Nuptials for Xerox, RRD Are Called Off

It looks like the proposed acquisition of RR Donnelley (RRD) by Xerox Corp. isn’t going to happen, according to the Wall Street Journal. When word broke that North America’s largest printer and one of our industry’s leading technology providers were in talks about getting hitched, the graphic arts industry took notice. Ironic — if the deal is truly dead — that the breakup of the merger discussion comes at a time when both companies themselves are in the process of breaking up into separate companies.

Partly driven by Carl Icahn’s financial stake and influence, Xerox is in the process of separating the $11 billion Xerox document technology business (led by newly promoted CEO Jeff Jacobson) from its $7 billion business process outsourcing enterprise, which will be called Conduent. Likewise, RRD, as it announced last year, plans to split up into three separate, publicly held companies, with a target date of some time in October.

So what caused Xerox to reportedly leave RRD standing alone at the altar? Of course, neither company would comment about the proposed marriage, as you’d expect — especially fo rtw o publicly held companies. That leaves plenty of room for conjecture by industry watchers.

My take is that the deal fell through for multiple reasons. For one, I’m sure Xerox sales reps were getting an earful from their printer customers, complaining that acquiring RRD would essentially put Xerox in direct competition with them. Perhaps Xerox was really after RRD’s business process outsourcing business to combine with its own, and was planning to sell off RRD’s printing assets, but tha t’s anyone’s guess.

Another driver that got the merger discussion started in the first place, in my opinion, is the inability for companies like Xerox, and RRD especially, to garner high valuations and drive shareholder value on Wall Street. Unfortunately, the financial markets don’t value printing companies highly, believing printing is a slow-to-no-growth industry. Despite generating about $11.6 billion in annual revenues and paying a high dividend, RRD has a market valuation of only about $3.9 billion.

Perhaps RRD has also grown — through numerous acquisitions — too big to manage and lost its entrepreneurial edge. By comparison to competitor Quad/Graphics, RRD has also been investing less in capital expenditures as a percent of sales to be more automated and efficient.

As Neil Sedaka’s lyrics go, “ Breaking Up Is Hard to Do.” I bet both companies’ boards of directors are hearing that song in their sleep.