HP’s $3.3B Acquisition Of Poly: Six Things You Need To Know

HP’s $3.3 billion acquisition of Poly has big implications for hybrid work with HP plans for a “more complete” portfolio of hybrid work offerings and improved audio/video capabilities on HP systems.

A Hybrid Work Game Changer

HP is hoping to forever change the post-pandemic hybrid work landscape with its $3.3 billion acquisition of Poly, a $1.7 billion global provider of videoconferencing and audio peripheral solutions.

The $3.3 billion price tag includes Poly debt. HP Is paying $40 per share for Poly, a 50 percent premium on the close of the shares last Friday.

“The rise of the hybrid office creates a once-in-a-generation opportunity to redefine the way work gets done,” said HP CEO Enrique Lores (pictured) in a prepared statement. “Combining HP and Poly creates a leading portfolio of hybrid work solutions across large and growing markets.”

In an interview with CNBC, Lores said HP will leverage the 1,100-strong HP audio and video patent portfolio to build a “more complete” portfolio for hybrid work. He said HP also intends to leverage those patents to improve the audio/video quality of HP systems.

HP, in fact, plans to partner closely with Zoom and Microsoft Teams to improve the videoconferencing cloud experience. “This is really about the experiences we are going to be to deliver to our customers combining the quality of the solutions from Poly with our compute systems, with our manageability,” he said. “We can really create very unique experiences that will help us grow in this space.”

The pandemic has redefined the workplace with an HP survey from last May reporting that 68 percent of employees expect to work from home at least three days a week.

That new hybrid work model provides a big opportunity to drive improved user experiences with improved videoconferencing rooms in offices, said Lores.

In fact, Lores said there are 90 million conference rooms with only 10 percent of them with videoconferencing equipment. “This market is going to triple in the next three years as people will have to enable that to allow people to again work from home and work from the office at the same time,” he said.

Gainesville, Va.-based solution provider NCS Technology, which partners with both HP and Poly, expects the deal to open up new opportunities for channel partners, said Mike Turicchi, vice president at NCS.

“I think it’s a great acquisition,” he said. “It’s smart on their part to address a broader portion of solutions and it’s consistent with our own strategy,” he said. “The (HP acquisition in February of Gaming Peripherals provider) HyperX (a unit of Kingston Technology Company) didn’t really address the business needs of video, so this was a good move. And this brings it closer to one-stop shopping for us as a partner to both companies.”

The HP-Poly Channel Possibilities

HP and Poly, which both have five star-rated channel partner programs by CRN, said the deal opens up new possibilities for channel partners.

In fact, HP said it expects to cross sell the Poly product set across its global commercial and consumer channels, while at the same driving incremental sales from combining Poly’s products with HP’s PC portfolio.

HP’s channel partner program should adapt easily to the new offerings from Poly, said HP CEO Enrique Lores. “We don’t think this will change our overall channel approach,” he said. “We will be integrating their products into our programs and allow our resellers to expand their business. This gives us the opportunity to scale up to leverage our strength, and to also leverage the presence that they have in channels, that until now, we’ve had a very limited presence.”

HP Personal Systems President Alex Cho (pictured) called the blockbuster deal a “win-win” for partners. “Think about it from a channel perspective – they’re going to get a portfolio that is so meaningful for the future,” he said. “This is about hybrid work … (channel partners) will be able to cross sell and upsell all these new innovative solutions that we have planned together.”

Poly CEO Dave Shull, for his part, said the deal opens the door for his company to “dramatically scale, reaching new markets and channels, supercharging our innovation with a like-minded partner.”

Shull said he sees the deal as a means of “helping businesses everywhere meet the challenges of a generational disruption in the way people work.”

An Initial Thumbs Down From HP Investors

HP shares were down $1.78, or four percent, after the PC andprinter maker acquired Poly in a $3.3 billion cash deal.

HP paid $40 cash for each share of Poly, a whopping 50 percent premium from the Friday close of Poly shares. Poly shares stood at $49.77 in mid-day trading.

Responding to the drop in HP shares, Lores told CNBC that HP was buying Poly for the long-term value.

“We are buying this company for the long term and for the long term value that we think we are going to be creating,” he said. “We strongly believe in the opportunity that we see in the hybrid space. We think this is a winning combination because of the portfolio, the technologies that they have and the complementary go-to market. We think we can really scale and the financial case is very strong. Long term this is a great acquisition for HP and we are very confident about that.”

How It Impacts HP’s Balance Sheet

HP said it expects the acquisition to be “immediately accretive” to its revenue growth, margins and non-GAAP EPS once the deal is closed.

In fact, HP said it expects to “realize substantial revenue synergies” in peripherals as well as meeting room and workforce solutions as a result of the acquisition.

HP, in fact, expects to achieve $500 million of revenue synergies by fiscal year 2025. Furthermore, HP said it expects to accelerate Poly’s revenue growth to an approximately 15 percent compound annual growth rate over the first three years after the closing of the acquisition.

