While the Market Is Declining, Recent M&A Activity Could Be Good News for the Channel

by Charles Brewer, Actionable Intelligence

Since the earthquake struck Japan in March, I’ve been following its impact on our industry closely. Some Japanese hardware vendors were hit harder than others, of course, but in general, there were significant adverse effects on the entire office imaging equipment industry.

With important facilities in the devastated region, Canon and Ricoh have reported they will lose billions of yen because of the quake. Even companies that don’t have facilities in northeastern Japan, the region that experienced the full fury of the quake, have been harmed. Hardware makers have successfully made contingencies to continue operations, but some manufacturing had to be curtailed. I’ve read various reports on shortages of parts and consumables. Because of the damage inflicted on Japan’s infrastructure, especially its power grid and transportation system, the problems caused by the quake will most likely continue to dog the industry in the foreseeable future.

That said, the industry has many more serious concerns, in my humble opinion. We have been experiencing a secular move away from hard copy for at least the past four or five years, and conditions have further deteriorated since the Great Recession. Long before the horrific events took place in Japan, most hardware vendors experienced either revenue or margin declines, and some have experienced both. Because printing is critical to every business, it’s clear we’ll never see the once-prophesized “paperless office.” Still, the need for hard copy is diminishing, and copier and printer vendors are wrestling with the results.

Ricoh recently announced that it would trim some 10,000 workers from its payroll. While the firm is Japanese, the need for such drastic bloodletting was due to factors unrelated to the quake. This is only the most recent example of layoffs. HP, Lexmark and others have been shedding jobs for a while, and more cuts may be coming. Like most of its competitors, Ricoh has seen annual hardware sales shrink since the recession set in. Likewise, Konica Minolta’s revenue dropped 20 percent between the second and third quarters during its 2009 fiscal year, and its revenue has been essentially flat ever since. Even Canon, which has improved its sales somewhat, has witnessed a double-digit drop in combined hardware and consumables revenue since 2008.

To rectify the situation, office-equipment manufacturers have begun to modify their business models. Printer firms have moved from relying on strictly transactional sales to writing more leases. Copier vendors are looking for more avenues to be able to provide value-adds to their leaseholders. Printer and copier manufacturers alike are investing heavily in expanding the services they can provide.

The IT industry has seen a growing amount of merger and acquisition activity recently. According to a post at the MSPmentor website in April, 18 managed service providers were acquired in the first quarter of this year alone.

Although they aren’t the only ones involved in these buyout, OEMs have been gobbling up service providers. In January, Konica Minolta bought the U.S.-based IT service provider All Covered. More recently, Hewlett-Packard acquired Printelligent and Xerox purchased the U.K.’s NewField IT. These acquisitions will allow the respective hardware makers to provide more services to small and medium-size companies. While the enterprise space is well-covered by the direct sales organizations at most hardware companies, the SMB segment has not been. HP and Konica Minolta’s acquisitions should allow the companies to better penetrate it. Now that banks are providing more access to capital, you can bet there will be more M&A activity.

It remains unclear what the OEMs’ move toward providing more services will mean to the channel. Hardware manufacturers have done well selling services directly to large customers, but it seems they will need to enlist the aid of their VARs and other channel partners to effectively pursue SMB clients. This should provide the channel with more revenue opportunities. While marketing services could prove to be quite a boom, there’s also a risk that channel conflicts may arise if manufacturers mismanage the way they put their acquisitions to use.

The industry has certainly experienced some growing pains as it has matured, and much of that pain has come in the past few years. I’m hopeful that as it continues to consolidate, though, some of the hurt can be mitigated. There continue to be plenty of opportunities out there for everyone.