What is Next for the US Office Products Industry ? Winners & Losers

Ricoh's acquisition of IKON, if closes, will undoubtedly solidify its position as a global market leader. In the short-run, Canon is the biggest looser but in the long run HP will be. However, the biggest winner will be Xerox; It will help defend its turf against the print-centric assault by HP while aggressively targeting IKON-Canon customers during merger integration via its subsidiary of Global Imaging Systems. Having picked a much less problematic dealer group (Global vs IKON) to acquire, Xerox will have a window of opportunity to better compete against Ricoh particularly in the US middle market. Other winners include smaller players like Oce or Lexmark which will become natural candidates for acquisition with "scarcity premium" after a wave of consolidation.

Analysis:

The ongoing consolidation of US office products distribution channels appears to be finally over, or at least until a rival attempts to outbid Ricoh's apparently low-premium bid. Following Konica/Minolta's acquisition of Danka US, Xerox's acquisition of Global Imaging and Oce's buyout of Imagistics, Ricoh bought IKON, the only independent mega dealer in the US. Ricoh has emerged as one of the four industry heavy weights - in terms of brand equity, financial size, sales coverage/channel footprint and product depth & breath. The others include Xerox, Canon and HP. A long time consolidator of the industry, Ricoh's latest move constituted a MAJOR blow to Canon who lost %35 of its US business. When Xerox acquired Global Imaging Systems last year, Canon immediately dropped them. One would expect a similar move now considering long-time rivalry among Japan Inc. It becomes also very difficult to understand why Canon decided to watch Ricoh buying their channel in the US. According to industry insiders, a rep on average sells about 2-3 machines per month and this has been relatively stable over the years. Accordingly, losing feet-on-the-street of this magnitude could mean up to 300 basis point change in Canon's bottom-line. HP has lost its only viable office multi-function distribution & break/fix service arm and a sizeable revenue (about %25 of IKON’s sales) which could also hurt their long-standing sourcing relationship with Canon. In the short-run, Canon is the biggest looser but in the long run HP will be. However, this is all great news for Xerox! This will mark the end of long-term assault into its turf by HP. Xerox's field reps (at Global Imaging) have a valuable window of opportunity to aggressively target IKON-Canon customers. Having picked a much less problematic dealer chain (Global vs IKON) to acquire, Xerox can better compete against Ricoh which will have its hands full with IKON's internal restructuring efforts in addition to daunting post-merger integration tasks. Other winners include smaller players like Oce or Lexmark which will become natural candidates for acquisition. However, I am hearing that rival bidders could emerge as Ricoh seems to have paid less premium compared to similar transactions in the industry. Also, IKON inherited some scarcity value after a wave of consolidation. Apparently, one of their major shareholders was not involved in the process leading up to the sale of IKON. As a result, Canon could challenge the decision teaming up with unhappy shareholders in a defensive move and offer a much higher multiple. The board would have no choice but to respond.