Although Indigo NV chairman and CEO Benzion (Benny) Landa sounds very pleased by the sale of Indigo NV (Nasdaq: INDG) to computer giant Hewlett-Packard (NYSE: HWP), shareholders have few reasons to celebrate. Indigo, which was floated seven years ago at a $1 billion market value, was sold in a share-swap deal at $7.50 per share, reflecting a market value of $830 million, a 17% premium over the market price prior to the acquisition announcement. Over the years, investors have seen their stakes diluted by a series of private placements. As a result, after seven years, Indigo was sold for 17% less than the issue price and 67% below the issue share price.
However, investors have an alternative. They can receive $6 today in HP shares, and another $4.50 in cash in three years, contingent on Indigo generating $1.6 billion in sales over this period. However, the share price would still be far below the $20 issue price.
"That's true," Landa told "Globes", "Investors in the IPO have lost, but that was a completely different time. One shouldn't look only at the price. Wall Street didn't like Indigo after the fall, and investors didn't like the restructuring plan we announced a year ago, or the company's performance. Nevertheless, we're leading the digital revolution in the printer field. We floated at a market value of $1 billion, and we're now selling at a valuation of $1 billion, if we meet our sales forecast."
Landa naturally looks at the glass as half full. In fact, considering the severe market crisis, the deal is a success. The bottom line is that Landa sold Indigo at an astonishing price, relative to the times, and got HP's "seal of approval" on his dream of digital printers, proving he wasn't delusional.
"Globes": Which sales alternative will you choose?
Landa: "I chose the second alternative; I'll receive $6 in HP shares today and $4.50 in three years, if we meet the $1.6 billion sales target for this period. I believe it's possible. We planned to have 30% annual growth each year, which isn't hard. This means we'd reach $1 billion in sales after three years, and now that we've linked up with HP's immense sales and marketing resources, the growth rate will be even higher. In order to achieve cumulative sales of $1.6 billion over three years, we'll have to grow 60% a year over the next three years, which is possible. That growth rate means Indigo will have to recruit employees, by the way. Indigo currently has 1,100 employee, half of them in Israel."
Do you advise investors to chose the second alternative?
"I cannot make recommendations to investors. I can only say which alternative my family and I chose."
Indigo shareholders received a rather low premium. In an earlier transaction, HP acquired a minority holding for $6.75 per share in cash, and it's now acquiring control for $7.50 in shares. This isn't a large premium.
"Share price isn't the only consideration - who will be the industry leader is also important. If we had kept our previous structure, we wouldn't be the industry leader vis-a-vis the giants. We wouldn't have failed, but the success would be limited."
But you had marketing and technology cooperation agreements with HP. Why was full acquisition necessary?
"The moment it was clear that commercial printers would be the crucial market, HP couldn't enter (the market) without a huge investment, unless it acquired all of Indigo. HP doesn't take big steps without justification, and a 13.4% stake in Indigo wasn't sufficient for them. If we were to stay under the earlier agreement, HP wouldn't have invested in the sector as it will do now. It wouldn't have brought all of its power to bear to defeat the competition."
So you're saying that HP pressured you to sell Indigo?
"We both wanted to declare war on the competition, which wouldn't have been possible under a limited alliance. One party didn't pressure the other; we reached the same conclusion. HP thinks the digital printer field will be crucial and wanted to make an acquisition. As I mentioned, we knew there could be only one winner."
A year ago, when HP invested $100 million in Indigo, was it already interested in acquiring the entire company?
"There were talks about that, but the conditions at the time weren't right. It was important to try to live separately for a year. This period allowed us to test the synergy between the two companies. In practice, the deal is between two companies with complimentary capabilities. There's no overlap between us, either in marketing, R&D or production."
Is there a connection between HP's announcement of its acquisition of Compaq Computer (Nasdaq: CPQ) and the Indigo acquisition?
"The original date for the acquisitions was supposed to be the same, but we weren't ready and it was delayed a few days. There was, however, no connection between the two acquisitions."
