As of this writing, Xerox is attempting a hostile takeover of HP Inc., after HP Inc.’s board reiterated its rejection of Xerox’s offer on Jan. 9, 2020, and has obtained a commitment for the necessary $24 million loan to complete the deal should HP Inc. accept a Xerox offer.

HP Inc. continues to contend Xerox’s valuation of approximately $33 billion is too low, implying it would consider an offer with a higher valuation. HP Inc.’s stock market valuation is almost four times that of Xerox.

Acquisition remains a possibility

HP Inc.’s board has signaled its willingness to consider higher offers, as the driver of the offer, activist investor Carl Icahn, is a major stockholder in both companies and there is considerable overlap among leading institutional investors in both companies. Nevertheless, since the first offer was made, HP Inc.’s stock has increased in value and Xerox’s has decreased, making the proposed acquisition less attractive to shareholders. Xerox is limited in how much it can increase its offer, since higher offers would increase the debt carried by the new company.

Supporters of the acquisition recognize that Xerox’s and HP Inc.’s printing and printing-related services businesses are very complementary. Xerox is stronger in the enterprise, while HP Inc. is stronger with SMBs. HP Inc. relies on a strong channel, with emphasis on value-added services, and Xerox has a larger direct business, with channel partners relegated more to a reseller model. Xerox owns a more comprehensive services business, Xerox Business Services, that retains its locally and vertically oriented subsidiaries. HP Inc. is relatively stronger outside North America, especially with SMBs.

But it could go the other way

Because of its larger size and lower debt burden, HP Inc. is positioned to counteroffer Xerox with an offer to merge. The companies were in talks before Xerox’s original offer, and HP Inc.’s objection to the current offer is regarding valuation, so TBR believes HP Inc.’s board would consider a merger on better terms. Both companies are executing restructuring plans that involve headcount reduction to adapt to the globally shrinking market for printing, and therefore, print supplies, which has been a profitable part of both businesses. Both restructuring plans are also aggressive, Xerox’s more so than that of HP Inc. However, TBR believes Xerox’s proposed plan for the new company is too aggressive for HP Inc., suggesting an HP Inc. acquisition of Xerox, or a more equal merger, would not align with the plans of Icahn or the Xerox board.

3D printing: HP Inc.’s unhidden gem

The not-so-hidden gem in the HP Inc. portfolio is additive manufacturing, more commonly called 3D printing. HP Inc. has more than a decade of research in this field, growing out of the inkjet business. It has products and customers and regularly announces partnerships, small acquisitions and improvements in speed, size and materials. TBR believes 3D printing is a slow-moving, large-scale disruptor, starting with medical applications and retail customization and expanding into repair parts and low-volume manufacturing. Over time, 3D printing will drive top-line growth that the mature PC and printing businesses cannot. Xerox’s plan includes 3D printing, but it is one of many ostensibly adjacent businesses in which it has an interest. It is not clear that a Xerox-led merged company would continue to make the investments necessary to capitalize on this gem.

The PC impact

The big question for the PC industry is what a unified company would do with HP Inc.’s PC business. For HP Inc., PCs are a relatively low-margin business but generate a considerable amount of cash because of an advantageous cash conversion cycle. Spinning off or selling the PC business to reduce the new company’s debt burden is one possibility; however, Xerox has plans to leverage HP Inc. to make its services businesses more comprehensive, effectively combining managed print services with PCaaS.

There are no obvious acquirers for HP Inc.’s PC business. Acquisition by HP Inc.’s primary competitors, Dell Technologies and Lenovo, would probably be met with regulatory objections. Huawei is too restricted in the U.S. market, due to concerns over Huawei device security, to profit from such a deal. These facts suggest that an offer for HP Inc.’s PC business would be too low for the new entity’s needs.

Irrespective of the future of this deal, the uncertainty has opened up opportunities for HP Inc.’s primary PC competitors among customers and partners. While a merger would be more disruptive than the uncertainty, a spinoff or sale of HP Inc.’s PC business would be more disruptive than a merger. And TBR believes the uncertainty of this deal will continue to hinder HP Inc. as a whole until issues are resolved.

New year, new buys. And if your name is Accenture, it may be not too surprising to see twin acquisitions within the first week of 2020. In back-to-back announcements less than 24 hours apart, Accenture unveiled its plans to acquire Germany-based SAP shop maihiro and Symantec’s Cyber Security Services business. Maihiro will deepen Accenture’s SAP C/4HANA capabilities while Symantec’s cyber business buy will add a node (or six) to a well-established network of cyber managed services capabilities around the globe. Each acquisition is a natural extension of Accenture’s previous investments, including the company’s work with SAP around project Elevate and Accenture Security’s role as the connective tissue in the company’s innovation-led agenda. While some may consider the two buys mutually exclusive, we see enough overlap, considering the collaboration between Accenture Interactive and Accenture Technology when it comes to developing front-office, cloud-enabled and secured customer experience solutions, alleviating enterprise buyers’ pain points around managing first-party data.

We do not expect Accenture to slow its pursuit of acquisitions, considering the company’s announced intent to spend $1.6 billion in FY20. Many anticipate the next purchase will support a high-growth initiative such as Industry X.0 or will perhaps explore another agency buy similar to that of Droga5. Regardless, Accenture takes a well-rounded approach to developing its functional (e.g., technological) expertise, similar to how it ensures industry-vertical-aligned revenues and capabilities are well balanced and diversified. For example, each of the company’s five operating groups generates about one-fifth of total sales. With all the acquisitions Accenture makes, and has made for the past five to six years, the question of how best to integrate talent often arises. While some amount of turnover is inevitable for one reason or the other — often acquired talent from small firms cannot adapt to a larger organization and all the processes and policies that may come with it — these policies and processes reflect Accenture’s core command-and-control-style organization, helping the company execute its integration strategy quite successfully.

Will the next buy continue to support Accenture’s “in the new” agenda? Highly likely. Which area? Only Accenture knows. But, according to TBR’s Digital Transformation Insights research, cloud remains the most adopted technology among digital transformation buyers. Accenture recently launched two cloud solutions, myNav and Accenture Cloud Native Core Solution, suggesting the company is not finished building its portfolio and capabilities in the space.

TBR will continue to monitor and analyze Accenture’s acquisitions and overall go-to-market strategy, along with its financial performance across TBR’s professional services, cloud and telecom research portfolios.