Will the Lexmark Legacy be Around After the Merger?

Almost a year ago (October 23, 2015) Lexmark published a press release that announced its Board of Directors had authorized the “exploration of strategic alternatives to enhance shareholder value.” At the time it was reported, “There is no set timetable for the exploration of strategic alternatives.”

By now most everyone in the printing and imaging industry knows that Lexmark agreed to be acquired on April 19, 2016 by a consortium of investors led by Apex Technology and PAG Asia Capital for $40.50 per share. Legend Capital was also mentioned as a member of the consortium (see Figure 1). Lexmark issued a press release announcing its entry into the definitive merger agreement with the consortium per SEC Form 8-K.

Figure 1 - Lexmark Acquired by Apex Technology
Figure 1 – Lexmark Acquired by Apex Technology

On April 20 Paul Rooke, Lexmark chairman and CEO, sent a letter to Lexmark’s customers and partners and said, “The transaction, which is expected to close in the second half of 2016, is subject to various conditions, including the receipt of required shareholder approval and foreign and domestic regulatory approvals.” Jean-Paul Montupet, lead director of the Lexmark Board of Directors, commented, “We anticipate that the transaction will cause no disruption to our operations or on-going cost-savings initiatives, and will only strengthen the business.”

Latest Developments

What has happened since the announcement on April 19? Remember, Rooke said the merger “is expected to close in the second half of 2016.” Right before Lexmark’s Q2 2016 earnings release, the company reported its shareholders had approved the merger agreement “by an overwhelming margin” on July 22, 2016. The merger is still subject to regulatory approvals especially the Committee on Foreign Investment in the U.S. (CFIUS). This approval might get a little sticky since the Department of Defense and enterprises, in general, are concerned about security of a Chinese manufacturer acquiring U.S.-based technology.

On July 29 Lexmark released its latest earnings for Q2 2016. The company reported a loss of $35.4 million, the sixth loss in the past seven quarters. Not a good sign and it does give credence the company must get this merger closed. Additionally, Lexmark has not had an earnings conference call since Q3 2015 and recent quarterly earnings have been sketchy to say the least. Analysts may have seen Lexmark’s last earnings release and it is believed the company may start proceedings for delisting from the NYSE.

Even though the quarterly results were not encouraging, Lexmark’s Enterprise Software did have a nice quarter with revenue increasing 18 percent. Kofax and Readsoft acquisitions continue to drive the old Perspective Software division higher and may be able to set the company on a growth path. There have been rumors the Enterprise Software business unit may get sold after the acquisition because Apex is more interested in Lexmark’s hardware and channel relationships and not so much in the software space.

After Lexmark announced its FY2015 earnings it said it would cut 550 positions, about 4 percent of its workforce over the next 12 months. (It appears the company has already released the 550+ employees by the time you read this.) It also reported these positions would be moved to low-cost countries and that Lexmark would have an annualized ongoing “savings” of approximately $100M beginning in 2017.

Photizo can’t really agree with what Jean-Paul Montupet said about “no disruption to our operations” due to the continued company losses. His comment about “cost-savings” seems to be related to a reduction of expenses related employee layoffs.

Our View

What will be the impact to the industry if/when the merger is finalized? Assuming the national security issues have been resolved with CFIUS and the Department of Defense (and potential security issues with U.S. enterprises), Lexmark will be 100 percent owned by Ninestar Group, Limited. With the printing and imaging industry’s revenue and margin trends in a downward trajectory, it is felt this acquisition will continue to contribute to reduced margins that this industry has not experienced in the past. The major hope for companies that have not been acquired is to maintain margins by improving operational efficiency.

My belief is that Ninestar Group will attempt to use Lexmark’s BSD (Business Solutions Dealer) channel program to penetrate SMB with A4 devices with lower pricing for hardware and supplies. Also, it is believed that Lexmark engineers will attempt to incorporate Lexmark laser technology into Ninestar’s Pantum printers to sell throughout China. Finally, as mentioned previously, Ninestar will most probably sell the Enterprise Software business unit for at least $1 billion (B) which is less than what Lexmark paid for the 13 software acquisitions totaling over $2B (see Figure 2).

Figure 2 - Lexmark Software Acquisitions
Figure 2 – Lexmark Software Acquisitions

The key question is, how aggressive will Ninestar be in its pricing model? Could this be the start of the industry’s first supplies price war? And are you prepared if this does happen? The next few months will be interesting indeed!

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