Will you stay at Indigo?
"I'll continue to lead Indigo, but I won't handle operations anymore. I'll only be involved in strategy. I'll be a strategic consultant to Hewlett Packard chairman and CEO Carly Fiorina. I'll have access to everything at HP, and that's exciting, and I'll have a huge sandbox to play in."
When will the deal be closed?
"That depends on when the authorities approve the acquisition. The deal will be closed in 2-3 months."
How will the shareholders who opted for the second alternative be able to check Indigo's quarterly revenues?
"All sales based on Indigo technology will be noted, and there'll be reporting and supervisory mechanisms, such as accountancy oversight, that will examine the revenue each year. There won't be a quarterly financial statement to the shareholders, but periodic ones."
Landa, as is his wont, talks about the future of the printing industry. "We're operating in a gigantic $400 billion per year market. However, despite the market's size, fundamental printing processes haven't changed in centuries, and remain primitive."
"Most printed material today is used by companies and enterprises for marketing, brochures, and catalogues. Everyone receives the same catalogue, even though in the Internet age they know the precise preferences of each consumer, his behavior, consumption habits, etc. In other words, a customer profile can be made and marketing material can be specialized for him. Enterprises have incredible power in this era, which is where digital printing and our solution comes in. "
The battle for the market
"The first digital printer was launched eight years ago. The market was characterized by competition for technological leadership. There was a need to penetrate the market with the digital concept and convince printers of its advantages. After we convinced them that printing would be digitalized, we began the second stage of the campaign, the battle for market leadership. In terms of competition, we succeeded. Xeicon, our main competitor, was more successful at first, but we now have 75% of the digital printer market and proved our technology is better. However, because Xeicon started out earlier, they have more printers installed than we do, but not many more."
"The battle for market leadership is only now beginning. Major corporations are about to enter the market, including Xerox (NYSE: XRX) and Heidelberger Druckmachinen, which is cooperating with Eastman Kodak (NYSE: EK). These are huge corporations with immense resources, and although our technology is better than theirs, we simply must invest huge resources in sales and marketing for the struggle. Hundreds of millions of dollars. This isn't a game for small players. We could have identified niches in which we could be leaders, and I believe we'd have continued to grow and succeed. But I dreamed of leading the digital printing revolution, not being a niche player. This meant hooking up with one of the giants."
Boosting Israel
"We also wanted the digital revolution to come from Israel. Israel isn't a global leader in any industry, and we wanted Indigo to put Israel on the map. The connection with HP guarantees it will be on the map. We signed an alliance with HP three years ago, and tested our technological and commercial compatibility, and most important of all, our cultural compatibility".
"After testing our cooperation with HP (which sells $20 billion of printers a year) across various parameters, we were convinced the great opportunity lay in the digital revolution. The next stage was reached a year ago. We began cohabitation. HP invested $100 million in Indigo, for 13.4% of equity. We also signed marketing and joint product development agreements. We learned how to live together, market together. We're now married."
"Indigo will become a division in HP, Indigo Division, which will be headed by Indigo COO Rafi Maor. The products will continue to carry our logo. Indigo's operations in Israel will expand and we'll recruit workers. I'm very proud that HP agreed so enthusiastically. I don't know of any global company that is basing an entire division in Israel as they are doing, and talking about transferring staff here. In effect, HP is 'making aliyah' - immigrating - to Israel."
"The three years with HP were a honeymoon. Although HP is a giant company, its corporate culture is similar to ours. It's a kind of giant start-up. We simply found a very compatible company."
"Beside the corporate compatibility, HP has immense power. Indigo's customers are commercial printers, while HP has huge sales and marketing power in the enterprise sectors as well. HP has 30,000 agents in that sector; it lives and breathes with enterprises. This means we can approach these enterprises and offer the chance of printing focused and customer oriented marketing material. Enterprises will send databases to the printers we direct them to, and they'll prepare the marketing material effectively and simply."
Published by Israel's Business Arena on 10 September 2001