Acquisition to also include 6,500 of Samsung’s printing-related patents
Computer and printer major HP Inc. (NYSE: HPQ) has announced on September 12th, 2016, that it has signed a definitive agreement to acquire Samsung Electronics Co. Ltd.’s printer business for $1.05 billion, in a deal that would help the Company expand into high-volume A3 printer-copier devices. Following its separation from the data center focused- Hewlett Packard Enterprise Company (NYSE: HPE) in November 2015, HP as a separate entity sells personal computers, but generates most of its profits from supplying ink and toner for its printers. It is the market leader in the desktop-class printer segment.
In its Q3 FY16 earnings results announced on August 24th, 2016, HP reported that revenue from ink and toner supplies declined 18% Y-o-Y, while printer hardware unit sales fell 10% Y-o-Y. To spur revenue growth, HP’s CEO Dion Weisler has said that the Company would expand into larger A3 printer-copier machines, dominated by companies such as Xerox Corp. (NYSE: XRX), Canon Inc. (NYSE: CAJ), Ricoh Co. (OTC: RICOY), and Konica Minolta Inc. (OTC: KNCAF).
Potential deal to make way for innovation
The potential acquisition assumes significance since Samsung already sells A3 machines, which HP will acquire in the deal. HP will also acquire the ability to manufacture a crucial component inside laser printers known as printing engines. Currently, Canon is HP’s main supplier of printing engines for its existing product line. The potential deal would also enable HP to disrupt and reinvent the $55 billion copier industry, with its superior multifunction printer technology.
For HP, the potential acquisition is the largest in its history, paving the way for the Company to accelerate growth opportunities in the copier segment, strengthen its leading laser printing portfolio, and enable printing innovation. It also enables greater profitability for HP’s partners as they expand managed print services from a transactional sales model to a contractual mode.
HP looking to combine Samsung’s A3 MFPs with PageWide
Research firm International Data Corporation (IDC) reported in May 2016 that worldwide shipments of printers declined 10.6% Y-o-Y to 23,114,918 units in Q1 FY16. HP, the leader in the printer market with a 36% market share, shipped 8,385,014 units in Q1 FY16, a drop of 18.6% Y-o-Y. Canon is the second-biggest printer company in terms of shipments, followed by Seiko Epson Corp., Brother Industries Ltd., and Samsung.
Samsung, the fifth largest printer company in terms of shipments, generates $1 billion to $1.6 billion in annual revenue. In Q2 FY16, Samsung’s shipments fell 8.9% Y-o-Y, according to IDC and as reported by The Wall Street Journal on September 12th, 2016.
However, Samsung has a strong portfolio of A3 MFPs that offer reliability and ease of use with as few as seven replaceable parts. Integrating Samsung’s printer products, including their mobile-first and cloud-first user experience, with HP’s next-generation PageWide technologies would create a breakthrough portfolio of printing solutions with the industry’s best device, document, and data security. HP’s PageWide technology sprays ink using a print head as wide as the paper being used, and can print color pages much faster than traditional inkjets.
Deal to include Samsung’s patents
The potential HP-Samsung deal includes about 6,500 of Samsung’s printing-related patents and a world-class workforce of 6,000 that includes nearly 1,300 engineers with expertise in laser printer technology, imaging electronics, and printer supplies and accessories. While the potential acquisition would boost HP’s presence in the fast-growing Asian market, it would also strengthen HP’s ability to service customers in global laser printing, a category where it heavily relies on Canon.
The acquisition is expected to be accretive in the first full year following closing, with cost synergies and a strong financial model. The transaction is expected to close within a year, pending regulatory review, after which Samsung has agreed to make a $100 million to $300 million equity investment in HP through open market purchases.
HP Q3 FY16 financial highlights
HP reported a 4% decline in net revenue to $11.9 billion (down 1% in constant currency) during the reporting quarter. HP’s Q3 FY16 GAAP diluted EPS from continuing operations rose to $0.49 from $0.39 in the prior-year period. Non-GAAP diluted EPS from continuing operations also grew to $0.48 from $0.35 in the prior-year period. HP’s net cash provided by operating activities in Q3 FY16 was $1.1 billion.
Personal Systems: This segment’s net revenue remained flat Y-o-Y during the reporting quarter (up 2% in constant currency) with a 4.4% operating margin. Commercial net revenue fell 3% and consumer net revenue jumped 8% during the reporting quarter. Total units grew 4% with Notebooks units rising 12% and Desktops units down 6%.
Printing: This segment’s net revenue fell 14% Y-o-Y during the reporting quarter (down 10% in constant currency) with a 20.4% operating margin. Total hardware units were down 10% with Commercial hardware units down 2% and Consumer hardware units down 14%. Supplies revenue plunged 18% (down 13% in constant currency).
Guidance for Q4 FY16 and full year FY16
For Q4 FY16, HP estimates GAAP diluted EPS from continuing operations to be in the range of $0.22 per share to $0.25 per share and non-GAAP diluted net EPS from continuing operations to be in the range of $0.34 per share to $0.37 per share.
For FY16, HP estimates GAAP diluted EPS from continuing operations to be in the range of $1.46 per share to $1.49 per share and non-GAAP diluted EPS from continuing operations to be in the range of $1.59 per share to $1.62 per share.
HP’s stock ended the day at $14.18, tumbling 2.14%, at the close on Tuesday, September 13th, 2016, having vacillated between an intraday high of $14.44 and a low of $14.06 during the session. The stock’s trading volume was at 14,979,024 for the day. The Company’s market cap was at $25.23 billion as of Tuesday’s close.