I had the chance to chat last night with HP Inc. Personal Systems President Alex Cho about its acquisition of HyperX for $425M. Cho, before Covid-19, called the PC “essential” and forecasted industry growth based on end user research the company conducted. And he was right. HP has seen growth this year driven in part by Covid-19 and the increased demand for PC gaming. In its recent earnings call, HP Inc. CEO Enrique Lores talked about gaming’s “surge in popularity.” In its fiscal Q4/20 earnings package, the company described that the company “Delivered strong growth in high valued categories of Consumer Premium, Gaming, Services, and Consumer Accessories.” While HP sees growth in gaming, it wants more- enter HyperX, a leading PC gaming accessories maker.
News per the HP Inc. press release
The following are the deal terms, financial impact, financing, management, governance:
- Price: $425M cash
- Accretion: expected to be accretive on a non-GAAP basis to HP in the first full year following closing
- Deal closure: The transaction is expected to close in calendar Q2 2021
- Proforma P&L: not relevant
- Cost synergies: not disclosed, likely not relevant
- Credit facility: not needed
- Combined TAM: not relevant
- Organization and reporting structure: not disclosed
I believe this is a good acquisition for HP Inc. for a few simple reasons.
Making money in the PC market is tough. It requires scale, never making a big mistake, and, quite frankly, finding ways other than the device itself to make money. Most PC makers make most of their profit dollars from services, extended warranties, software, and accessories. Accessory gross margins can 5-10X the margin percentage of the device itself.
I chatted with Canalys CEO Steve Brazier and he had a good perspective on the 2020 PC market related to profits and demand. He said, “2020 was a phenomenal year for the PC industry and were it not for the shortages, it would have been the biggest sales year in history. Champagne corks can still pop though, as operating % margins and actual dollars were at all time highs for the leading OEMs. Strong demand was an obvious positive, but so was the emerging choice in processors (Intel versus Arm versus AMD) and operating systems (Windows, Chrome and Apple). This diversity has created margin opportunities that never existed before.”
The PC gaming market is growing, as well, as I illustrated above. It was growing before Covid-19, but it grew, even more, when the pandemic hit because consumers could no longer go to movies, the gym, restaurants, and bars. PC gaming is a social activity now, different from 25 years ago as it was “you versus the computer.” This is why I think the PC market continues to grow.
Finally, this is a good move as I believe success in the PC market is increasingly dictated by the “experience” versus just the “piece-parts.” Consumers want an experience that is defined by the PC, its software, services, and accessories. While HP had gaming accessories, this acquisition brings it to another level. I believe a focus on “experiences” improves HP’s chances of selling more PCs overall, not just more accessories. HP could use more growth, too. Canalys reported that in the calendar fourth quarter of 2020, the PC market grew 25.4% while HP grew 10%.
Overall, I think this is a good move by HP. A few keys to long-term success for these types of acquisitions are creating an environment that doesn’t scare off the acquired employees or stifle innovation and take pieces of the acquired culture you like and permeate the larger company. It’s more an art than science. I have spent much time with HP Personal Systems President Alex Cho, and every time we talk, he talks culture, and I believe that if anybody can pull it off, it’s Cho.
Note: Moor Insights & Strategy writers and editors may have contributed to this article.