TALK OF SELLING LEXMARK CONTINUES…..
TALK OF SELLING LEXMARK CONTINUES…..
2007-07-16 at 11:10:00 am #18379
Talk of selling company continues
LOWER EARNINGS, AILING INKJET DIVISION FUEL SPECULATION
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
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
Low market capitalization
Lexmark’s current market capitalization, or total value of outstanding shares, is around $4.4 billion.
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.
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 ?
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
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
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.
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