Personal computer and printer company HP (NYSE:HPQ) announced a surprising move on Monday to acquire Samsung Electronics' (NASDAQOTH:SSNLF) printer business in a deal valued at $1.05 billion. HP stock is trading 1.9% higher at the time of this writing as investors digest the implications of the deal.
HP's ambitions with the acquisition of Samsung's printer business are grand. With Samsung's printer technologies under its belt, the company wants to "disrupt and reinvent the $55 billion copier industry, a segment that hasn't innovated in decades," HP said in a press release on Monday.
But such disruption is easier said than done. While the acquisition may better position HP to accelerate its plans to make inroads on the copier segment, the move also comes with meaningful risk.
Here's what investors need to know.
Why Samsung's printer business?
HP's choice to acquire Samsung's printer segment was based on the belief that the company's A3 MFPs, or multifunction printers, are superior technology to copiers and can replace them.
HP explained the rationale in its press release:
Copiers are outdated, complicated machines with dozens of replaceable parts requiring inefficient service and maintenance agreements. Customers are frequently frustrated with the number of visits needed to keep copier machines functioning. Today, HP is investing to disrupt this category by replacing copiers with superior multifunction printer (MFP) technology.
Samsung has built a formidable portfolio of A3 MFPs that deliver the performance of copiers with the power, simplicity, reliability and ease-of-use of printers and with as few as seven replaceable parts. Integrating the Samsung printer business' products, including their mobile-first and cloud-first user experience, with HP's next-generation PageWide technologies will create a breakthrough portfolio of printing solutions with the industry's best device, document, and data security.
As part of the deal, Samsung agreed to invest $100 million to $300 million in HP through open-market purchases after closing, demonstrating its confidence in the direction HP is taking its business.
Furthermore, the deal, which is expected to close in about 12 months, entails HP's acquisition of Samsung's portfolio of more than 6,500 printing patents.
In theory, this acquisition sounds great. As HP explained in its press release, it creates "new avenues for growth" for the company as industry sales models "shift from transactional to contractual." But it's impossible to ignore the heated competition in the copier space and headwinds in the printer space in general.
By moving into the A3 copier segment with the Samsung deal, HP will be up against established rivals, such as Xerox (NYSE:XRX), Canon, and Ricoh. These players are unlikely to let HP come in and "disrupt" the industry as easily as HP makes it sound.
Furthermore, the printer segment is questionable overall as demand declines for printers and supplies. For instance, in HP's most recent quarter, printing revenue declined 14% year over year and 5% sequentially. And its higher-margin supplies subsegment, which accounts for 64% of its printing revenue, saw revenue decline 18% year over year and 8% sequentially. And Xerox's declining revenue in its document technology business, which is made up of sales of printer and copier products and supplies, and the associated maintenance and financing of these products, doesn't help justify a case for growth opportunities in the A3 copier segment. Xerox's document technology business reported revenue of $1.8 billion in the company's most recent quarter, down 7% year over year.
Before the deal's expected closing, in 12 months, HP investors should carefully consider whether a move into the highly competitive A3 copier space really makes sense.
Daniel Sparks has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.