HP Inks Deal With Samsung; Launches Multifunction Printers

Leading personal computer manufacturer, HP Inc. (NYSE:HPQ) recently signed a deal to acquire Samsung (KS:005930) Electronics’ printer business for a purchase price of $1.05 billion. This acquisition is expected to close within twelve months and is subject to regulatory approvals.

The acquisition is a strategic move by HP, as it will expand the company’s printing business as Samsung's printer business has more than 6,500 printing patents. All these will support development and manufacturing of HP printers, going forward.

Rationale Behind the Deal

HP is one of the two publicly traded entities that were formed after the Nov 2015 split of Hewlett-Packard Company. The split also led to the formation of Hewlett Packard Enterprise Company (NYSE:HPE) . HP focuses on PC and printing products and services.

Over the past few quarters, HP has been losing market share to its Japanese rivals – Canon Inc. (NYSE:CAJ) and Espon – due to intense price competition. These Japanese manufacturers have been able to slash prices due to a weaker yen compared to the U.S. dollar.

Although HP is still the biggest printer manufacturer in the world as per IDC, the company’s market shrunk 420 basis points (bps) year over year to 36.6% in second-quarter 2016. In the same quarter, however, Canon and Espon’s market share expanded 100 bps and 220 bps, respectively.

Furthermore, HP’s recently released third-quarter fiscal 2016 results showed a 14% year-over-year decline in printing revenues to $4.432 billion, primarily due to an 18% plunge in supplies revenues and weak performance at the hardware segment. HP’s total hardware unit sales were down 10% primarily due to a decline of 2% and 14% in Commercial hardware units and Consumer hardware units, respectively.

Thus, we believe that the acquisition of Samsung’s printing operations could help HP turn around the printer business. The transaction will not only eliminate a major competitor but also help to control prices. Apart from this, the acquisition will also give HP access to Samsung’s partners and strengthen the former’s position across various geographies.

On the other hand, the spin-off is considered to be part of a broader restructuring process at Samsung as part of which the company is trimming its business through the divestiture of non-core assets. Hence, we believe that the divestment of its printer business will unlock investments for the company and help it to focus better on its core segments.

Product Launch

Separately, the company also unveiled the all new A3 multifunction printers (MFPs) designed to disrupt the traditional $55 billion A3 copier category.

According to the company, "The complexity of traditional copiers makes repair and maintenance too inefficient for our partners and customers." It also added "By leveraging our superior printing technology, we can change the status quo with next-generation A3 multifunction printers that improve the overall customer and partner experience while also serving as a springboard for growth in managed print and document services. This is what we mean by reinventing printing."

Conclusion

The persistent decline in PC shipments is a substantial headwind for HP. As the PC business generates over 60% of its total revenue, the reduction in business volume at the segment is a concern. The company is also witnessing a secular decline in this segment due to the ongoing shift toward tablets and smartphones, a space in which it is yet to gain a foothold.

We believe that with the strategic partnership with Samsung’s printing business and the continuous product launches, the company will generate higher revenues in the upcoming quarters. Also, the move will help the company to focus better on the PC and printing businesses.

However, macroeconomic challenges and tepid IT spending remain near-term concerns. Competition from International Business Machines (NYSE:IBM) and Accenture adds to its woes.

Currently, HP carries Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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