Thursday, April 29, 2010

Hurd's Gamble: HP to acquire Palm for USD 1.2bn

HP (NYSE: HPQ) and Palm, Inc. (NASDAQ: PALM) today announced that they have entered into a definitive agreement under which HP will purchase Palm, a provider of smartphones powered by the Palm webOS mobile operating system, at a price of USD 5.70 per share of Palm common stock in cash or an enterprise value of approximately USD 1.2 billion. The transaction has been approved by the HP and Palm boards of directors.

The combination of HP’s global scale and financial strength with Palm’s unparalleled webOS platform will enhance HP’s ability to participate more aggressively in the fast-growing, highly profitable smartphone and connected mobile device markets. Palm’s unique webOS will allow HP to take advantage of features such as true multitasking and always up-to-date information sharing across applications.

“Palm’s innovative operating system provides an ideal platform to expand HP’s mobility strategy and create a unique HP experience spanning multiple mobile connected devices,” said Todd Bradley, executive vice president, Personal Systems Group, HP. “And, Palm possesses significant IP assets and has a highly skilled team. The smartphone market is large, profitable and rapidly growing, and companies that can provide an integrated device and experience command a higher share. Advances in mobility are offering significant opportunities, and HP intends to be a leader in this market.”

“We’re thrilled by HP’s vote of confidence in Palm’s technological leadership, which delivered Palm webOS and iconic products such as the Palm Pre. HP’s longstanding culture of innovation, scale and global operating resources make it the perfect partner to rapidly accelerate the growth of webOS,” said Jon Rubinstein, chairman and chief executive officer, Palm. “We look forward to working with HP to continue to deliver industry-leading mobile experiences to our customers and business partners.”

Under the terms of the merger agreement, Palm stockholders will receive USD 5.70 in cash for each share of Palm common stock that they hold at the closing of the merger. The merger consideration takes into account the updated guidance and other financial information being released by Palm this afternoon. The acquisition is subject to customary closing conditions, including the receipt of domestic and foreign regulatory approvals and the approval of Palm’s stockholders.

Hewlett-Packard's (NYSE: HPQ) proposed acqusition of Palm Inc (NASDAQ: PALM) carries a "standard" break-up fee, a person familiar with the situation said. Bank of America-Merrill Lynch and Gibson Dunn & Crutcher advised HP on the transaction, while law firm Davis Polk & Wardwell advised Palm.

The deal is expected to close on 31 July.

Palm’s current chairman and CEO, Jon Rubinstein, is expected to remain with the company.

Tuesday, April 27, 2010

Canon Sees Office Equipment Market Has Hit Bottom, Gradual Recovery Ahead

(Reuters) - Japan's Canon Inc (7751.T) raised its annual outlook closer to market expectations on Monday after robust demand for digital cameras and printers powered up its quarterly profit by more than fourfold.

The result marked Canon's second straight quarter of year-on-year profit growth after eight quarters of decline and underscored a budding recovery in office equipment that is also boosting rivals Xerox Corp (XRX.N) and Ricoh Co (7752.T).

Canon benefited from growing demand for single-lens reflex cameras as the customer base continued to spread from professional photographers and camera enthusiasts to casual users thanks to the launch in recent years of introductory models.

Canon is the world's top maker of digital cameras ahead of Sony Corp (6758.T) and dominates the lucrative SLR segment along with Nikon Corp (7731.T).

"The demand for digital cameras continues to be strong, and chip equipment demand is also coming back, so the business environment is cyclically improving," said Kazuyuki Terao, chief investment officer at Japanese fund manager RCM Japan Co.

"The trend toward yen weakness is also positive, so the business environment is good. There are few negative factors right now.

Canon said it now expects an operating profit of 360 billion yen ($3.8 billion) for 2010, up from its previous forecast of 330 billion yen, though still short of the 371.2 billion yen consensus in a poll of 20 analysts by Thomson Reuters I/B/E/S.

The latest forecast compares with a 217.06 billion yen profit last year.

Analysts on average expect Canon to post double-digit profit growth for another two years before expansion slows in 2013, according to Thomson Reuters data, though growth in its compact camera business could be threatened if price competition intensifies further.

Canon Executive Officer Masahiro Haga said the office equipment market had hit bottom and would recover gradually.

