HP Inc. reaffirms its rejection of Xerox offer

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.

Sustained growth provides Accenture with the flexibility to enact internal and operational changes

In this week’s Accenture report, Senior Analyst Boz Hristov notes, “Accenture’s robust account management capabilities and diversified footprint supported continued profitable growth in FY1Q20 (CY4Q19), leading to increased market share. TBR does not expect major changes to the course of the company’s go-to-market strategy following the announced changes on Jan. 13 to its growth model, as client demand for globally supported, locally sourced services align well with Accenture’s integrated scale. TBR will provide further analysis of these changes during 1Q20.”

Additional assessments from our analyst teams

“As reported in the IT Services Vendor Benchmark, trailing 12-month IT services revenue growth decelerated year-to-year in 3Q19 as competitive pressures in traditional and emerging IT service areas, such as digital, cloud and cybersecurity, combined with unfavorable market dynamics tied to rising macroeconomic uncertainties and pockets of tight spending, slowed vendors’ revenue performance during the quarter. Average profitability for benchmarked vendors contracted year-to-year in 3Q19, and five of the top 10 operating margin leaders experienced the negative trend. Some of the vendors are finding it hard to balance addressing revenue pressures with investing in portfolio expansion, talent development and service delivery improvement such as through automation.” — Elitsa Bakalova, Senior Analyst

“In 4Q19 Wipro announced the opening of multiple centers globally. Specifically, Wipro opened a next-generation engineering and innovation center in Virginia that will focus on domain-centric use cases and add 200 jobs to its workforce of 500 in the area. Further, Wipro launched a NextGen Cyber Defense Center in Australia with plans to hire 100 cybersecurity personnel. TBR believes the new centers are aimed at diversifying Wipro’s APAC revenue base by driving traction with Australian government agencies for services like cyber resiliency and digital protection, supported by Wipro’s plans to open additional centers in Australia.” — Patrick M. Heffernan, Principal Analyst

On Wednesday Analyst Stephanie Long and Principal Analyst Geoff Woollacott will host a live webinar on the 2020 outlook of the data center market, including how data center vendors are investing in various emerging technologies to augment their portfolios and maintain relevance as legacy portfolios become commoditized. Register today for an opportunity to participate in this exclusive Q&A!

Humio highlighted as standout hybrid enabler

“Catie Merrill, a Research Analyst at Technology Business Research, includes Humio in her new special report. The report, Amid rise of Kubernetes as standard in cloud-native deployment, vendors vie to be leading hybrid enablers describes how Humio stands out among startups that seek differentiation with niche, data-friendly tools.” — Humio

CIO role: 9 ways it will evolve in 2020

“After several years of IT vendors and consultants targeting other C-suite leaders and line-of-business heads to engage in digital transformation work, they’re looking back to CIOs again. ‘We’ve seen a swing back towards IT as decision-makers as digital transformation starts to mature,’ says Patrick Heffernan, senior analyst at Technology Business Research. ‘As it becomes increasingly clear that even the most CX-focused or operations-centric projects still come back to IT for change management, implementation, and sustainment, CIOs have re-assumed their place as the key decision-makers – and therefore the target, again, for IT services vendors and consultancies.’ But as with all pendulum swings, this trend could head back in the opposite direction at some point.” — The Enterprisers Project

Twins born early in 2020

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.

Amid rise of Kubernetes as standard in cloud-native deployment, vendors vie to be leading hybrid enablers

Startups seek differentiation in an escalating market with niche, data-friendly tools

While many industry incumbents are taking the fast-paced Kubernetes market by storm, TBR argues the overall market is still in its infancy, leaving ample room for vendors to position their offerings as unique to developer customers. In a room filled with ambitious startups, Humio emerged as a standout due to its enterprise-grade partnership with IBM and impressive scale for a short-lived solution.

Humio streamlines visibility for on-premises and cloud-native environments, easing pressure on developers

Founded in 2016, Humio offers an index-free logging platform for on-premises and cloud environments that processes large data volumes in real time, providing users with greater visibility into both structured and unstructured data. While many competing vendors market public clouds as the home to their streaming technologies, Humio views its on-premises tool as a differentiator given that data challenges, particularly ingestion and investigation, impact legacy customers. TBR believes one of Humio’s distinguishing features is its unlimited pricing plan, which was launched over one year ago. Contrary to a “pay as you scale” model, Humio’s unlimited option flattens the cost curve when customers incur higher data volumes, helping users save on data ingestion and retention costs. While still in its early stages, Humio’s offering, as well as those from other vendors that follow the same pricing model, may end up disrupting the market.

Looking to technology and reseller partners for early entry

An indirect sales strategy is critical for startups, and Humio looks to both technology and reseller partners for success; ahead of the event, Humio entered into an integration and reseller partnership agreement with IBM. IBM now supports Humio’s logging tool on its recently launched Cloud Pak for Multicloud Management — in this instance, Humio’s tool runs as a SaaS offering in the IBM Cloud, where Humio will monitor data health and notify users of issues, all while being simplified for end users via the one-click deployment that the IBM Cloud Paks provide. TBR believes IBM’s backing of Humio’s platform, despite being newer to market, highlights the validity of the technology in its early stages, and we predict that through the IBM Cloud Paks, which are based on Red Hat’s OpenShift platform, Humio will be successful in scaling its offering.

8 digital transformation trends for 2020

“Those service providers that don’t acquire their way to digital prominence will partner to do so. ‘No vendor can do it all, despite many positioning themselves as end-to-end service providers,’ TBR analysts wrote in their September 2019 Digital Transformation Insights report. ‘Technology partners are and will remain an integral part of India-centric and consulting vendors’ go-to-market strategies, especially as clients seek off-the-shelf, minimally customizable solutions.'” — The Enterprisers Project