Is Xerox really going to purchase RR Donnelley?

Posted on by Dave Erlandson | 1 Comment »

Having just come back from drupa where Xerox had a press conference in which Ursula Burns and Jeff Jacobson spoke about the benefits of splitting Xerox into two companies, specifically how it would allow Xerox to focus on the market for selling copiers and production presses I was really surprised to hear Xerox is thinking about buying the largest printer in the US.  Guess that “focus idea” is overrated.

Now I’m not privy to any of the details so I can’t really comment on if this is a good deal or not, price plays the key role in any deal.  But here are some of the leading reasons for a merger/acquisition

  • Synergy
  • Growth
  • Increasing market power
  • Acquiring unique capabilities or resources
  • Unlocking hidden value

Synergy. Can the sum of the parts be greater than the pieces?  Well when it comes to outsourcing it can because outsourcing provides service revenue and the outsourcer can choose the printing hardware and software. So if Xerox acquires RRD they get their outsourcing revenues and the chance to place their gear in these accounts (this assumes that RRD doesn’t already use only Xerox gear).

And of course Xerox could place their digital printing equipment in many of RRD’s commercial printing businesses displacing other vendors. So they get the printing revenues and revenues from hardware and consumables.

But there’s a downside to the synergy equation as well.  RRD competes with every other commercial printer, direct mailer, and service bureau.  This would put Xerox in competition with their customers in the production market. Now today Xerox already competes with a number of commercial printers with their outsourcing business and evidently the downside of losing these companies as customers is much less than the revenue that they are capturing with the outsourcing business. However, this would take the competition factor to a whole new level.

Growth. Adding RRD would obviously generate growth in top line revenues for the year of the acquisition, but it gets dicey from there. RRD is a printing company with a large portion of revenue derived from the printing of magazines, catalogs, books, and financial statements. All of these applications have been subject to electronic substitution and are likely to continue to decline in print volumes for years to come. To overcome the volume loss they would have to gain share organically or buy other printing companies.

On top of future growth issues RRD has a high level of debt. RRD’s Debt/Equity (523.15%) is considered high relative to its industry (411.86%).

It’s hard for me to see the rationale for how this potential deal helps with increasing market power, acquiring unique capabilities, or unlocking hidden gems, but I’m not close enough to all the details to know.

When opportunity knocks you have to do your due diligence and maybe that’s all that is going on here. And if the price is right, a deal can be done.  But this deal seems to have issues with future synergy and growth that would need to be carefully thought through.

One Response to “Is Xerox really going to purchase RR Donnelley?”

Comment from Michael E Jahn
Time July 13, 2016 at 2:56 pm

I think Cary Sherburne made a great point in her article in WTT Commentary & Analysis article today ( July 13th 2016) when she wrote;

“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.”

The fact is, Xerox has two different groups doing opposite things. One group offers copy / print services – the other sells stuff that lets you do that yourself.

Before I worked for SmartSoft, I worked for a Xerox partner developer who sold solutions to the service side of Xerox – they had sales people pitching “hey, don’t buy and hardware, contract with us and we will do this stuff for you” – sometimes, that actually then stopped a sale of a Xerox system from the group out there trying to sell copiers and printers.

This is NOTHING NEW to Xerox. Sure, big deals can get in the way of different big deals. This sort of consolidation looks like chaos to some, and genius to others.

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