HP sets new focus for printer unit

Peter Henderson

PALO ALTO, Calif.: Almost overshadowed by the size and controversy of its bid

to buy Compaq Computer Corp., Hewlett-Packard Co. is pushing ahead with a deal

designed to overhaul its most profitable operation: the money-spinning printer

division.

For HP, the acquisition of Dutch-commercial printer maker Indigo NV is

designed to move its printer unit beyond the desktop and loosen the strong link

to personal computers that served it so well in the 1990s boom but has become a

liability during the current slump.

HP sells about half the world's desktop printers, usually tied to computers

running Microsoft Corp. software, but now needs to find new sources of growth,

executives said.

"The problem that HP has had," Lee Caldwell, the chief technology

officer and vice president of imaging and printing, said in an interview,

"is that we've been able to ride on Microsoft's coattails for the last 10

or 15 years of growth."

The Indigo deal, which was announced the same week as the Compaq merger,

comes at a time when HP will depend on its printing business for profits to

carry it through the tough times of integrating Compaq's computer and services

with its own.

Printing and imaging made up 40 per cent of HP's sales in the first nine

months of this fiscal year and 130 per cent of its profits from operations -

most other divisions lost money - but sales have fallen.

"Imaging and printing systems is the crown jewel of Hewlett-Packard, a

$20 billion business that we need to continue to grow," Printing's

president, Vyomesh Joshi, added in a separate interview.

Most of the world's printed pages



Short-term, HP sees growth in low-end printers that consumers and small
businesses are snapping up and it is also moving into digital photography

products.

Longer term, the company is eyeing the market for commercial presses, which

produce 94 per cent of the world's printed pages, compared to the three per cent

generated by desktop-type printers.

HP plans to edge out mechanical commercial presses with a digital system

similar to a huge and complicated color LaserJet. On Sept. 6, it said it would

pay up to $882 million in stock and cash for Indigo, which makes digital color

printing systems.

"The first and most important part for any merger is to really have

alignment on strategy," Joshi said. HP has a minority stake in Indigo and

has worked with the Dutch company for three years, he said. HP also plans to put

top engineers on the project to work the kinks out of the Indigo machine, which

one HP engineer likened to a prototype.

HP has also tied the price of the deal to results, which is not true of the

larger Compaq deal. HP is paying $629 million in HP stock for about 87 per cent

of the company - HP bought the remainder earlier - and will pay up to $253

million in cash if sales rise from roughly $200 million now to $1 billion to

$1.6 billion in three years.

"It is a great retention program for us," Caldwell said.

Huge growth, but not next year



Even so, Caldwell did not expect the market to jump right away. "We are not
looking for a huge expansion of this business next year. We are looking for a

huge expansion over the next five to 10 years," he said.

Indigo's digital press produces good-looking copy that is comparable to the

output of traditional presses but the system is expensive to use, executives

said. The presses themselves cost about $200,000 to $500,000.

Some commercial press operators say they can offset that premium by charging

customers more for fast turnaround of short press runs, industry sources said.

The digital press can as easily turn out 500 customized sheets as 500 identical

sheets.

San Ramon, California-based K/P Corp., which gets about six per cent of its

$100 million in sales from digital color printing, said its division was very

profitable. Others in the industry remain cautious.

The underlying technology is changing quickly, meaning the machines should be

treated as a three-year capital investment rather than a five-to 15-year one,

said Mervyn Ely, managing director of British printer William Pollard & Co.,

Ltd., who was at HP to look at the Indigo press.

In addition, commercial clients often struggle with their end of the

technology needed to make full use of the customization features of the

machines, raising costs beyond expectations, he said.

"I wonder if printers are making as much profit from their digital

printers as they think they are," he said. HP plans to improve the Indigo

system by bringing to bear technology and information processing technology that

would link the printer through the Internet to clients.

"It is a very Internet-centric type of space," Caldwell said.

(C) Reuters Limited 2001.