"Laser printers along with their consumables are recovering strongly. As for copiers, the degree of recovery varies from region to region," Haga told reporters after a news conference.

"But judging from the overall operating environment in the first quarter, our business seems to have hit bottom and is heading for a mild recovery."

Canon said in September that it would start providing its multi-functional printers to Hewlett-Packard (HPQ.N), in a move to broaden HP's lineup of office equipment and boost Canon's hardware sales.

The Tokyo-based company also took over Dutch printer maker Oce NV (OCEN.AS) this year to strengthen its product lineup and broaden its distribution channels.

For January-March, the maker of IXY and EOS brand digital cameras posted an operating profit of 86.84 billion yen, up from a profit of 20.03 billion yen in the same period last year amid the depths of the global economic downturn.

Quarterly sales jumped 10 percent to 755.5 billion yen.

In light of growing demand for high-end cameras, Canon raised its digital SLR camera sales target by 4 percent to 4.9 million units.

In 2009, Canon held a 44.7 percent share in the market for digital SLR cameras, high-end models with interchangeable lenses, followed by Nikon with 34.3 percent, according to research firm IDC.

Canon's result comes three days after rival Xerox posted stronger-than-expected first-quarter operating profit, driven by demand for its document management and printing services.

Before the announcement, Canon shares closed up 3.5 percent at 4,395 yen, outperforming the Tokyo stock market's electrical machinery index .IELEC.T, which rose 2.6 percent.

Lexmark 1Q Profit Jumped 61%, Revenues Up 10%

Lexmark beats all WSJ expectations following Canon’s and Xerox’ recent 
upbeat announcements. While it is true that the worst is behind in the sector, 
we may not see full recovery of demand to post-crisis levels; It should also 
be increasingly led by outsourcing-led services engagements where a corporate 
client typically wants to save at least 20-30% of total document output costs.
In other words, small independent vendors like Lexmark could see tougher times 
ahead competing against - Xerox/ACS, Ricoh/IKON and of course HP/EDS/Canon.

Many firms looked at Lexmark in the sector; HP was never a candidate 
due to anti-trust concerns. Xerox was interested before acquiring 
Tektronix. Some of Japanese vendors did approach too but in every case, 
Lexmark management was over confident in their ability to fly solo. They may
have a change of heart considering the massive consolidation that took 
place in the industry and assessing how realistically sustainable their competitive 
position will be going forward.

NEW YORK, April 27 (Reuters) - Printer maker Lexmark International Inc (LXK.N
said first-quarter profit jumped 61 percent, beating estimates, on strong sales of 
printing services contracts and cost cuts boosted margins. 
Lexmark, which competes with Hewlett-Packard Co (HPQ.N),Canon Inc (7751.T
and Samsung Electronics Co Ltd (005930.KS), said net income rose to $95.3 million, 
or $1.20 a share, compared with $59.2 million, or 75 cents a share, 
in the year-earlier quarter.

Profit excluding items was $1.35, beating analysts' average forecast of 89 cents, 
according to Thomson Reuters I/B/E/S. Revenue rose 10 percent from a year earlier 
to $1.04 billion, exceeding the average analyst estimate for $961.1 million.  
The company said sales in its printing solutions and services division 
grew 20 percent in the quarter.

Sunday, April 18, 2010

Scott McNealy Can Still Dish

I first met Scott when he was still running Sun at the headquarter's building in Palo Alto as part of a strategic alliance in a former life. He was by far the most energetic and visionary person I had met in my career. His distinctive ability to dream about a new tomorrow, make his team feel it and mobilize them with passion and persistance was exactly what we needed then....I always admired his passion for new technologies for early adopters, but perhaps too early to "cross the chasm" yet. It is unfortunate that Sun was sold to Oracle for dead-cheap...I hope to see Scott lead the need, it is people like him that make Silicon Valley the magnet for wold's most talented entrepreneurs!

Here's an article from this weeend's WSJ about Scott's perspectives on the Oracle deal and what he might do next.

Sun's former chief talks Oracle, Apple, Microsoft and how in his next company nepotism will be 'not a bug but a feature.'

