HP buys Indigo for $629 mln in shares – Experts analysis

Hewlett-Packard Company (NYSE:HWP) and Indigo N.V. (Nasdaq:INDG) announced that they had entered into an agreement for HP to acquire the remaining outstanding shares of Israeli company Indigo, which produces commercial and industrial printing systems.

(Source: Seybold Bullitin.com, Sept 7, 2001) The future of the color digital printing market is taking shape. It now looks like there will be three major competitors: Heidelberg (which is officially launching the NexPress 2100 at the show), Xerox (with the official introduction of the iGen3, aka “FutureColor”) and now HP. Indigo, on its own, would not have been able to compete in this league, so it’s clear that the deal is a good (maybe even an essential) move for them.

But it remains uncertain whether HP will fare well in this market. Its experience with desktop laser and ink-jet printers is not very relevant. Unquestionably, HP has good contacts in thousands of corporations. But how can they be leveraged and converted to sales of high-quality color printing devices?

Landa doesn’t think HP will sell many high-end digital presses directly into the corporations it currently serves. But he thinks that it may be possible to build on the base of HP’s corporate users, many of whom have outgrown their desktop printers. He thinks they might be persuaded to send work to the nearest HP/Indigo-equipped service provider, and that this demand “pull” will drive sales of the machines. We (Seybold) don’t think that’s likely. Digital presses that cost hundreds of thousands of dollars will continue to be a tough sell, and slapping the HP name on them won’t necessarily help much. We know that HP has the financial and technical resources to become a major player in the high-quality printing market in the long term. But does it have the patience? It could be a long, slow process.

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5 years comparison between Scitex and Indigo

(source: The Marker, Sept 10, 2001) The good news is that after a long alliance, PC and printers maker Hewlett Packard (NYSE:HWP) decided last week to acquire full ownership over Indigo (Nasdaq:INDG, INDGW). HP’s decision came, no less, at the lowest point of the computers world in general, and the entire Israeli economy in particular.

The bad news is that the dream is dead. Indigo founder and chairman Benny Landa’s dream, that is. He wanted to make the Israeli digital printing into a world leader, but now he has to step down from his executive aerie.

From now on, Indigo’s fate depends on an American giant ruled by executives sitting in Palo Alto, California. There are clear marketing and managerial advantages to the foreign connection, but also disadvantages, as many Israeli companies have learned in recent years.

The good news is that Indigo won’t be firing any of its workers, Landa promises. If anything, based on growth forecasts of 30% a year, it may recruit new hands. Indigo is one of Israel’s bigger hi-tech employers. It’s welcome news for the hi-tech it, which is reeling from one massive layoff after another.

The bad news is that as of today, Landa can advise HP, but that’s it. If the forecast was wrong and HP’s situation worsens, it could callously chop limbs off its Israeli unit without a second thought.

The good news is that HP is paying at least $629 million for the remaining 86% of Indigo’s stock that it doesn’t already own. It’s paying in stock, this is true. But Indigo’s shareholders can throw the HP shares right back onto the market, ensuring they will get around that amount. The Landa family alone will be getting $300 million worth of stock.

The bad news is that over the last decade, Indigo raised almost that very amount from investors. Meaning, it barely created any value, certainly if you factor in how long it’s been around, raising money.

Therefore, the Landa clan aside, almost all Indigo’s investors lost money on the deal. If you bought Indigo stock in 1994, when it first went public, you lost 65% of your money. Nasdaq gained more than 100% during that time.

The good news is that after five years of the capital market doubting Indigo’s business model, because of the company’s constant losses and high product prices, HP came along and vindicated it.

The bad news is that HP still has to prove that Indigo’s product and business model were worth the price it’s paying. Indigo has reached sales of about $200 million a year, compared with $140 million in 1995. It hasn’t made one red cent all its life and stayed afloat thanks to investor infusions.

The good news is that becoming an HP division opens new marketing vistas for Indigo, greatly enhancing its chances of surviving in the tough new business environment, where capital infusions are scarce.

The bad news is that if a company like Indigo, a pioneer in its field, a company that invented its field, a company that had achieved annual sales of $200 million a year, a company rich in experience, a company with one of the richest founders in Israel and hence with more room to maneuver ? if a company like that decides it can’t make it in the global market by itself, what Israeli companies can?