A key part of that plan to drive Poly growth involves leveraging HP’s global commercial and consumer sales channels to drive expanded hybrid work solutions with Poly products. HP also expects to drive incremental sales from combining Poly’s products with HP’s PC portfolio

HP expects to improve Poly’s operating margins by approximately six percentage points from current levels by fiscal year 2025 “driven by scale efficiencies across supply chain, manufacturing and overhead.”

HP expects the deal to close by the end of calendar year 2022, subject to Poly stockholder approval and regulatory clearances.

HP said it will finance the acquisition through a combination of balance sheet cash and new debt. In addition, HP said the acquisition is consistent with its capital returns program target.

Finally, HP said it remains committed to aggressively buying back shares of at least $4 billion in fiscal year 2022 with a plan to return significant capital to shareholders while continuing to invest in growth.

The Financial Implications For Poly

The deal comes amid recent Poly financial struggles with flat revenue performance and frustration in the wake of supply chain challenges.

Poly recently projected $1.7 billion in revenue for fiscal 2022, down from $1.74 billion in fiscal 2021.

In the most recent quarter ended January 1, Poly reported a net loss of $11.16 million on a 15 percent drop in sales to $410 million.

With Poly’s most recent financial results, Poly Chief Financial Officer Chuck Boynton called out “global supply chain and logistical challenges” continuing into the new year.

“We continue to take steps to optimize our operating model and control what we can, in a volatile environment,” said Boynton in a press release. “We‘ve conservatively managed our cash, favorably amended the terms on our undrawn credit facility, and instituted price increases. Taken together, as supply chain disruptions abate, we expect this operating leverage to result in significantly improved financial performance.”

A Poly Supply Chain Game Changer?

HP said it will use its supply chain prowess to improve Poly supply chain issues.

HP CEO Enrique Lores said HP’s scale as a $63.5 billion company will be key to helping cure the supply chain issues faced by Poly, a $1.7 billion company.

“It is important to realize that in situations like the one we are facing scale matters,” Lores told CNBC, “scale to support and drive our business will help us to make a difference from a component availability perspective (for Poly).”

Poly recently rolled out a Renew pilot program for its channel partners grappling with Poly supply chain issues. That program is aimed at helping partners work around product availably roadblocks with recycled or refurbished hardware.

The Renew program was launched ot help address the supply chain issues, Poly Channel Chief Nick Tidd recently told CRN. “I had a supply chain problem, and so, I’m trying to get my own product back,” he said. “And two, the upgrade cycle. We wanted our partners to be able to have a mechanism to get credit for the trade-in, but also give a voucher for future purchase. We’re now just two months into that and we’re day over day increase the number of partners that are taking advantage of it.”

Tidd advised partners to take advantage of the video conferencing everywhere and mobile enablement. “My message to the partners for 2022 is take advantage of the transitions that we’re seeing as we embrace a return to work and hybrid work -- be aware of the transitions [and] ensure that you’re equipped for those transitions,” Tidd told CRN. “As somebody who has been most of my career has been in networking and [unified communications] UC, the next window is definitely centered around video everywhere and mobile enablement, so pay very close attention to the personas of how the technology is being used and don’t sell on function and feature, but sell on use.”

The Impact On The Never-ending HP-Xerox Merger Rumors

The HP acquisition of Poly could have an impact on the long-standing rumors and possibility of a potential HP and Xerox merger.

Two directors of Xerox, including Chairman Keith Cozza, stepped down last week in a move that reignited speculation that Xerox may be in for more merger or acquisition talks.

Cozza became chairman of the board in May of 2018 as a way to appease activist shareholder Carl Icahn, who currently holds 20.5 percent of Xerox’s shares and a stake in HP.

At the time, Icahn and Darwin Deason, two of Xerox’s three largest individual shareholders, objected to the proposal by Fujifilm Holdings to acquire Xerox. That merger had been blocked a couple weeks earlier by Supreme Court of the State of New York, County of New York.

Xerox in late 2019 then revealed a plan to acquire HP Inc. That bid was eventually withdrawn. Two weeks after Xerox’s HP bid, Icahn unveiled a 4.24 percent stake in HP.

In an interview with Barron’s in March, HP CEO Enrique Lores said HP’s “priority” is to execute its own plan which is “going to create a lot of value” for shareholders. “We are open to exploring consolidation, but there are other opportunities we’re considering from an M&A perspective,” he said.

Lores told Barron’s that the Xerox takeover attempt did not recognize HP’s value as a “stand alone” company. “The second problem is the high leverage the combined company would have, which we consider extremely risky,” he said. “Third is the synergies they’re using to calculate the value of the deal are unrealistic. They count cost savings we’re already finding as a stand alone company.”

In an interview with CRN in February, Xerox CEO John Visentin told CRN that the HP deal was “dead.” That said, he also noted that he believes the printer industry should consolidate.

“It’ll always take two players to want to consolidate and we’ve always been very vocal that this industry is too large and that we should start seeing some consolidation, which we haven’t yet,” he said.