(Our exclusive intelligence reports are based on company sources, public SEC documents and industry consultants following the print and publishing industry. At times, it is necessary to quote unnamed sources. As a tradeoff for protecting sources, we are able to reach beyond the surface and gain a deeper understanding of key issues impacting the industry. If you have any questions about this story, please contact us.) 11.26.01 - On September 6, 2001, Hewlett-Packard and Indigo N.V. announced that HP would acquire the remaining outstanding shares of Indigo. HP already owned 13.4 percent of the company under an agreement signed last year for which HP paid $100 million. HP will acquire the remaining shares for $629 million in HP common stock and a potential future cash payment of up to $253 million contingent upon Indigo's achievement of long-term revenue goals. Said Benny Landa, Indigo's chairman and CEO, "Our vision has always been to lead the printing industry into the digital era and to see Indigo technology pervade the commercial printing market.'' HP has been hovering over the high-volume commercial print market for several years. Their inkjet and LaserJet technology/products have gained market share in prepress areas but they have only recently turned out a high-end output device. Last year’s investment in Indigo called for Indigo to manufacture digital color equipment under the HP brand. This summer, HP introduced their first high-volume color press under this partnership - the HP Digital Press 6600. Three months later, HP announced their intent to acquire Indigo. "The Indigo team has a rich history of innovation and strong customer relationships that has made it a leader in the commercial printing market," said Carly Fiorina, HP's CEO. "Our two companies have a proven track record of collaboration, and this new relationship will result in an even more compelling suite of offerings and support services for customers around the world." Digital color printing - HP thinks now is the right time and Indigo has the best technology. This deal can be traced back to 1998, well before last year's investment by HP. Was this a good deal for HP? Was it a good deal for Indigo? The focus has been on HP being a new choice for printers when selecting a digital press, but is something much bigger brewing behind the scenes? Indigo Recap: Indigo's products include the Indigo e-Print Pro+, a four-color entry-level press; the Platinum, featuring electronic collation, personalization and six-color printing capability; the UltraStream 2000, which is designed for high-volume print requiring seven-color capability; and the Publisher presses, for mid-volume and commercial printing and direct mail markets. (expected to be available in 2002) Industrial printing products include the Omnius WebStream family of One-Shot Color presses, which bring on-demand color printing to the packaging and labeling markets, and the Omnius MultiStream which permits printing on plastic sheets for the production of specialty products. Indigo's photographic printing products, which are not expected to be commercially available before 2002, include the Photo-e-Print line, which will provide high quality, high speed and low cost solutions for retail and professional photographic labs as well as centralized wholesale photofinishing operations. Indigo's liquid electro-photography (LEP) technology touches commercial and industrial printing as well as photo-finishing. LEP combines digital laser imaging with ultra-small ink particles enabling prints of higher quality to be produced at offset print speeds. Besides direct sales, their products are marketed through OEM channels under agreements with DataCard, A.B. Dick Company, Werner Kammann Maschinenfabrik, Nilpeter A/S and of course, HP. Details of the Inevitable Deal Over the past few years, the two companies discussed the possibility of HP buying Indigo on at least three different occasions. Three years ago, HP examined the possibility of an acquisition, again in the spring of 2000, and once again this year. Sources say Indigo CEO Benny Landa has always believed that HP could benefit most from their technology and always desired them as a formal partner. It was just a matter of time. The September 2000 Agreements: Last year’s investment by HP initiated motion for the eventual acquisition. However, Indigo spoke with several competitors to determine interest before agreeing to grant equity to HP. Executives at Indigo knew that the investment by HP would certainly “land lock” the company and possibly limit future liquidity and partnership options. Discussions with other companies were fruitless. So needing the cash and HP being an attractive partner, Indigo sold 13.4 percent of the company for $100 million. HP would sell certain digital color printing products on an OEM basis and HP and Indigo would collaborate on future digital color printing systems and products. Sources say that the OEM agreement signed in September really handcuffed the two companies. Executives at Indigo said the agreement called for a total opening of their intellectual knowledge. Said one source, “As Indigo and HP began working ever closely together, it became even more evident that the two companies should combine. Even before the deal, Indigo felt they would end up carrying HP into the commercial print market on their back.” In March 2001, Bill McGlynn, Vice President and General Manager, Digital Publishing Solutions at HP, and Landa held meetings about the existing agreements. Landa made his wishes known that HP should acquire Indigo. Shortly after this discussion took place, Landa detailed conversations with McGlynn to Indigo’s board of directors. At the end of May 2001, HP and Indigo met again in San Diego