Nov 30, 2016
The News and Facts
The leadership at Lexmark began a process to explore “strategic alternatives” for the future of the business back in October of 2015. In April 2016, the company announced it would be sold to a consortium of Chinese investors led by Apex Technology and PAG Asia Capital. Now, on November 29th 2016, Lexmark announced its sale has been completed and decisions have been made regarding the strategic decisions of the company.
While Lexmark’s corporate headquarters will remain in Kentucky, long time President Paul Rooke will no longer be leading the company. Instead David Reeder, former Lexmark VP and CFO, will be the company’s new President and CEO. Lexmark also announced two of their key initiatives going forward. The Enterprise Software group, now undergoing rebranding as Kofax, will be split off and subsequently sold. The Imaging Solutions and Services (hardware) division will now focus on “growing the imaging business, particularly in China and the Asia-Pacific region.”
Rebrand & Sale of the Software Division
It wasn’t long ago Lexmark consolidated all of its software acquisitions (with the exception of newer, much larger Kofax) and rebranded them Lexmark Enterprise Software.
Figure 1: Lexmark Software Acquisitions
A rebrand was going to be necessary, especially if these assets were looking to be spun off and sold. Kofax, as the single largest component of the division and the only one with its own strong brand, was simply the most logical choice. Considering the new investor consortium has already announced its intentions, we could see a sale of the software division promptly and they may already have potential bidders/buyers. While there is a possibility of selling some of the software assets separately, this seems unlikely for investors who may wish to divest quickly.
What is price could these assets be sold for? We believe it’s not impossible that a sale in the neighborhood of $1.5 billion could take place, given that Lexmark recently paid approximately $1 billion for Kofax and the software division as a whole has had annual revenues of $700 million. This would mean that the Apex-led consortium will have in practice paid roughly $2 billion for the hardware division of Lexmark. While InfoTrends has no specific information on potential buyers, the several large private equity funds and large software vendors active in the legacy on premise software space might be interested given the background of the investor consortium.
Lexmark’s and Apex’s Focus on New Geographies
Two-thirds of Apex technology is owned by Seine Technology which is also the majority shareholder of Pantum International, China’s first printer and printing solutions provider. Currently, Pantum is sold in limited quantities in both NA and Western European markets, and its product roadmap consists of A4 40 ppm MFPs and below. The focus on very low end monochrome single function printers might have helped them to establish themselves as a player in markets such as China and Russia, but it has clearly not given them much share in the major markets. It would appear that Lexmark will continue to serve the developed markets, with the possible addition of very low end products from Pantum. This will address the gap that some channel partners have indicated in Lexmark’s portfolio previously.
Figure 2: Lexmark Worldwide Revenue Distribution
We would expect that Pantum will continue to serve the domestic Chinese market and will extend its portfolio, with Lexmark devices at the high-end, as well as reap the expertise from internal staff capable of grappling with growing demand for software solutions and MPS. It has also been suggested that the connection linking Lexmark, Lenovo, and Legend Capital will result in Lenovo selling Lexmark printers through its distribution network, which would be an added bonus for Lexmark. Lexmark’s distribution to-date has been focused on direct and dealer channels that often do not serve the much smaller office or personal user. In addition, while Lexmark does not develop its core engines (it currently sources from a variety of OEMs), it is likely that Pantum will increasingly take over that role moving forward especially in the lower speed A4 space.
Impacts on the Industry
The immediate effect from the shift to more Chinese ownership could be additional aggressive price competition and lower margins in the document industry. In the case of Lexmark, we would expect more device production to go in-house to Apex and move away from other device suppliers, such as Konica Minolta. This is expected to lead to a lower quality of hardware offered at a cheaper price. APEX could leverage the Lexmark brand, not just to gain access but to boost prices for its aftermarket supplies in developed markets. Both of these scenarios present significant challenges to both hardware and supplies vendors across the office document technology industry.
The spinoff of the software division may end up being a plus for that entity going forward. When the hardware side of the document technology industry is seeing such rapid change, the ability to be vendor neutral could be very useful. While the nature and intentions of the new owners is uncertain, investment and strategy decisions will be made for the benefit of the new Kofax –meaning without accounting for Lexmark’s ISS business.
More blogs from Brendan Morse