HP Partners Assail Xerox Takeover Bid

One partner tells CRN that an acquisition of HP by Xerox would 'lead to a negative outcome for the entire channel ecosystem,' due in part to Xerox’s lack of skills in the PC market.

Top HP Inc. partners are questioning the proposed takeover of the company by Xerox, raising issues ranging from Xerox's inexperience in the PC market to differences in the two companies' channel approaches.

Xerox last week made a takeover offer for HP that is reportedly 23 percent higher than where HP shares started the month—a deal that would bring together the leaders in A4 and A3 devices at a time when the print industry is waning.

[Related: 5 Reasons HP Might Oppose The Xerox Takeover Bid]

Key partners of HP have told CRN that they don't see the upside for the company, though.

"This proposed move by Xerox has only negative outcomes for HP’s channel partners," said Harry Zarek, president and CEO of Compugen, No. 57 on CRN's 2019 Solution Provider 500. Richmond Hill, Ontario-based Compugen in March was named HP Inc. Personal Systems Partner of the Year for Canada.

"Xerox has historically been a direct sales organization and is still in the early stages of understanding how the channel model works," Zarek said. “They have a large direct sales organization focused on enterprise accounts and still deals with them directly and only selectively permits channel companies to participate. They have a direct agent model which covers the SMB market.”

"Contrast that with HP as a mature, channel-focused business,” Zarek said. “There is a big cultural mismatch around Xerox being able to understand how today’s IT channel model works."

A Xerox representative did not respond to a request for comment.

Notably, HP's personal systems business is nearly twice the size of its printing business, and the company is the second-largest PC maker worldwide and the largest in the U.S. HP generated $28.27 billion in personal systems revenue during its latest three quarters, up 2.4 percent year over year.

"I have a general concern when I'm thinking about Xerox running a PC company," said Juan Fernandez, vice president of managed IT services at Oklahoma City, Okla.-based ImageNet Consulting, which received an HP Inc. Partner of the Year award in March.

"HP is now moving into a space that's cross-collaborative with Xerox [in print], and I think this is what makes it attractive for Xerox more than attractive for HP. I think it would work well for the print industry for that merger to come together," Fernandez said. "I don't necessarily know if I like that same scenario on the PC side. For personal systems, I just can't see how that would benefit."

Compugen’s Zarek also questioned the idea of Xerox taking charge of HP's massive and growing PC business.

"Xerox has no skills in the PC market and would only be a negative influence on that business," he said.

Zarek said the situation made him recall a plan by former HP CEO Leo Apotheker years ago to sell off the company's PC business.

"That caused enormous uncertainty in the business for HP PCs," he said. "Thankfully, that initiative did not happen. We can all be grateful, because we have seen since then how HP has excelled and taken a leadership position in the PC market and built very strong channel allegiance."

Bob Venero, CEO of Holbrook, N.Y.-based Future Tech Enterprise, No. 101 on CRN's 2019 Solution Provider 500, said Xerox's statement on the takeover offer ignores HP's prominent position in the PC market. The health of the PC market has consistently been undervalued, he said.

“The PC is the view into the cloud and is more alive than ever,” he said. “The PC is one of the enablers of the cloud. Making a statement that the industry is long overdue for consolidation doesn’t recognize the value of the PC business.”

For the channel specifically, Venero said consolidation would destroy longstanding and valued relationships with the separate HP and Xerox teams and lead to “turmoil and dysfunction” in the sales trenches.

The significant differences between the two companies’ channel approaches should be seen as a major issue for the takeover deal, said one executive at a partner of HP, who asked to not be identified.

"I can’t imagine how this would represent any incremental value to HP in terms of go-to-market approach," the solution provider executive said. "Rather, I think it would create confusion and massive conflict and upheaval at the front lines at a time when it seemed that HP Inc. was coming along well—and at a time that the end-user technology environment is experiencing a complete transformation around cloud platforms such as Office 365 and enterprise digital transformation."

Zarek said he hopes "to get a message to the financial markets that a potential acquisition of HP will lead to a negative outcome for the entire channel ecosystem."

According to reports, Xerox is proposing to buy HP at $22 a share in a cash and stock offer that would give HP shareholders a 48 percent stake in the combined enterprise. Xerox reportedly has lined up financing for the deal through Citigroup Inc.

“Our industry is long overdue for consolidation, and those who move first will have a distinct advantage,” Xerox said in a statement last week. “We look forward to expeditiously moving this process forward and creating additional value for shareholders.”

Both companies do see a rationale for a merger, Bloomberg reported this week. However, there are major disagreements over the specifics—such as which company would be the acquirer in the deal and which of the two management teams would run the combined company, according to the report. Bloomberg characterized the issues as "potentially intractable disagreements."

HP said last week that it will "continue to act with deliberation, discipline and an eye towards what is in the best interest of all our shareholders” after receiving the takeover offer. The company has "great confidence in our multi-year strategy and our ability to position the company for continued success in an evolving industry, particularly given the multiple levers available to drive value creation," HP said in its statement.

Along with growth in personal systems, HP has said it sees an opportunity to disrupt the $12 trillion manufacturing market with its 3-D printing systems, which aim to offer high-speed 3-D printing of parts at a comparatively lower cost.

The Xerox takeover bid came just days after Enrique Lores took the helm as CEO of HP and the company began rolling out a reorganization and restructuring plan meant to improve efficiency and support investment in key areas.

Overall at HP, "we are starting a new chapter," Lores said in a recent interview with CRN, prior to the Xerox takeover offer. "And the key elements of the chapter are our ambition to advance our leadership in personal systems and print, and the opportunity that we have to disrupt some key industries."