Print, photocopy, scissors

Xerox-Donnelley deal would be epic paper shuffle

A Xerox-RR Donnelley merger would be an epic paper shuffle. Binding together the iconic photocopier maker and the 150-year-old commercial printer would create a $14-billion giant - which Xerox would then presumably break up. That would increase integration risk and wouldn't necessarily solve each company's dilemma of being print-heavy in an ever-more digital world.

The two are in a similar boat. Information's relentless shift to computers, tablets and phones has cut demand for Xerox machines and printing presses. Granted, both companies have diversified into other businesses - with Donnelley carving out a niche in financial reporting and communications and Xerox investing in back-office services. But their shareholder returns have badly lagged those of the broader S&P 500 Index in recent years.

That has led to more radical proposals to boost value. Donnelley last August unveiled a plan to separate its financial, marketing communications and legacy print businesses into three companies. Xerox Chief Executive Ursula Burns, under pressure from billionaire activist investor Carl Icahn, followed in November with a plan to split business outsourcing from the legacy documents business.

The new deal under discussion would involve Xerox buying Donnelley, then merging it into its successor companies, according to Bloomberg, which first reported the talks on Monday. Trouble is, Xerox would be taking on debt to invest in a declining industry.

A takeover at a 25 per cent premium would value the Chicago-based printer at a little under $5 billion, including debt. Xerox would end up with net debt of around three times analysts' average estimate of combined 2016 EBITDA, assuming it borrows money to finance the takeover. It would be one thing if the companies could count on big cost savings to bring that multiple lower. But analysts at Credit Suisse see few obvious synergies from combining the document and print businesses. Adding more product lines to Xerox's low-margin outsourcing unit, meanwhile, would add complexity just as its newly spun-out entities are trying to find their footing.

It's one of the major problems that accompany big mergers. Another is the risk of a brain drain - a real fear if the executives recently appointed to run the divisions Donnelley had been planning to hive off decide to move elsewhere. Xerox's ambitions could be heading for a disappointing jam.