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.
Industry Comments
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.
Discussion
By David L. Zwang on Jul 12, 2016
This notice was a bit of a surprise to me as well.
I get the value of the RRD services business to Xerox. It is probably one of the largest components of RRD at this point. As for the other side of the RRD biz. They do have some hardware they have developed, but the bigger prize is probably the IP (intellectual property). RRD has lots and lots of IP. Much of it came from Moore Wallace, but a lot was internally developed. I think the bigger issue will be where do they put the 'print' component? Service?
By Gerhard Maertterer on Jul 13, 2016
What a sense of déja vue!
In 2012 Ricoh acquired Georg Kohl, a german provider of document process outsourcing, business process outsourcing, direct mailing services and production printing capabilities. In those days Ricoh’s press release broadcasted: „This merger enhances Ricoh’s ability to provide outsourced invoicing services to customers around Europe“.
At that time we – as offset-printers – were on our way to enter also the digital printing market. And we were looking for the best digital printing equipment. But we hesitated to discuss our digital strategy with a manufacturer, who owned a competitor in our very own market segment – c'est la vie!
Gerhard Maertterer
Director One-to-One Marketing Solutions
EVERSFRANK GROUP, Germany
By Peter Crean on Jul 13, 2016
Cary,
My first thoughts were the same as yours - why??. But I think we are looking at it from the wrong end. It makes more sense when you consider the positions of Carl Ichn and ACS fonder Darwin Deason, two legendary merger specialists and raiders. They are the two largest Xerox shareholders and they are looking to makeout in the Xerox split(s). They thrive on chaos, confusion and deal making. Having this come out about the time the new Xeroxes are setting their evaluations is great opportunity. Adding a 3.5 B$ (RRD) company to 7 (ACS) and 11 (XEROX) B$ companies shouldn't make much of a difference, but I"ll wait and see.
By Cary Sherburne on Jul 13, 2016
Peter, thanks for your comment. The $3.5B is RRD valuation not revenues, their revenues are more like $11B ... it appeared from the article that the entire RRD would be acquired and split across Xerox and Conduent, although this is, of course, just speculation at this point. I still see a major issue with Xerox competing with its customers, or the perception of it, anyway. As you say, we'll wait and see! Never a dull moment.
By Wayne Lynn on Jul 13, 2016
Cary, I agree with Peter. This doesn't make a lot of sense when you look at it from the classical M&A point of view. If this comes to pass I think we are likely to be surprised at the shape and size of the resulting business entities. Somebody sees something in this situation that holds value that will generate a nice pay day for the investors. Reminds me of that Michael Douglas movie...
Discussion
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