Printer Companies Add Services To The Mix

Printer companies are turning to high-tech services as a way to inject excitement into a low-tech business.

On Monday, Xerox Corp. (XRX) said it was buying business services provider Affiliated Computer Services Inc. (ACS) for around $6.4 billion in cash and stock. The Norwalk, Conn.-based printer giant is hoping to expand outside of its slow-growth core business by adding more lucrative services, like custom book publishing and major print run management.

Xerox isn't the only printer maker trying to goose sales by tacking on professional services. Canon Inc. (7751.TO) and Hewlett-Packard Co. (HPQ) recently struck a deal that lets H-P sell more of the Japanese company's printers along with its own "array of software and service offerings." Other printer makers, like Hitachi Ltd. (6501.TO) and Lexmark International Inc. (LXK), have added Internet connections to their machines to provide pipelines for delivering services, like photo-book printing, directly to customers.

Dressing up printer businesses with professional services takes a page from the playbooks of tech giants like International Business Machines Corp. (IBM) and H-P. These companies, which started off as computer makers, are integrating professional services with their hardware. That, in turn, is spurring demand for their computers and servers.

The Xerox-ACS deal is "further validation of the business model of offering integrated solutions consisting of hardware, software and services," Kaufman Bros. analyst Shaw Wu said in an email interview.

Already, the changes at printer companies are making their mark. Last week, Palo Alto, Calif.-based H-P said the operating margin for its printer division could be as high as 17% in fiscal 2010. That's stronger than the 15.6% the division posted in fiscal 2008, the last full year for which the company has reported results.

The new enthusiasm is driven by sales of wireless and multi-featured printers, plus commercial and digital printing services, H-P said. Among its plans: Opening what it calls a "Printer Application Studio" that will let H-P printer owners download specialized software onto their machines.

How well the industry's strategy will pay off has yet to be seen. While no one sees the demise of paper, options to printing are becoming more affordable and prevalent. Digital photo frames, which eliminate the need for printed photographs, have become popular gift items. And e-readers, like Amazon.com Inc.'s (AMZN) Kindle devices, are making inroads with bookworms, even if they haven't displaced the printed word.

On Monday, the stock market offered a cold assessment of Xerox's deal. Xerox shares fell 14.3% to $7.68, though ACS shares jumped nearly 14% to $53.86.

Still, analysts say printer businesses have plenty of kick in them for the foreseeable future, particularly if they can work in more services contracts.

In a note to clients, BMO Capital Markets analyst Keith Bachman said Xerox's deal might encourage more consolidation. Xerox itself, he said, may want to add more service companies to its stable as a way of "bridging the gap."

-By Ben Charny, Dow Jones Newswires; 415-765-8230; [e-mail]