The tech world has been a less interesting place since former Sun Chairman and CEO Scott McNealy stepped away from the company he co-founded. You will remember that Oracle (ORCL) boss Larry Ellison swooped in about a year ago and bought Sun from beneath IBM in a deal worth about $5.6 billion (after Sun cash and debt are subtracted).

McNealy ended his stint as Sun chairman this January, but that hasn’t meant the always-combative businessman has abandoned technology, or can keep his famously candid mouth shut. He had some zingers for a crowd of database heads, gathered recently for the roll out of new products by Greenplum, a startup McNealy advises.

On Oracle buying Sun: “Larry is a smart guy, he actually signed the merger agreement when the Dow hit bottom. It was a brilliant move. When someone comes into a public company and basically offers to double your stock price, your shareholders are going to want you to go with it. But Larry got a steal, it was almost like he was in cahoots with Alan Greenspan and Ben Bernanke.”

What Sun did wrong: “Sun has always been very early, and often way too early with a lot of our ideas. For example, in the ‘80s we were preaching that the network is the computer. Shame on us for not summing it up in one word – cloud. To sound a little Al Gore-ish we invented open source, but we went a little too aggressive over the last four years."

Regarding his own legacy in the business world: “I will be known as a good capitalist. We tried to balance the raging capitalist in me by sharing projects via open source.”

On Larry Ellison’s legacy: “He’s a great capitalist, but not all into that sharing thing and all the rest of it. You have to give the guy credit; he has found a way to extract every dollar he can from customers from every product he offers. He is very impressive, and there are very few who have lasted as long as he has.”

Apple (AAPL) and Steve Jobs: “Apple is beyond proprietary, and the consumer has no idea that they are checking into the roach motel. Jobs has been brilliant, and he also understands the power of the secret better than anyone I have every seen.”

How Microsoft (MSFT) is positioned: “Technology turned on them so quickly with the advent of the Web. But they still have this massive cash cow in Office. That thing has minted more money than any product I can think of.”

On being a good CEO: “You gotta maintain integrity, and you can’t break character. You can’t let your customers down or the media down. Look, you aren’t a sports star or celebrity, people are trying to get their jobs done with your help, and that this is way more important than winning a tennis match or a football game.”

How to sell: “Every single employee in the company is in sales, and they have to know that. If your customers are happy then you don’t need PR or advertising. Your customers will sell your product for you.”

Finding the right partners: “My gaming theory strategy says you can almost never partner with the leader. The leader has not interest in justifying or partnering with a smart, young, hot company. So it’s mankind versus Goliath. You go after No. 2,3,4 or 5. You team up to beat Google, beat IBM or Microsoft or Oracle or whatever. Everyone can coalesce around that, and they will partner with you because they think you will be collateral damage. We were going to be collateral damage every year at Sun, that’s why it was easy to partner.”

His conditions for starting another company: “It must be private, never go public. There will be no upside investors other than me and the employees. I will have enough of the voting shares – meaning more than half – so that the board will be hand-picked buddies that I know are smart. Nepotism will not be a bug but a feature, this will be a family owned and family-run organization. It also has to be cash-flow positive from day-one.

“I hope we can pull it off under those condition because I would be thrilled to lead another group of smart engineers, without all the crap that goes into running a company today. I just don’t want Congress telling me how much I should be paid or firing me. I want to pretend I am back in the 1980s again.”

Who’s going to win the Stanley Cup: “Sharks all the way.”

A Gold Rush in Green Technology

I am not surprised to see so many solar technology players - strapped for cash – are looking to file for IPO. However, their revenue model today largely depends upon government subsidies in terms of long term feed-in-tariffs. Most of these firms do not have stand-alone sustainable business models or robust technology. In the field of solar, there are many competing technologies that have yet to mature and of course commercialize. Many European governments have huge budget deficits and are starting to reconsider large subsidies to forms of clean technologies that are cost-competitive vis-a-vis traditional forms of energy.  For solar, any form of subsidy needs to incentivize more research & development, prototyping, field testing etc rather than purchasing guarantees over decades at 4-5 times traditional costs. Wind energy, energy conservation and water management technologies appear more attractive investment domains in the mid-term. Here’s an article from this week’s BusinessWeek:

On tap, a slew of IPOs from clean energy companies, many of them subsidized—at least for now

By Mark Scott and Alex Morales

Like bright sunshine charging up solar panels, investor fervor is fueling the market for public offerings of green companies. Electric automaker Tesla Motors, U.S. green energy producer Ameresco, and Spain's T-Solar have filed to go public, and many more are waiting in the wings. "There's renewed appetite for green IPOs," says Luigi Ferraris, chief financial officer of Italian utility Enel, which plans to sell a minority stake of its renewables subsidiary Enel Green Power for $5.4 billion by the end of the year. That would be Europe's largest listing since 2007.

