also benefit from Canon’s national account
program.  National accounts were IKON’s strength and Canon will need to go after
these large companies directly to maintain their significant presence in this
market segment.  The independent dealer will gain the service and supply
business from Canon’s efforts.

As Canon looks to grow distribution—with one of the top brands in the
industry—other manufacturers will look to shore up their distribution.  There
are only two ways to accomplish this that I know of: Buy the distribution or
make the channel so profitable that they don’t want to leave.  You will
definitely see an increase in dealers acquired by manufacturers.  The race to
lock up distribution is in the final laps and nobody wants to finish fourth or
fifth when they only handout medals to the top three.  But I believe you will
also see some phenomenal marketing programs as manufacturers target IKON’s base
of accounts—as well as Danka and Global accounts—and attempt to keep their
dealers warehouses stuffed with product so they have difficulty switching
product lines. 

As a dealer principal I learned early on that you have very little control of
the price at which you can sell product, so you need to ensure you buy the
product at the best price.  I see some really good pricing in the near future;
another benefit to the independent dealer.

Finally, independent dealers are very adept at focusing on mid-market
accounts and are very adaptable.  Dealer principals have deep community
relationships.  Many companies would prefer to do business with the local
entrepreneurial company.  The dealer principal is focused to profit and when
combined with adaptability they can launch programs such as print
management—without a hardware focus.  There will be fewer independent dealers as
the industry continues to consolidate.  Some pundits say this is fair warning to
get out while the getting is good.  I believe it is one of the best times to be
an independent dealer; nobody can compete in the mid-market better than you and
we all know the mid-market is the most profitable segment. 

Tom Callinan is the founding principal of Strategy Development, a management consulting and advanced sales
training firm. Tom graduated with honors from The Wharton School, University of PA. At callinan@strategydevelopment.org
or 610.527.3317, (www.strategydevelopment.org)

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