IBM Sells Printing Division to Ricoh for $725 Million

Seeking to further focus on its core server, storage, software, and services businesses in corporate computing, IBM announced last week that it was creating a joint printing business with Japanese printer and document management software partner (and sometimes rival) Ricoh Company. The joint business, called InfoPrint Solutions Company, will eventually control IBM’s entire Printer Systems Division, and will see Big Blue finally exit the printing business altogether. The spinout, which will take IBM an estimated three years to complete, is valued at $725 million.

The divestiture of IBM’s enterprise printing business, which has always been located in Boulder, Colorado, follows IBM’s exit from several businesses over the past couple of years. IBM sold off its PC business, which was generating around $11 billion in revenues and little or no profit, to Chinese PC maker Lenovo Group in December 2004 for $1.25 billion. The company sold its disk drive business to rival Hitachi for $2.05 billion in June 2002. Over the years, IBM has sold off its Prodigy online service, its network equipment business (to Cisco Systems), and its network services business (to AT&T).

This is not the first time that IBM has considered selling off its high-end printer business, which makes high-speed continuous forms and cutsheet printers (some actually used Hitachi and Kodak engines) as well as document processing software that integrated with its own mainframe and midrange systems as well as with Windows, Unix, and now Linux boxes of all shapes and flavors. As was the case with disk drives and PCs, IBM was on the leading edge of printing, since all those mainframes from four decades ago needed printers, since bills and statements were most of their output.

In December 1991, as IBM’s chairman and chief executive officer, John Akers, was running up against a declining mainframe market and a tough recession, IBM seemed to be prepared to spin out its enterprise printing business, and even went so far as to pay some hot-shot Madison Avenue marketeers to come up with a new name for this division–Pennant Systems–and set up a new headquarters for the division in Norwalk, Connecticut. Back then, IBM said it would eventually set this up as a wholly owned subsidiary, but it never did. When Akers was ousted from IBM after tens of billions of dollars of losses, Louis Gerstner was brought in from American Express to be the new chairman and CEO and he battened down the hatches and killed off all talk about divesting any IBM units. Then again in 1998, as the printer hardware business continued to shrink (but still kicked off lots of maintenance-related profits), there was talk on Wall Street that IBM was looking to sell this unit, which had about $2.3 billion in sales.

The printer division that IBM is selling to Ricoh has just under $1 billion in sales–with about two-thirds coming from hardware and one-third from support. According to Tony Romero, general manager of the Printing Systems Division who will be president and CEO of the joint operation, this business is still profitable, but he did not say by how much during a conference call announcing the deal in New York.

The deal with Ricoh is, of course, a bookend to the divestiture of the low-end enterprise and consumer printing business and, believe it or not, the typewriter operations at IBM. These were based in Kentucky and they used to be a very large and profitable business for IBM. (Before PCs, offices had Selectric typewriters.) This unit was acquired in March 1991 by private equity firm Clayton, Dubilier and Rice for $1.6 billion and became Lexmark International, one of the few rivals Hewlett-Packard has today when it comes to desktop and network printers. Lexmark went public in 1995, nearly hitting $1.8 billion in sales the following year and is now bringing in over $5 billion in sales a year with some modest profits.

Lexmark is perhaps the best example of how Big Blue sometimes needs to shed businesses so they can get out from under IBM’s hierarchy and compete in the market–which is why so many IBMers back in the early 1990s, when IBM was bleeding red ink and fired over 100,000 employees, wanted to split the company up into separate companies, much as happened to AT&T through court action. (We all see how well that has worked over the long haul.)

Also at the event was Nick Donofrio, executive vice president of innovation and technology at IBM, who is in charge of the company’s research, development, and intellectual property operations and partnerships like the one that IBM has had with Ricoh back in Japan for two decades. Donofrio didn’t try to sugarcoat why IBM was divesting the high-end printer and software business.

“There comes a point when you realize that you no longer have the capability to move a technology ahead and have profitability and growth,” Donofrio said. He explained that IBM wanted to accelerate other businesses, and that the rate of investment in this printer business was not as large as it needed to be to produce the growth IBM would have to see if it were to get a return on investment that was comparable to that which can be attained in other businesses. “It doesn’t mean this is a bad business,” he was quick to point out, but he said that IBM has been examining its options for the printer business for the past three years. “We have learned that sometimes we must let go. You have to be able to do new things, but you have to be able to let things go.”

Ricoh has been selling PCs, midrange servers, and other office equipment made by IBM for two decades. And Ricoh is a much larger player in the enterprise printing business than IBM could ever hope to be, with approximately $16 billion in annual sales and over 79,000 employees, according to Masamitsu Sakurai, the company’s president and CEO who was in New York for the announcement as well. He said that IBM had built up expertise in printing on demand printers and software, which allows high-volume printing of documents and books that once needed offset printing, and as well as in variable data printing, which is what you do to customize documents for specific people–such as a customized catalog or billing statement. “I am confident that we are poised to take a significant share of this market,” Masamitsu said.

InfoPrint Solutions Company will remain located in Boulder, but Masamitsu said that Ricoh had not done any long-term planning beyond the next three years. The acquisition deal is staged, according to Donofrio, to allow a smooth transition of intellectual property, engineering teams, and sales and marketing staff from IBM to InfoPrint Solutions Company. The deal is expected to close in the second quarter of 2007, and will result in the transfer of 1,200 IBM employees to this entity. Over time, another 1,000 support engineers will be moved into the company, too. IBM will provide maintenance services until these support engineers are moved over, and will sell and support printers and software for the next five years, for an estimated $150 million a year.

The $725 million price that Ricoh is paying for the Printer Systems Division is the entire cost of the acquisition, but Ricoh will only start out with a 51 percent controlling stake in IPSC, compared to IBM’s 49 percent stake. Over the next three years, IBM will divest itself of its IPSC shares, although Ricoh is, for some reason, prepaying IBM for those shares. IPSC will be allowed to use the InfoPrint brand and the IBM logo for five years–similar to the deal Lenovo cut with PCs, and it will take over intellectual property associated with printers and software. IBM’s channel will continue to peddle printers and software to link them to its servers and operating systems.

The big question about this deal is how IBM’s server platforms–particularly its z/OS, i5/OS, and AIX operating systems–will continue to get support now that the Printer Services Facility software that is at the heart of many billing and statement applications is not part of IBM, but part of Ricoh. This software is integrated tightly into many applications, and it has been a comfort to many customers that IBM provided the whole stack–from the server up through the printer software and drivers and on out into the printer itself. There was one throat to choke, and now there are two. The next effect of this deal might be to open up some opportunities for HP and Xerox as well as for Ricoh. IBM also resells Lexmark printers to entry and midrange customers, and over time, it will likely resell both Lexmark and Ricoh products. This could have an adverse affect on Lexmark where Rioch products overlap.

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