Green companies have said they hope to raise $9.6 billion worldwide, according to Bloomberg New Energy Finance. That's more than triple the total for eco-IPOs during all of last year. Renewable energy projects such as wind farms and solar parks still garner the most interest, but energy conservation and water management are also winning financial backing.

British solar energy producer Engyco wants to secure $1.4 billion, while its Madrid-based rival Renovalia could raise more than $300 million. Indian clean-tech manufacturer Indosolar aims to raise $88 million in Mumbai. San Diego-based Fallbrook Technologies, a maker of efficient transmissions for vehicles, is looking for $50 million. And Tesla is aiming for $100 million. "Investment bankers are out there soliciting business," says Nigel Meir of Ludgate Environmental Fund in London, which invests in clean technology companies. "The green sector has a lot of forward propulsion."

Some of the fuel is coming from national governments around the world, which have earmarked billions to fund renewable energy installations and projects such as modernizing the electricity network. Climate change regulation could also help eco-firms lock in revenues from customers required to reduce their carbon footprint. "A big part of the renewables market is the stimulus provided by governments," says Chris Thiele, a Morgan Stanley (MS) investment banker in London.

Some worry that the rapid flow of state funding may end as abruptly as it started. Governments, particularly in cash-strapped European countries, face growing deficits. Costly green initiatives such as cheap loans for homeowners who install solar panels could be cut by politicians reluctant to curb spending on, say, health care or defense. Subsidies "are at the whim of whichever party is sitting in power," says Walter Nasdeo of Ardour Capital Investments, a New York investment bank that specializes in clean technology.

Concerns over government cutbacks haven't stopped Enel Green Power. The company has secured $61 million in U.S. stimulus money for two geothermal power plants in Nevada, and hopes to land further millions in federal support for American wind, solar, and geothermal projects. "The U.S. offers a huge opportunity for growth," says Ferraris. In its home market, the Rome-based utility benefits from rules that let it charge customers above-market prices for energy from renewable sources. All told, Enel Green Power plans to invest $6.9 billion in renewables across three continents by 2014. The IPO money will help pay down its parent company's $69 billion debt.

Before the fiscal crisis, even companies with few customers and unproven equipment could get funding. These days, steady sales from proven technology are a must—something virtually all the companies looking to list now have. "People once backed hope," says Stephen Mahon, chief investment officer at Low Carbon Investors in London. "Now they back revenues."

Wednesday, April 07, 2010

Gold Rush to Services – Is It Too Many Too Late?

Just few days after my blog post on Xerox, HP and Dell investing in services aggressively, the WSJ has published an article that confirms how critical it is for these firms to succeed in services to compensate for lack of sustainable profitable growth in their core businesses. Xerox missed out on digital transition, HP relied upon "over-milking" its printer franchise for too long, and Dell fell victim of its own “everyday low prices” strategy in the PC market.

IBM on the other hand thanks to its visionary leader Lou Gerstner had proactively taken on a radical and massive services transformation . New category players such as Indian outfits delivering “will do your mess for less” out of remote locations such as India or China will inevitably replaced by technology-driven digitization and automation value proposition that will clearly benefit IBM and others with the discipline and track record to commercialize technology-centric innovation. Therefore, in the services market there will always be IBM and the others.

The article however talks about the services contract size and how they are getting smaller with more corporations diversifying risks with multi-vendor sourcing. However, this is not a new trend and unfortunately the WSJ writer does not sound familiar with services. While smaller deals also means more deals contacted out more competitively, which is bad news for new entrants such as Xerox and Dell,  because clients would like to diversify these days, they might be willing to give them a shot….

Firms Jockey for Space in Services
Big Competitors Join Increasingly Crowded Market as New-Deal Spending Slows
Hewlett-Packard Co., Dell Inc. and Xerox Corp. are seeking new profits in the technology-services industry. But those companies face a major challenge: While competition is intensifying, their corporate clients are spending less on new deals.

