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 user 2007-07-16 at 11:09:00 am Views: 48
  • #18378

    Talk of selling company continues
    In a discussion last week about Lexmark International’s struggling inkjet division, the first question on an analyst’s mind was where the company saw itself in the future.The question came from UBS analyst Ben Reitzes to CEO Paul Curlander during a conference call about lowering the outlook for Lexmark’s upcoming quarterly earnings. Would the company consider a sale of itself, or at least of its inkjet segment, Reitzes inquired.Curlander replied that Lexington’s largest private employer is focused on improving its inkjet division, and thinks it will be a profitable contributor in the long term.But the projected earnings shortfall has again given rise to conjecture on whether Lexmark might be prime for a buyout.Analysts and others point to parts of the business that would make Lexmark an appealing buy for a private equity firm or other purchaser. But they also note the barriers that could discourage such an acquisition.

    A good buyout candidate?
    The laser printer business
    The company’s laser segment recovered quickly after a downturn in the latter half of 2005. Its positives include a strong direct sales force that has helped the company penetrate vertical markets like banking and retail, said Larry Jamieson of industry tracker Lyra Research.The company also runs a toner cartridge remanufacturing program, which “helps keep people coming back to buy their products … and also keeps the supplies out of the aftermarket,” Jamieson said.The program, which was at the heart of the recent trial in the civil case between Lexmark and Static Control Components, has been upheld by a federal district judge.

    Low market capitalization
    Lexmark’s current market capitalization, or total value of outstanding shares, is around $4.4 billion.
    The company’s stock price has fallen precipitously since the beginning of the year — now trading in the mid- to upper $40s — but the lower market capitalization also results from a decision to repurchase a significant amount of stock over the last few years.In 2006, the company repurchased $0.9 billion of its stock, or 16.5 million shares. The year before, the company spent $1.1 billion on repurchasing 17 million shares.The current market cap is inexpensive compared to the past, such as at the end of last year, when its market cap was more than $7 billion.Tom Carpenter, a vice president and senior equity analyst at Hilliard Lyons in Louisville, wrote in a note to clients last week that he questions “whether some of the money should have instead been spent on product development and
    distribution.”Carpenter’s firm or affiliates beneficially owned at least 1 percent of Lexmark’s stock at the end of May.

    Cash flow
    Because of the sale of ink and toner cartridges, the company produces a steady cash flow that could appeal to a business looking to leverage that cash for further acquisitions.It could also appeal to consumer electronics companies, Jamieson said. Most of those companies have only one contact with a customer: the sale of hardware. In the printer industry, though, “because of supplies, you get a pretty good ongoing annuity.”However, that steady annuity has declined on Lexmark’s inkjet side because its installed base of printers has shrunk as, among other things, it withdrew from part of the market in a bid to increase profitability.

    A bad buyout candidate ?
    Cross-licensed technology
    The most frequently mentioned barrier to an acquisition of Lexmark is probably the agreements it has with competitors about certain patents.Cooperation among the competitors in the industry is common. For instance, Hewlett-Packard purchases its laser engines from Canon. In many cases, there are cross licenses, in which companies resolve patent disputes by agreeing to license intellectual property to another.Jamieson said he thinks the bulk of the patents that could stymie a sale of Lexmark focus on the inkjet side and printheads.”Because of the way the patent structure is, as you come up with inkjet technology, at some point or another you’re going to have a couple of things that infringe on somebody else’s patents,” Jamieson explained. “So they’ll say, ‘OK, we’ll give you this, you give us that’ … That’s what kept a lot of companies out of the business.”Shannon Cross of Cross Research, in a recent note to clients, cited a 1996 agreement between Lexmark and HP, which was included in Securities and Exchange Commission filings, as evidence that cross-licensing could prevent a sale.That document, which is heavily redacted for confidentiality, resolved claims by each company that the other had infringed on its intellectual property. The document mentions inkjet products and states that in the event of a change of control of either company, the other can terminate the licenses granted.In a recent note to clients, though, Bernstein Research analyst Toni Sacconaghi Jr. suggested that the cross-licensing may not be as disruptive to a buyout as thought.And as Jamieson put it, an acquirer could always “write a very big check.”

    Laser printer business, again
    Though the laser printer business has strong points, Jamieson and Carpenter question whether a buyer could find strong value in operating it alone if it sold off Lexmark’s inkjet business or stopped research and development and simply milked the sale of existing replacement ink cartridges.

    Competitive marketplace
    Above all, the printer industry has become more competitive in recent years as the overall market matures. Despite its maturation, the market does have some high-growth segments, which Lexmark has targeted over the last year with a spate of product introductions.

    Back to the future
    Ultimately, analysts suggest Lexmark’s future may depend on whether it can turn around its inkjet business.
    Some think it should exit the business entirely, while others note the balancing act the company is attempting in spending now and depressing profits in order to grow them in the long term.”I’d like to see Lexmark pull a couple of rabbits out and keep it going,” Jamieson said. “They’ve got some good stuff going, and they’ve got a lot of good people.”