Commentary & Analysis
Xerox and RR Donnelley to Merge? What Would This Mean for the Industry?
Say what? Mainstream media is reporting that the two are in talks, and all this in the middle of Breaking Up Is Hard to Do for both companies. Xerox responded to an email inquiry early this morning with this: “All we are willing to share at this point is that we don’t comment on market speculation.” Expected. RR Donnelley has always been extremely close to the vest even when the topic is not material, so there wasn’t any point in reaching out there. But we do have our feelers out to see what we can pick up.
By Cary Sherburne
Published: July 13, 2016
Update 7/15: Xerox Board of Directors have privately rejected a proposed merger with R.R, reports the Wall Street Journal.
Our readers are certainly aware that in January, Xerox announced that it would split its business in two by the end of the year. Its services business, largely comprised of what was ACS that it acquired a few years ago, will be known as Conduent and headed by Ashok Vemuri as CEO. Its technology business, which will retain the Xerox name, will feature Jeff Jacobson as its CEO.
Meanwhile, RR Donnelley announced plans for a three-way split last year, although there has not been much news on its progress. The company split would look like this:
- Customized Multi-Channel Communications (CMCo)
- Financial Communications Services (FinancialCo)
- Publishing & Retail-Centric Print (PRSCo)
According to a report published by Bloomberg, “The talks are at an early stage, one of the people said. A deal could be announced before Xerox’s split is completed, another person said … R.R. Donnelley, the owner of the Edgar financial-statement wire service, announced it planned to split into three publicly traded companies last year. A deal with Xerox would negate that plan, the people said.” It would seem likely that such a deal would need to be completed before the Xerox split, especially if piece parts of RR Donnelley are to be split between Conduent and Xerox.
Xerox’s document technology generated about $11 billion in 2015 revenue, compared with $7 billion in sales from the outsourcing business. According to Bloomberg, Xerox has a market value of about $9.6 billion based on Monday’s closing share price, while R.R. Donnelley has a market value of about $3.9 billion. RR Donnelley reported 2015 revenues of $11.3 billion. Over the years, RR Donnelley has snapped up a number of companies, most notably the relatively recent acquisition of Consolidated Graphics, but has acted as a consolidator, failing to generate much, if any, organic growth as a result of these deals. Xerox has historically not been known for its acquisition skill, or rather, the ability to successfully integrate the businesses, although some of the more recent ones, including Impika, seem to be doing a bit better.
What Would This Mean for the Industry?
Good question. RR Donnelley certainly has a diversified portfolio, including its own proprietary inkjet printing equipment. Back in 2011, the company announced a deal to license some of that technology to KBA, wherein the companies would jointly develop, manufacture, and sell next-generation piezoelectric digital inkjet printing solutions to the packaging, securities, commercial, and newspaper segments. Interestingly, Xerox and KBA recently announced a partnership as well, to build a hybrid folding carton press, the VariJET 106 Folding Carton Press.
But the bottom line is that much of RR Donnelley’s revenues, across all three proposed new companies, consists of printing – books, financial, commercial, packaging, all of it. It would seem that by joining forces with RR Donnelley, Xerox would be put in the position of competing with its customers. Over the years, this has been a bone of contention between Xerox and many printing concerns, who are uncomfortable purchasing equipment from a company that might then sell printing services to companies in a competitive mode. While Xerox has worked to quash this perception, acquiring RR Donnelley would surely resurrect this discussion, big time.
It should also be noted that while RR Donnelley has Xerox gear in many of its locations, it also has gear from Xerox competitors, most notably HP.
Personally, I can’t even get my head around this. I can’t imagine the complexity of trying to integrate these two companies in the midst of a split. But it is not hard to imagine what the reaction in the industry will be as the situation evolves.
We’re hoping you will post your comments here, and we will keep abreast of the story on your behalf.
Marco Boer, IT Strategies:
I’m not privy to any of this, but I’d speculate that by Xerox acquiring RRD it enables Xerox to a) gain growth in revenue it hasn’t been able to do organically, b) puts it further up the value chain (but at the same time in competition with some of its existing customers who use Xerox equipment to print which might make some customers unhappy), and it makes it more difficult for Xerox to be acquired by another company.
There may be a second play to all this, where Xerox sells some of the RRD divisions after the deal closes.
What RRD gains is a bigger parent, with presumably more resources. While the end results of this merger/acquisition won’t be clear for some time (assuming the deal closes), the transaction costs associated with this will make the bankers and lawyers happy.