Over the past two years, H-P, Dell and Xerox have spent billions to muscle their way into better positions in tech services. The market, traditionally led by International Business Machines Co., is regarded as attractive because it provides steady revenue from customers who pay recurring amounts to outsource their tech systems like email or payroll.

But even as the total number of new services contracts awarded each year more than doubled globally between 2000 and 2009, the amount spent on those new contracts fell to $74.5 billion from $90 billion in the same period, according to tech-consulting firm TPI. The market is expected to remain tight even amid a recovering economy.

Behind the slowing growth are companies like Dow Chemical Co. that are signing smaller, shorter-term tech-services contracts. In 2000, Dow Chemical signed a seven-year deal to outsource parts of its information-technology systems to IBM. Last year, it signed a new services deal with IBM for just five years. IBM and Dow Chemical declined to disclose the dollar values of the deals.

"From a buyer point of view, you always want smaller contracts," says Dave Kepler, Dow Chemical's head of IT. Dave Liederbach, general manager of IBM's strategic outsourcing division, acknowledges that "the deal size, on average, is going down."

Industrywide, "we're increasing the number of deals, but revenue isn't increasing at the same rate," says Tom Blodgett, head of corporate tech services for Xerox, which last year acquired services provider Affiliated Computer Services Inc. for $6.4 billion.

The declining growth started last decade, says Don Mann, who heads Dell's services unit for large businesses. "The deals kept getting smaller and smaller and smaller," he says. In the past, it was common for large companies to sign 10-year outsourcing agreements with tech-services providers like IBM.

But a growing number of players in the services market, including low-cost Indian competitors like Infosys Technologies Ltd., have made the market more competitive and given customers more leverage, says TPI vice president Mike Slavin. That's allowed customers to grab smaller, cheaper deals that can be frequently renegotiated.

Such dynamics haven't dissuaded tech giants from investing in tech services. Dell last year bought Perot Systems Corp., which specializes in public-sector tech services, for $3.9 billion—a 68% premium over Perot's share price at the time the deal was reached. H-P spent more than $13 billion to purchase Electronic Data Systems. The wave of acquisitions came as profits fell in areas like computer hardware and printers.

Since the services industry has no one dominant player—IBM had less than 8% of the total market by revenue in 2008, the last year for which data are available, according to market-research firm Gartner—the big tech companies saw an opportunity to grow, says TPI's Mr. Slavin. They also saw services as a way of developing new customers who would buy computers, he adds.

In response to the slowing growth, H-P, IBM, Dell and others are also trying to cut costs by creating new software, developing niche specialties in areas like health care, and shifting to employees in lower-cost countries like India. IBM, Mr. Liederbach says, has been sending research scientists to develop new software with companies like Dow and now bids for smaller, short-term contracts with customers in the hopes of securing larger ones in coming years.

Dell's Mr. Mann says his company has created new offerings for health-care customers, which stand to receive more than $19 billion in federal funding to computerize patients' records. Xerox's Mr. Blodgett says his company is focusing on outsourcing specific functions, like employee benefits, which ACS started managing for Ford Motor Company last year.

Still, customers such as General Motors Co. appear to have the upper hand. GM, which at one point owned EDS, played a big role in the move toward smaller contracts when it changed its outsourcing strategy in 2006. Until that year, GM outsourced almost all its technology to EDS, but in 2006 sought bids from other providers to get away from giant, single-vendor contracts. GM awarded a $700 million contract to H-P (which had not yet purchased EDS) for certain systems and also outsourced pieces of its IT to IBM and Wipro Technologies Ltd.

EDS said in 2006 that it still expected to get about $1.2 billion a year from GM, though it only had 70% of the outsourcing work, rather than close to 100% as it had in years past. A GM spokesman declined to comment. An H-P spokeswoman said the company still does work for GM.

Saturday, April 03, 2010

Will Xerox’s Bet in Buying ACS Pay Off Like HP’s Bet in Buying EDS?

After HP bought the computer services company last year for $13.9 billion, it immediately began hacking the work force. Led by a master cost-cutter Mark Hurd, HP laid off 25,000 EDS workers, and cut the salaries of some by more than 20 percent. Hurd even stripped the EDS brass of their plush offices and corralled them into 6-by-6-foot cubicles.

