HP buys Indigo for $629 mln in shares

Indigo shareholders could also receive a future cash payment of up to $253 million, contingent upon Indigo's achievement of long-term revenue goals.

Hewlett-Packard Company (NYSE:HWP) and Indigo N.V. (Nasdaq:INDG) announced yesterday 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.

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 Business Arena on 7 September, 2001

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