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(Source: Globes Sept 7, 2001) HP currently owns 14.8 million of Indigo’s common shares, representing 13.4 percent of the company’s outstanding shares. Under the terms of the agreement, HP will acquire the remaining shares of Indigo for approximately $629 million in HP common stock, and a potential future cash payment of up to $253 million contingent upon Indigo’s achievement of long-term revenue goals, for an aggregate potential payment of up to $882 million. The goals are for Indigo to achieve $1.6 billion in cumulative sales revenue over the next three years.

This is a high threshhold, considering that in the second quarter of this year, Indigo achieved record sales of printing machines, yet its revenue amounted to only $48.1 milion, on which it made a loss of $2 million, or $0.02 per share. However, under the agreement, Indigo’s shareholders will receive a proportionate amount of the promised sum even if sales are below $1.6 billion, as long as they surpass $1 billion. The companies said the acquisiton was expected to add to earnings per share in its first full year of operation.

“The Indigo team has a rich history of innovation and strong customer relationships that has made it a leader in the commercial printing market,” said Carly Fiorina, chairman and chief executive officer, HP. “Our two companies have a proven track record of collaboration, and this new relationship will result in an even more compelling suite of offerings and support services for customers around the world.”

HP already invested

A year ago, HP invested $100 million in return for 13.4% of Indigo, which is a leader in the development of digital printing machines. The companies also signed a technology and marketing agreement, whereby HP would sell Indigo’s digital printing systems in an OEM arangement, and the two companies would develop new machines jointly.

The strategic alliance between HP and Indigo was in fact forged in 1998, but was fairly low key until last year’s investment. The alliance found expression in the link between HP’s digital camera and Indigo’s printing machines.

The launching of the digital printing machine, and the forthcoming launch of machines costing under $100 intended for desk-top computers, represent HP’s latest shots in the war in the printing market which occasioned it a 3% fall in revenue in this field in the last quarter, to $5 billion, and a 40% fall in operating profit to $410 mllion.

“HP intends to lead the transformation of commercial printing into a web-enabled, all-digital industry,” said Vyomesh Joshi, president of HP’s Imaging and Printing Systems. “The speed, image quality and cost effectiveness of Indigo’s technology will now be available to a larger audience through HP’s brand strength and global reach. By linking Indigo’s digital press to higher-value pages, we believe we can grow our commercial printing division over time into a multi-billion dollar HP business. We have worked closely with Indigo’s management for several years and expect a smooth transition as they join the HP team.”

Not Compaq

“This is a very different acquisition” from Compaq,” Joshi said. “It is really driving what we need to do… We will continue to do these kinds of activities for growing the printing and imaging business.”

Salomon Smith Barney’s John Jones told Reuters that HP was dealing with separate issues from the Compaq transaction, which has sent Compaq and HP shares plummeting, and adding new technologies to its printing business.

“This is a very different technology than either the company’s Inkjet or laser product offerings, although long-term it may be a technology that can be used in the photographic markets,” he said.

“Our vision has always been to lead the printing industry into the digital era and to see Indigo technology pervade the commercial printing market,” said Benny Landa, Indigo founder, chairman and CEO. “Now, as part of HP, that goal is in sight.”

Indigo’s versatile liquid electro-photography (LEP) technology spans commercial printing, industrial printing and photo-finishing. According to Indigo, LEP combines digital laser imaging with ultra-small ink particles enabling prints of superb quality to be produced at offset printing speeds.

Indigo is a $200 million business with a growing installed base, strong intellectual property in LEP, a highly profitable consumables business, a direct and specialized sales force, and experienced engineers. The company has 1100 employees, is headquartered in The Netherlands, and has R&D and manufacturing operations in Israel. Upon completion of the transaction, Indigo will operate as a new division within HP’s Imaging and Printing Systems business.

In the second quarter of 2001, Indigo reported revenue of $48.1 million, up 18 percent from the $40.8 million reported for the second quarter of 2000. Revenue was the highest ever reported by the company for a second quarter. Indigo’s net loss for the quarter was $2.0 million, compared with a net loss of $6.0 million for the second quarter of 2000.

Indigo shares closed Thursday at $6.30 on Nasdaq, up 14.13 percent.

Hewlett-Packard shares closed on Thursday at $17.70, off 51 cents or 2.8 percent, reducing the value of its all-stock offer for Compaq to $19 billion from the $25 billion value it announced based on last Friday’s closing price.

Published by Israel’s Globes Business Arena on 7 September, 2001