But despite the risk that disgruntled employees and customers would walk out the door, the acquisition has paid off big for HP — so well, in fact, that an important rival has decided to strike a similar deal. Dell announced later that it was paying $3.9 billion for Perot Systems. Plenty of employees have complained about HP’s tactics, but the company says it has persevered through the turmoil to keep most of EDS’s customers. Last quarter, HP’s operating profit margin on services hit 13.8 percent, the highest in a decade. And the combined company’s services division is HP’s biggest business in terms of revenue — a remarkable metamorphosis for what has long been viewed as a slow-growth PC and printer maker.

They even decided to extinguish the 47-year-old company’s name. The new name, HP Enterprise Services, reflects the union of the services operations at the two companies. HP may have engineered the deal at just the right time. The down economy gave HP time to perform its painful restructuring and primed the company to grow when the good times returned.

Following HP’s footsteps, Xerox acquired ACS early this year for over $6 billion. According to the management, the deal creates a diversified leader with $10 billion from services in the fiercely competitive Business Process Outsourcing market. Xerox claims the combination offers a strong revenue growth potential by scaling ACS internationally through Xerox brand and global account relationships and cost synergies by combining corporate governance, services delivery and infrastructure. Xerox CFO Zimmerman expects a total base case of $750+ million in year three reaching almost $2 billion in year five.

Here is why Xerox/ACS merger seems far more challenging than HP/EDS deal:

1. Size Matters – HP was a bigger company at the time of acquisition than EDS which was financially struggling on its own. ACS is more than twice Xerox Global Services size with a more diverse revenue mix that even includes IT outsourcing that is completely foreign to Xerox.

2. Culture Anyone? – Even Xerox CEO Ursula Burns complained about Xerox’s “let’s not rock the boat and be ultra-nice to each other” culture out of NY/CT which fundamentally contradicts with ACS’ more operationally-driven culture out of Utah. Mrs. Burns will have to get very hands-on overseeing the integration almost daily.

3. Technology vs Appliance Provider Heritage - HP has traditionally offered technology, services and appliances as an integrated solution that can be delivered outright or outsourced. On the other hand, Xerox has traditionally offered appliances such as copiers, printers, scanners etc. Xerox would have difficulty in monetizing ACS capabilities with Xerox’s own board room brand permission which shortfalls HP's.

4. Mixed Integration Approach and Track Record – HP’s Mark Hurd knew exactly how to chop EDS up to integrate into HP Enterprise Services division. Xerox on the other hand bought ACS because it realized it was way behind the market and could not internally catch up via XGS. In other words, HP has already absorbed EDS but Xerox has put ACS in charge of managing Xerox Global Services. Xerox’s track record of successfully integrating acquired companies is mixed compared to HP's under Mark’s leadership. However, Ursula may be a much tougher cost-cutter than Mark because this deal of her own making is too critical for her future as CEO and now Chairman.

5. Are You Global or Multi-domestic? – Neither HP nor Xerox operates as a truly global company. Neither EDS nor ACS has successfully established a commercial footprint outside the US. It is precisely why Xerox’s ambitions to cross-sell and up-sell ACS into its global accounts outside the US would prove to be almost a non-starter. Not to mention neither Xerox nor ACS has any meaningful services delivery footprint outside the US.

6. Show Me the Money – Xerox is world famous for developing brilliant inventions that created HPs and Apples of the world. The firm has not been able to cross the cultural chasm between researchers and business managers to quickly commercialize innovation; ACS’s value proposition today largely depends upon offshore and/or people-intensive “do-my mess-for-less” value proposition which can not be sustainable in the long term. One of the more interesting potential drivers of value behind the deal seems to be injecting Xerox intellectual property around work and process automation technologies into ACS’s delivery and technology infrastructure. One would wonder if they failed to do it for so long for so many times internally, how effectively could they do it now for an external company?

These are interesting and challenging times for Xerox and ACS…Xerox is desperate for sustainable growth that it has long been searching for...however time will tell whether this deal would be a winner for its shareholders who should closely monitor management synergy scorecard quarterly and think twice before jumping into XRX yet.