to discuss the existing agreements. Once again, sources say there was simply no way of getting around the obvious. In June, the parties met in New York City to discuss further the possibility of an acquisition of Indigo by HP. At these meetings, Landa had determined the key issues and concerns from his board and raised them here. In July, HP’s board of directors authorized HP's management to continue its discussions with Indigo. John Brennan, HP's Vice President of Strategy and Corporate Development contacted Landa and outlined the terms of a non-binding proposal by HP to acquire Indigo. Indigo's board met and discussed the terms of the proposal. HP wanted to pay for Indigo with stock combined with future payments based on a contingent value rights (CVRs) component. (Future cash payment based on Indigo meeting revenue targets.) Indigo’s board concluded that a higher proportion of payment should be in the form of HP stock payable at the closing and a smaller portion attributable to future performance. Landa went to work - contacting and meeting with HP executives and Indigo board members on numerous occasions to move the deal forward. One important meeting was even held at San Francisco International Airport between flights. In mid-August, Landa told McGlynn that Indigo was willing to discuss a structure where Indigo shareholders could elect between receiving solely HP stock or a combination of HP stock and CVRs. Specifically, Landa proposed a structure in which fifty percent of Indigo shares would receive a combination of HP stock and CVRs, and fifty percent of Indigo shares would receive solely HP stock. (Interestingly, some of the recent comparisons used to formulate the value of the deal included NUR’s acquisition of Salsa, Creo’s buy of Scitex’s pre-print business, Xerox’s purchase of Tektronix’s color division and even the purchase of Linotype-Hell by Heidelberg.) On August 31, 2001, Landa met with Carly Fiorina, CEO of HP, and Vyomesh Joshi, President of HP's Imaging and Printing Systems, to discuss the structure of the CVRs. HP’s board of directors authorized HP to acquire all the outstanding Indigo common shares by way of an exchange offer. On September 6th, the deal was done. HP’s Competition - Not the Usual Suspects While Indigo brings HP into the commercial print market, their primary target will be corporations. HP will sell digital color presses to printers, but high level sources respectfully say they will not wait around for printers to realize the market shift. Since the announcement, the industry hype has focused on HP’s presses versus Heidelberg’s NexPress and Xerox’s DocuColor machines. Sources say the battle will be won in the services business. Expect HP to compete more in on-site facility managements - against Xerox, Pitney Bowes, IKON and even local printers. Important analysis has been conducted by HP to determine the opportunities for on-site print management. Clearly, HP could flex their muscles in accounts where they have heavy IT infrastructure and top level relationships. The company has already surveyed many customers and held talks with possible partners. (We’ll report more specifics about this soon.) Examine this excerpt from a speech Fiorina gave at the IDC European IT Forum shortly after the Indigo announcement. “HP wants to help our business customers save money in the printing of annual reports, customer brochures, and other types of printed collateral by bringing these capabilities in-house so companies can print materials like these on-demand. One CFO we talked to said he'll save $25 million a year by reducing his storage and carrying costs for obsolete printed materials. That's real money - and the customers I talk to appreciate opportunities to save real money. Incidentally, these opportunities are not just about printing... they also include lots of servers, storage, and software. I remain convinced that having an imaging and printing franchise and a computing systems franchise will continue to be a competitive differentiator, particularly as the physical and digital worlds become even more intertwined.” A Good Deal Most agree it’s a good deal. HP’s offer was a superior alternative versus continuing to operate independently in light of current economic conditions and uncertainty in the forcasting of digital printing trends. Since going public in 1994, Indigo has never made a profit and has spent significant time raising money. Additionally, Landa says there is no overlap with current HP divisions which means no one will lose their job - in fact they’ll be hiring. Landa will serve as a consultant to HP and his fortune depends further on the success of Indigo under HP. (Landa’s family owns 44 percent of the outstanding shares in Indigo and has selected the option of HP stock and CVRs that entitle the Landa family to a contingent cash payment based on Indigo's achievement of revenue milestones.) Someone has to fund and balance the research, sales and innovations for this new growth market. If anyone has that experience, HP does. Again, from Fiorina’s speech at the IDC Forum, “In order to deliver on these big aspirations for technology and its role in business, society and daily life ... one company had to step forward to lead the change ... a company with enough market presence ... a company with a conviction and commitment to market-unifying architectures and approaches ... a company committed to putting customers first, not technology. The new HP will be that company.” Indigo, left to itself, most likely would have experienced the same financial strains that Xeikon is going through now. Indigo would have eventually scaled with size and possibly reached profitability, but it’s not a very attractive challenge these days - even for Benny Landa.